My 2 cents worth: (probably worth only half of that though)
By my reckoning: AP has dropped about $6.8 million today. I am pretty confident that he too is wondering why the SP has dropped almost one-third. A2 was shallow and was never expected to contain light oils: indeed, this very topic has also been discussed - at length - on HC (remember also the whole "
dead oil" discussion about two weeks ago?). And, given the depth, it is hardly surprising that the heavier stuff needs some sort of help to get to the surface. The only suprise today is that roughly 1/20th (5%) of the company's shares traded, leading to a 33% drop in the share price. Clearly, stoplosses and impatient traders lost their lunch when reality hit home about A2.
What we know about the oil: it is still there: A2 now has an expanded zone: the company specifically said "
again has moveable hydrocarbons" and "
natural fracturing that enhance the productive qualities of the reservoir". The company also stated that this was a "
significant oil bearing formation typical of what is normally produced in Cuba" and conclude that "
we now have the potential for a project in this upper sheet Amistad formation". These are the company's own words, not mine.
Cast your mind back to early July. The company stated that "
Recovering oil unassisted from this shallow depth (hence lower pressure) was only given a low chance and therefore did not materially contribute to the previous resource estimate" and that they had "
low expectations given the shallow depth and associated low reservoir pressure and temperature". At no point did the company say that A2 would have light oils at high pressure.
The Amistad interval in Block 9 is similar to other shallow oil fields in the northern Cuba fold belt (ref: 05/July/2023). The results are therefore NOT a surprise to the company, who previously stated that "
Production from these fields use a combination of various pumping methods and free flow". For anyone to be gobsmacked at today's announcement flies in the face of what has been previously published by the company. Only the market (punters) are disappointed, not the company, as the results are exactly in line with expectations. Again, at no point did the company say that they expected that oil would flow to the surface from all units unassisted. Pipedream stuff that. In their announcement of 16th February 2023 the company simply stated "
Alameda-2 will use a slimmer hole design to enhance well integrity and logging results. Potential to increase both the net pay zone and the estimates of Oil in Place and Prospective Resource.". Have they achieved that? Have they increased both the net pay zone and the estimates of OIP and Prospective Resource?
What actual facts do we now know?- the oil bearing zone for A2 is larger than originally anticipated (hence the text today regarding U3 being intercepted 500m away and 200m updip).
- the hydrocarbons are moveable.
- no formation water (one concern negated).
- the oil is of the type/nature as found elsewhere in the Cuba fold belt (as expected).
- the potential is now there to produce from Amistad (A2).
- the company pre-empted this with applications for further permits.
- the company eluded to more production wells during the recent webinar.
And most importantly, A3. In their announcement of 9th December 2023 the company stated that "
...the second appraisal well, also to be drilled off the same pad but targeting the deeper even more energised reservoirs, to follow". Note also the diagrams showing higher pressure section for A3 (ref: the investor presentations over the previous months). In their assessment of Marti (the lower structure), McDaniels noted the following:
"
The Marti structure was initially encountered in 1988 by the Marti-5 well which recovered 24° API oil from a normally pressured section. Alameda-1 has now drilled the same section offset by about one kilometre to the south and also encountered oil but in a high pressure interval. Therefore, the Marti objective is divided into Unit-1, the normally pressured section intersected by Marti-5, and Unit 2, the high-pressure section intersected by Alameda-1. The two units appear to be separated by a fault identified on seismic data.".
Further, the company went on to state that "
McDaniel’s combined estimates for this Marti reservoir are 1.5 billion barrels of oil originally in place (OOIP) and a Prospective Resource of 95 million barrels of oil - a significant increase to the pre-drill assessment of 72 million barrels of oil, particularly given that the base of the Marti reservoir may "not have been encountered"." (ref: announcement dated 1st August 2022).
In other words: to use crude language - A2 is the entree, A3 is the main course. The results from A2 are actually bang in line with what we (and the company) expected; and is is very clear that the drill team are being more carefully supervised this time around (compared with A1). Think of it another way: A2 has delivered "
to the upside" in terms of volume, and on-par with respect to quality and pressure: the Evolution Capital estimate of 103mmbbl (versus reported 88 mmbbl) should be achieved. Interpolated, if A3 delivers on-par with expectations there will be a significant increase in the Marti prospective resource, perhaps to or above the McDaniel's estimate (which sits above the EvoCap mean estimate in their valuation model).
For my money: once the panic merchants leave the building (give it one or two days) I think we will see the SP stabilise and re-build. I am also expecting the company - spurred on by AP (who is now around 7 million poorer, on paper at least) - to clarify the findings from the entire upper sheet - perhaps when they release the final U2 results. AP and the team may also now be more motivated to spud A3, knowing how fickle the market has been about Amistad.
At least, that's my two cents work. One cent, after today's sell-off.
Best regards
Kit.
(20min delay)