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New Alaska oil well boosts interest in Pantheon Resources and 88 Energy

Published: 21:30 08 Jul 2022 BST

Pantheon Resources PLC - New Alaska oil well boosts interest in Pantheon Resources and 88 Energy

Shares in Pantheon Resources PLC (AIM:PANR, OTC:PTHRF) and 88 Energy Ltd (AIM:88E, ASX:88E, OTC:EEENF) advanced this week as the former announced the start of drilling operations for the Alkaid-2 well in Alaska.

The potentially pivotal well promises to put a rubber stamp on what could become a major new multi-billion barrels oil asset, on American soil.

Success with a series of previous wells has sent Pantheon to a very substantial valuation – peaking at around £1bn immediately before equities slipped into a bear market, and, today’s price of 89p pitches the market cap at close to £700mln.

Pantheon’s share price performance for the past year highlights the high-stakes nature of the Alkaid well, meanwhile, Alaskan neighbour 88 Energy is living somewhat vicariously through PANR’s project, though more about that later.

Right now, let’s focus on Pantheon and take a look at the reasons that Alkaid is going to be a very closely followed drill programme.

It is big

Boil the investment proposition back to its basics and the opportunity appear quite simple – ‘there’s a good chance that there’s a lot of oil’, or at least that’s the theory.

Exploration experts, internal and external to the company, believe there are very large accumulations of oil in the region known as Alaska’s North Slope.

Pantheon’s project area in located further onshore from previous coastal discoveries such as Prudhoe Bay (estimated to have some 33bn barrels of oil in place) and Kuparuk/West Sak (14bn barrels OIP), and is to the east of Smith Bay, Pikka-Horseshoe and Willow discoveries which measure in the hundreds of millions of barrels.

As the drill-bit began turning in the Alkaid-2 well Pantheon technical director Bob Rosenthal highlighted that the AIM-quoted explorer had “discovered a lot of oil” so far in its project area.

To date the oil-in-place volume is estimated at 23bn barrels, with 2.3bn of those presently deemed as potentially recoverable.

Alkaid-2 could lead to an upgrade on those already big numbers, depending on results.

Successfully testing the reservoirs at greater depth, in this location, is likely to increase the known scale of the resource, according to WH Ireland’s oil and gas analyst Brendan Long.

The WH Ireland analyst, who pitches his ‘fair value’ estimate for Pantheon at some 208p (versus today’s price of 90p), meanwhile, points to the other important aspect of Alkaid.

Going horizontal now

Pantheon’s successful Alaskan wells to date have all been vertical test wells, designed to confirm the presence of hydrocarbons and gather valuable data, but, any future development of the fields will comprise horizontal production wells.

For those unfamiliar with the methodology, the idea is pretty straightforward (and was the basis for much of the United States onshore oil ‘boom’ seen over the past two decades).

A vertical pilot is drilled down until it reaches the depth of the reservoir (in such wells often referred to as the ‘horizon’ or ‘formation’) at which point one or more lateral holes are drilled across and through the expanse of the oil-bearing feature.

It massively increases the surface area to which the well bore is exposed, and, as a result means much higher volumes of oil can be produced.

Understanding this fairly simplified explanation of such wells helps explain the excitement over Pantheon’s expectation beating wells drilling in 2019.

The most recent well, Theta West, was a vertical hole and flowed oil at a rate of 57 barrels per day in a brief period of testing and before that the Talitha A well confirmed a test rate of 32 bopd, and before that, its preceding Talitha well yielded 73 bopd.

Alkaid, Pantheon’s first vertical discovery well in Alaska, drilled in 2015 and flowed around 100 barrels during testing in 2019.

A cynic without much understanding of the oil industry would probably wince at the notion that Pantheon’s near £700mln valuation could be built on such a catalogue of test flows.

The company’s point of view has, however, always been clear.

“Pantheon is on the path to unlocking an enormous basin play”, Bob Rosenthal said in March.

“Pantheon has an opportunity to develop a number of large, discreet oil accumulations in an established oil province adjoining export infrastructure, which we believe is unique.”

Chief executive Jay Cheatham added: “we have collected enough data to confirm our expectations that we have discovered, and now appraised, an extensive resource which we believe meets or exceeds our pre-drill estimates.”

Higher volume production statistics from a horizontal well like Alkaid-2 will be undeniable, and, of course, will go a long way to shoring up the commercial case for developing oil fields across Pantheon’s acreage in Alaska.

The Alkaid drill in detail

Pantheon has explained to investors that Alkaid-2 will have multiple objectives, over multiple formations.

It will test the oil zones discovered previously by the Alkaid-1 well, as well as being drilled deeper to appraise an oil target that’s anticipated as an extension to oil resources seen in Talitha-1, and will also go for previously untested exploration targets.

Alkaid-2 will include what the company says will be a ‘conservative’ lateral section – notably shorter than the 8,000 ft section that’s envisaged for a full development scenario – in order to minimise operational risk.

Like other wells on the Alaskan North Slope (ANS) it is anticipated that the well will utilise unconventional oil production technologies, applied to conventional oil reservoirs, in order to maximize potential reserves and production.

Such stimulation has become standard operating procedure across the entire ANS, Pantheon noted.

Significantly, the sort of extend testing planned in a success case would open up a potentially lucrative revenue source for the company.

“The Alkaid-2 well is the first production well in this new oil field using unconventional technology. As is typical in the industry, we will apply what we learn from this well to subsequent wells in order to optimise future drilling, testing and production,” chief executive Jay Cheatham said in Thursday’s statement.

"Commercial success at any standalone project, along with our geographic location, onshore and adjacent to export infrastructure in a low sovereign risk jurisdiction, would be transformational for Pantheon."

What analysts say

WH Ireland analyst Brendan Long, in a recent note, described the previous drill campaign as unambiguously positive, and, called the Lower Basin Floor Fan (seen in the Theta West well) as a “giant elephant”.

This is the basis of Long’s fair value estimate for Pantheon’s shares pitched at 208p, suggesting more than 100% upside the current market price of around 90p.

Alkaid-2, meanwhile, is “a baby elephant” according to Long, who wrote in come cover and caveats ahead of the next well.

“The Alkaid-2 well is not, in our opinion, a make or break well.

“In our opinion, there is zero chance that any result at Alkaid would reduce our enthusiasm for the main prize, the Lower Basin Floor Fan of the Theta West structure.

“It is also critical to appreciate that Alkaid#2 is an early-stage appraisal well. That it can be brought onstream on along-term production test (and thereby generate revenue) is reflective of the extraordinarily advantageous operating environment enjoyed by Pantheon Resources, inclusive of its access to road and pipeline infrastructure.

“It is wrong, in our opinion, to expect the well to come on like a fully optimised developmental well: That is typically not the intention/expectation for the first-ever horizontal well completed in a large-scale resource play, based on our experience.”

The analyst added: “For us, we are most interested in gaining an understanding of the reservoir’s flow behaviour over time.

“If that behaviour is encouraging, we have confidence that both initial production rates and expected ultimate recoveries per well can be scaled up over time by drilling longer wells and fracking them more intensely.

“Based on investor discussions and market commentary we would caution against putting the cart ahead of the horse due to the rather extraordinary ease with which Pantheon Resources is able to monetise oil production from its wells.

“In our opinion, an appraisal well is an appraisal well, even if its production is monetised.”

So, why is 88 Energy relevant?

Many of London small-cap investors were likely introduced to Alaska’s North Slope via 88 Energy.

The exploration company has had an acreage position since 2015 and, has at different times garnered an awful lot of attention and speculation with its exploits.

It has drilled a number of wells and has progressed its own acreage, albeit (to borrow from WH Ireland and paraphrase) its results have been less unambiguously positive than Pantheon’s.

Whilst 88 Energy continues to progress its other exploration interest in the region (across its Project Icewine, Project Peregrine, the Umiat and Yukon projects), right now the activity of its neighbour is the most impactful catalyst for the company.

According to 88 Energy this is more than an exercise in ‘nearology’ though. Studies commissioned by the company have determined that geologies observed by Pantheon, in its wells, crossover into a section of the Icewine territory.

Consultant Jordan & Pay evaluated the Shelf Margin Delta (SMD), Slope Fan Set (SFS) and Basin Floor Fan (BFF) play fairways across the Project Icewine acreage on Alaska’s North Slope.

The consultant’s report, completed in May, used publicly available information related to the Pantheon wells and concluded that all of Pantheon’s reservoir units extend into the Icewine acreage.

At the same time, it had petrophysical data from a prior Icewine well was re-evaluated.

More recently, in June, it agreed to acquire data which are said to include 3D seismic data for an area it says covers the SMD, SFS and BFF – it spent US$1mln for this access.

All this desktop work is intended to culminate in a data package to support a farm-out process, which the company hopes will being in a new partner and funding for future exploration.

88 Energy says it wants to drill a well to test these targets in 2023.

Such is the timeline, 88 Energy shares are likely to follow the near-term fortunes of Pantheon and therefore its investors will keep a very close eye on the well programme.

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