88E Video Transcript

Hi all

Thanks to Tim and Graeme for organising the presentation in London and for video-ing it - and also for Mickey (i think it was) for recording audio from the front row which helped clarify some of what was said (particularly when Paul or Dave was speaking off-mic). I decided to transcribe it to make it easier for me to reference and wanted to share what I have with you. (I'm about an hour in so far - so about half way through).

I apologise in advance for transcription errors - I'm a software developer, not a petro-geo so whilst I can google with the best of them, there is some terminology that flies straight through to the keeper.

Without further ado...

First up: Dave's presentation...

88E Burgundy Presentation - London - 9th September 2016

Hosted By: 88E Long Term Investors Group (Graham McHardy / Tim Ashdown)

Presented By:
Dave Wall - CEO - 88 Energy
Paul Basinski - CEO - Burgundy Xploration
Stephen Staley - Director - 88 Energy

Tim Ashdown:
Welcoming remarks and purpose of 88E LTIG

Dave Wall:
Thanks everyone for coming and a special thanks to Graeme and Tim for putting this together.

You know I’m not going to talk for very long, I’m not going to go through the whole presentation because most of you guys do understand it and we do have a long period of time for Q&A afterwards, so I’ll speak for about 10 minutes, then Paul will speak for about 10 or 15 minutes and then we’ll get stuck into the Q&A ‘cause that’s where I think we can really create the most value - by us understanding where we’re not communicating effectively with you guys and managing your expectations and things like that.

Let’s just flick through this quite quickly… so… standard disclaimer…

You guys know all about this. Where we are… down here in the red… 271,000 acres it’s obviously a very big parcel of land particularly for a relatively small joint venture. Typically this type of acreage position you would be seeing in a much larger company. And it’s fair to say that, in the lower 48 states we wouldn’t be able to do this because you would only have 3 years to drill out every 640 acres to hold the acreage by production. So this is kind of unique just in that sense, and then obviously the project has a lot of other unique aspects to it.

So just running through… you guys know all this stuff

Some of the highlights… obviously we’ve got an above-ground story here as well as the below-ground story.

The above-ground story:

• Incentives from the State of Alaska allowed us to drill our first well relatively cheaply;
• We were able to do a deal with Bank of America who co-funded the well, and now we have debt, which is offset by a receivable:- debt with Bank of America and the receivable from - it’s now AAA+ - State of Alaska;
• Our acreage is bisected by the Dalton Highway, which is the only all-year-round operational access road in Alaska, and,
• We have the Trans-Alaska-Pipeline System (TAPS) running through the acreage, which is running out of oil - and that’s the reason why the incentives were put in place in the first instance.

So that’s just a couple of the above-ground stories.
Obviously - we’re on the infrastructure - we can get to market - we have some all-year-round drilling locations, whereas the rest of Alaska on the tundra you can only drill in winter when the ground freezes - so there are some other advantages there as well.

And then if we get to the below-ground story and we’ll talk about the well now...

So… we drilled the first well and that was designed to mitigate risk.
So it wasn’t designed to tell us if this play was definitely going to work. But we’re trying to figure out if the things that would make it definitely NOT work were NOT present.

So - that’s kind of a slightly different way of looking at things.
If we were going to fail, we wanted to fail as fast as possible - which sounds kind of funny - but that’s the best way to stop all of us from wasting our time and money. We wanted to do it in as efficient a manner as possible from a cost perspective as well.

And we think we were able to do that - and obviously the result was very good.

All of the things that Paul (Basinski) knows, and we now know as well that are required for this vapour-phase, which is like the “holy grail” for these shale plays - we know that all these elements exist.

It doesn’t mean that it’s definitely going to work though. It means that we’re about 50% Chance of Success (CoS) is our internal estimate.

So the next well, which we had originally designed as a lateral, was designed to test the productive potential of the HRZ.

We know the reservoir is amazing.

But can we frack it efficiently, keep the fractures open, maintain good conductivity through the fractures, which means you get a high flow rate?

The reservoir can flow at high rates, but you need to be able to design an effective fracture simulation.

We think we have enough information on hand to be able to do that, but there’s always uncertainty.

So typically in these plays what you’ll do is you’ll have a geological theory, which Paul spent many years putting together; you test that theory which was Icewine #1, and then you move to the evaluation on the flow potential - which in every other play is done with a vertical well with a multi-stage stimulation.

We thought we might be able to skip that step and go to the next step, which is lateral wells - but what ultimately ended up happening once we spent the last nine months analysing the results from Icewine #1 - we couldn’t get to a point where the uncertainty was low enough for us to be able to take that next step.

So the objective of the well - and this well (Icewine #2V), or the lateral (Icewine #2H as originally proposed) - is to prove the productive potential of the HRZ.  

So our job is to maximise our chance of achieving that objective.

And this (Icewine #2V) is the design that does that and that is the main reason why this design was chosen.

Things like cost-reduction… it’s a by-product.
Things like being able to test the HUE… that’s a cherry on the top.

But they’re not the drivers. The real driver is reducing risk, mitigating uncertainty and increasing the chances of achieving the objective which is flow-testing the HRZ.

So this is the design that does that, and Paul will talk a little bit more about that as well.

And this (table) we thought spelled it out pretty clearly but I guess it is hard to put in a table, which is kind of a sterile way of disseminating information, really what we’re thinking.

Are we less bullish on the potential of the HRZ?
Nothing could be further from the truth!

Do we want to maximise our chances of achieving success?
Hell yeah!

So how do we do that?
And really it's this strategic going back, re-assessing the strategy, again and again and again, until we’re comfortable that we’ve got it right. And now we are, which is why we’ve come out and said we’ve finalised the design.

So that’s that - and obviously Q&A - I’m sure there’ll be a few more questions.

In terms of the seismic, I think people probably expected to see something a little bit more mature, or maybe we mis-managed expectations there - but what we tried to communicate was that the first look, which we’ve come out with in this presentation was always going to be a bit of a tease.

So this green area here, this was the 3D seismic that was shot in 2015 using dynamite. And we’ve just purchased some 2D extracts - lines from within that box.

And that was obviously done last year so the processing was finalised earlier this year, only a few weeks ago really.

And then we obviously acquired the big blue box.

So… what we’ve seen is extremely good quality of data.

That’s obviously important. Investors just kind of assume that that’s going to be the case, but there’s actually quite a bit of work that goes into that - and it is possible for that not to occur if you haven’t done the planning right.

So having seen that - it’s very important for us.

You know - some of these images… it’s just squiggly lines and all the rest… and to me, to be honest… they are a little bit too… and Stephen (Staley) is here who is a geophysicist and a director - so if there’s anyone who wants to ask questions about the squiggly lines in a more technical fashion, he’s well equipped to answer those questions.

But what you can see quite obviously here - is, you can see these clinoforms which are really just all beach-fronts. So when you talk about pro-gradational - it just means that what we have is an inland seaway and eventually it was closed in over time - and you had all these beach-fronts that formed.

And what these are is they’re very ideal kind of geological setting for deposition of sand and reservoir. it’s obviously what you need for conventional oil and gas - and also the source rock as well - which is obviously important for both the conventional and the unconventional.

00:09:35
Something like this - it’s probably a little bit hard to see - but this is quite significant for us in that this tiny little green blob - we’re already seeing something that we had hoped to see - but we didn’t know whether we would see or not - especially not in such a small area.

And we can see this on a number of seismic lines which means that it could be of significant size. We’re not at a point where we can say how big and what does “significant" mean and all that - I won’t be able to answer that question - but you won’t have long to wait.

This here again - you can kind of see this mound of sand which is effectively what it is.

So that’s kind of it… and this is the recap of stuff that you guys already know about - so I’m going to leave it at that… you understand all of this stuff...

I’ll maybe just touch on this one just briefly (Cost Analysis slide), so this is something that we put out which we thought was pretty exciting as well - and then Brexit happened so we got caught out a little bit with that one - but ultimately, when we look at the parameters in the HRZ, the quality of the reservoir is exceptional.

Like I said - it doesn’t mean that we can fracture stimulate it effectively - but if we can get it to flow at its potential and you overlay a bunch of different cost assumptions and the fiscal regime in Alaska, what you come up with is a breakeven in our mid-case of less than $40 a barrel - and that’s very significant particularly in a low oil price environment that we’re finding us in at the moment… although hopefully that will change one day in the not-too-distant future.

And then just one last thing in terms of upcoming news flow...
- seismic results… the interpretation of the larger piece of acreage.
- the finalisation of the interpretation of the smaller piece (around Icewine #2V location)
That’s the kind of stuff into the end of the year… over the next 4-8 weeks

And then also we are in commercial negotiations with a number of parties about different deals to lower the cost of the well in some way. We are funded for the well now that we’ve changed the design but as I said - it’s a by-product. So we don’t need to come back to the market. Really what that does - it puts us in a very strong negotiating position and means that we can opportunistically take advantage of investments - whether they be from a strategic source - which might be somebody who wants to take equity in the company - but not at a discount, at market price, and committing to fund us on an ongoing basis.

So I think some people have questioned what I mean when I say “strategic” - but that’s pretty much it in a nutshell.

And then obviously on the industry side - bringing in parties on that front as well.

But as I said - we don’t need to raise money so we’re in a very good position.

So that’s kind of it from me - and I think Paul’s going to come up and say a few words...

Paul: Thanks Dave

Question:
00:12:24
Q: So your little bit just there about… (without being cheeky…)  not needing to raise money… are you 100% sure about that?
‘Cause you said that last time Dave… (DaveW: There’s “needs” and “wants”) ...and a few weeks later we had a Capital Raising

00:13:00
Dave: So I think people do get a little bit confused by some of this which is - there is a difference between a “need” - so “is your forward program covered by your current cash position?" - and the answer at that point in time was “yes" - but then if we wanted to drill another well, which everyone knew we did - and it was obvious that we didn’t have the money for that - so, how are you going to do that?

You have to raise money, or do a farm-out.
Q: I agree

DaveW: And what happened was… we had demand to raise that money… and so we did - and it was kind of opportunistic - the share price had gone up and that’s what we did.

Q: It put us in a very good position so I’m not complaining...

(Organiser: Q&A will be at the end and there is plenty of time for questions…)

DaveW: There will be plenty of time and we’ll answer all the questions.

[Applause]

Next up... Paul's presentation