By Martin Luke From Vox Markets
Pantheon Resources (PANR) issued a cleansing statement yesterday ahead of their well-publicised institutional investor roadshow. I managed to secure an invite to one of these meetings through an old colleague and was encouraged by what I heard. The team at Pantheon admitted that, if they had not had institutional investor meetings, they would not have issued an update as it is incomplete and inconclusive. They would rather have waited until they had conclusive flow test results. However, cancelling the meetings instead, could have caused even more questions. I tend to agree with this, however it does show that honesty isn’t always the best policy in the square mile and may explain why certain management teams are reluctant to be so open with investors. If nothing else, I commend the team for adhering to the rules!
Jay Cheatham (CEO) looked very relaxed (unlike after the horizontal drilling shambles of VOBM#2) and sounded positive. Most importantly, they are fully funded through 2017 and revenue generation will begin in Q1. I would also add that despite the fall in the share price, the general mood of those in attendance was positive. VOBM#3: This well was sited as a planned horizontal well. After the failure of horizontal drilling at VOBM#2, they reverted back to vertical, but deviated drilling. Due to the ambiguity of the seismic data, they discovered that they had drilled on the edge of the mini-basin and into a thinner section of sandstone. They said that there were 2 possible interpretations of seismic depending on the various inputs. They had input the parameters borrowed from the VOBM#1 well log. There was no well log data from VOBM#2. They sited the well as far east as possible within the drilling unit. (The company has leases set out in drilling units licenced from the Railroad Commission. Land is held by production so the company wants as bigger drilling units as possible (I believe he stated 300 acres) in order to hold as much acreage as possible with the least drilling cost. The company has c.4,500 leases.) The drilling at VOBM#3 has cleared up the ambiguity about of seismic results and given the JV partners a greater understanding of the geology. I am not technical expert on oil & gas, but management stated categorically that the clarifying of seismic data in no way impacts their interpretation of geology or reduces the scale of the potential reserves. They believe the well was probably 400ft off (towards the edge of mini-basin) hence the thinness of the sandstone section. The well was drilled on time and on budget of $3.75m (including the fracking cost).
As the well was towards the edge of the mini-basin, they decided to conduct a single stage frack (‘in order to emulate the possible benefits of horizontal drilling’) to access the hydrocarbons back into the mini-basin. They are now flow testing the results. As mentioned before, the flow-testing is still continuing and less than 60% of the frac fluid has been recovered. They stated the initial flow rates have been very variable, but Flowing Tubing Pressure (FTP) has been rising and is at 5,900 psi, which is a good sign. They are using 12/64ths choke, which is only c.4mm, as they are being conservative and do not want frac proppant (fines) flowing back into the well. The well has flowed between 240 boe & 740 boe per day. Even at the low end of that range (240 boe), the well would still be commercial generating c.$9,000 per day (after tax & royalties). The JV partners currently have no agreed explanation, although they are a whole host of possible contributing factors (eg. fines moving), as to why the well is flowing less than expected. However, they hope that it should increase once the frac fluid has been recovered and that flows should increase to the equivalent of the analogous Double A Wells Field wells, which are in the 1,000-3,000 boepd range. Typically, the flow rates from analogous Double A Wells Field wells increase for the first 6 to 14 months and then start decline. (The adjacent Double A Wells Field was first drilled in 1985. Well life is 20-30yrs and well density is high with variable results across the basin. The more central wells have been shown to contain c.4m boe recoverable and those towards the edge c.1m boe.) The full flow test results will not be known until it has been put on extended test (several weeks). However, as with all wells, one actually needs to go into production to see proper results.
Jay, looking at the well result as an oilman (rather than as an investor), sees it as part of the learning process to gain a greater understanding of the geology & mini-basins and, therefore, is not at concerned about the well in the bigger picture of things. Obviously, he would like to see higher flow rates, but believes that these should increase as the well cleans up and pressure continues to build. Gas processing: Originally the JV had 2 options: to contract out collection & processing or to build small scale processing facilities themselves. It now seems that there is preferable third option – a 3rd party pays for and builds dedicated a larger gas processing plant. The benefit, apart from no capex cost to the JV, is that a large plant would be more efficient and also more of the condensates would collected as liquids thus improving the economics for the JV. The JV would just be charged a processing fee. The JV is already in advanced discussions with a potential a 3rd party, who state that the processing plant would be in production 60 days after the contract is signed. The JV have already planned the site of plant, their own pipelines and paid for their tap into the gas pipeline.
They state Spring 2017 for first production revenues and believe that these cash flows should hit $1m per month from the existing wells. Both the JV partners, Vision and PANR, are keen to get into production so I imagine it could possibly be by Feb 2017. VOBM#4 – Tyler Co centre basin test: Drilling is proceeding well and is currently at 12,000ft. However, penetration rates slow at depth so one should not expect the same rate of progress. TD should be reached (on a trouble free basis) in the first week of Jan. If they proceed to flow test (which one certainly hopes they will do), we should get results towards the end of Jan. The JV hopes to prove that Tyler Co is one large mini-basin. The Double A Wells Field is 6 sq. km, whereas the JV believe the Tyler Co basin could extend to 20km by 3km. Obviously this well, if successful, would be a major step forwards. Other plans: After VOBM#4 the rig will move back to VOBM#2 to re-enter and then drill vertically. Jay said that he would be keen on drilling a fourth Polk Co well. If VOBM#4 is successful, the JV would seriously consider a second exploration rig. Rig rates remain very low.
In summary, Jay seemed confident, relaxed and upbeat. I suppose this is the benefit of having years of drilling experience together with the requisite patience compared to investors with a rather shorter time horizon and the lack of appetite/understanding for/of exploration drilling and it’s various vagaries. Jay CEO Jay Cheatham, drilled his first well at 17, really do you find such an experienced executive.