Taking my rose-tinted glasses off for this post to focus on our key risks moving forwards now that the dust has settled on MK-2.
Key risks as I see it are the potential for:
1. Poor reservoir quality and low permeability in Upper and Lower Angwa at Mukuyu 2. Significant downgrade to prospective recoverable resources in the Mukuyu structure due to net pay well below pre-drill estimates 3. Low flow rates in the upcoming flow test at MK-2 4. Low CGR and minimal liquids content
The likelihood of one or more of these eventuating is fairly high imo. Based both on what Scott has reported to the market and also more importantly on what he is not telling us.
No comments whatsoever from SM regarding reservoir quality is a concern and leads me to think that this is because they will disappoint the market. I’ve never seen a company stay silent on reservoir quality and permeability results when declaring a discovery and reporting net pay, especially if they’re good.
SM is in possession of permeability data from the routine core analysis of samples from MK-1 and is not reporting these results.
He is also in possession of permeability data for the reservoir units which contributed to net pay at MK-2, obtained using the SLB MDT and also from mobility data acquired during cleanup and fluid sampling. Also not reported.
The only comment from SM regarding reservoir quality is that the LA is better than the UA at MK-2. But without knowing what the UA quality is, then this comment is meaningless.
As a minimum we should have heard a qualitative description of reservoir quality - ie. tight, poor, fair, good or excellent.
For investors to be conservative and without any supporting data, we need to assume that the UA is poor quality and the LA is “better”…or most likely fair and at best - good quality?
There’s too many red flags to suggest that we’re going to be suprised to the upside. I think SM is just hoping for decent flow rates when the time comes and has decided not to unnecessarily disappoint shareholders by reporting poor reservoir quality data now and is just rolling the dice on flow test results instead.
2. Prospective recoverable resources
Again, no guidance from the company post-drill. A lot of operators will at least make comment on whether we are in-line, above or below pre-drill expectations.
We know that Mobil was basing their resources on 46m net pay and estimated approx. 3 TCF recoverable in the Upper Angwa.
We can only assume that IVZ have used a similar net pay thickness with a larger area of closure to determine 4.1 TCF for the UA.
With only 13.9m net pay vs 46m, there’s a real risk that the prospective recoverable resources in the UA is less than 1 TCF (assuming linear relationship with net pay thickness). And the potential for poor quality reservoir will only worsen this figure.
We have no real pre-drill estimate for the Lower Angwa in terms of reservoir thickness. But given that this has been promoted by the company as the “Massive Member” with a high net to gross ratios of reservoir sand, then the only reasonable assessment on what has been encountered is the net to gross ratio. Typical NTG would be at least 25% for a predominantly sandstone formation. We encountered less than 4% in MK-2. The pre-drill estimate was 2.6 TCF over 650m from 3100m to 3750m. If this was based on 25% NTG then our actual result of 4% puts us at less than 0.5 TCF recoverable from the LA.
And the concern is that if the low NTG continues below 3,718m then our upside is possibly only another 0.5 TCF from deepening the LA down to say 4,500m. This isn’t necessarily the unlimited potential that I was hoping for before we hit a water contact.
In terms of our total resource at Mukuyu, there’s actually a real concern that we’ve just signed a MOU for 1.4 TCF which is right on the limit of what we’re likely to have encountered and will limit our potential for signing more agreements without being able to demonstrate that we have enough gas supply to meet these additional commitments. Which is why I’m not even sure that we would be in a position to firm things up with Sable Chemicals as well as Tatanga prior to demonstrating a higher average net pay figure.
The other thing that I take issue with SM is the fact that post-MK-1 he was still quoting prospective recoverable resources for the Mukuyu structure of 20 TCF, despite the fact that the Dande, Intra Dande, Forest and Pebbly Arkose were dry at MK-1 (and most likely across the remainder of the structure). We were clearly limited to a maximum of 4.1 TCF from the UA and 2.6 TCF from the LA. To promote this post-MK-1 as 20 TCF still was completely dishonest imo and only serves to set shareholders up for a disappointment.
3. Flow rates
Key risk is managing investor expectations. And SM has always exceeded at disappointed in this space.
I’m not expecting SM to provide guidance on the flow rates that they’re expecting to achieve prior to the flow rate, despite the fact that they would have a good idea of these numbers right now and could quite easily make reference to their expectations. Would be good if they did, but I’m not getting my hopes up.
So the problem for us is that only a surprisingly large flow rate will excite the market and re-rate us.
I think we’ll need a combined 30-40 mmscf/d plus 5k-10k bopd liquids for this to be considered a catagoric success and send the share price to where it belongs.
Anything down at the 10 mmscf/d levels from both UA and LA and low liquids would be a disappointment imo
And with the risk of poor quality reservoir and thin net pay intervals this is my biggest concern for 2024
4. Liquids content
It doesn’t matter whether you use an in-ground resource value or a revenue based valuation - a condensate discovery is worth twice as much as dry gas alone. Even in Zimbabwe. The fact that SM doesn’t understand that this is how investors value a company and hence gets reflected in the shareprice is mind boggling.
For over a year this has been touted by SM as a “very liquids rich” field with CGR estimated from MK-1 mud gas data at up to 135 bbls/mmscf which is well above pre-drill expectations and adds massive value to the economics of a discovery.
The language has now suddenly changed to SM wondering why shareholders are fixated on liquids and moving back to saying this was only ever a gas play and liquids aren’t relevant.
I’m concerned that there’s negligible liquids in the samples obtained from MK-2 and this will counter any positive news that comes out of the lab results early next year.
He was confident enough to declare a gas discovery based on down-hole data without blowing down a sample to determine hydrocarbon composition. So if he was certain that we have gas, then he should be just as confident that we have liquids in the samples. And why not make mention of this in the discovery announcement?
Or is it possible that they observed C6+ liquids on the in-situ fluid analyser but he needs to confirm if this is volatile oil versus condensate? And if this was the case then why didn’t they blow a sample down on site to verify prior to the discovery announcement? Even if it meant a voluntary suspension for a couple of days. Blowing down a sample on site was the plan all along. And they grabbed multiple samples from the same intervals so there was no real issue with “wasting” one of them.
Not meaning to down ramp or be overly negative. But just hoping that this can generate some positive discussion to counteract these negatives and hopefully some of the more seasoned posters can address these concerns in detail and maybe alleviate them altogether.
Still holding. And hopeful that the flow rates turns things around for the better by mid-year.
IVZ Price at posting:
11.5¢ Sentiment: None Disclosure: Held
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