London Video with Transcript, page-3

Dave Wall: The other thing that can happen as well is, say 75 barrels came. We still got 10 years on most of those leases. We'd go and look at the conventional, and potentially, there'd be a technological advancement which would mean that we'd be able to come back and say, "Well, actually, those guys were only getting 75 barrels and now they're getting 200. Maybe we can apply that technology." That's the thing at the moment, the way that technology is advancing not just in oil and gas but in every field, it's pretty phenomenal. That's something that doesn't mean the project is 100% dead. It might be dormant, so it would push out that timeframe we're talking about.
Paul Basinski: The real key to Dave's point is that we know we have an extraordinary resource in the ground. We've not shown this to anyone in Houston or anywhere that doesn't agree with that. The point is you got to start with that. If you don't have that, then, really, the rest doesn't make any difference. We have a compelling resource that is very difficult to find anywhere in a western country.
Questioner: [inaudible - I'll just build on that, partial result you're talking about.]
If you got a partial success, what's the timeframe for getting after another well?
Dave Wall: It depends. Say if it's partial success which we understand why it failed and we think we can do better, we would fast track the drilling of the next well. We're looking at Q1, Q2 next year, realistically. The way the permit works is that most of the major permits allow us to drill another well pretty much immediately from the pad. Permit to drill is something which takes a couple of months to put together. It's fairly complicated engineering document. It usually only takes two to four weeks to get approved. Theoretically, if we understood everything immediately which isn't going to happen, within three months, we could be drilling another well and also access rigs and all those things, and funding. Realistically, it's going to take longer than that.
Questioner: To complete your scenarios in the high case, what would you do? What would you expect?
Dave Wall: I think it said the same thing just earlier. That looks like we'd get after drilling a horizontal well from the pad as a follow-up to Icewine 1 and 2 from the same location and then we look at expanding or building a new gravel pad from which drill the four wells with the one gas injection well. Then, we look to delineate to the eastern west. Not all of those wells, theoretically, if we can line up the ducks, could happen starting from the first quarter of next year. We probably wouldn't be able to execute them all at the same time, so there'd be a priority on which one is going to have the most value. That could probably look like the horizontal well as a low-hanging fruit to follow-up on the vertical success, and also the delineation wells to try to get our arms around the HRZ and our confidence level in the mapping.
Paul Basinski: To that point, the offset wells on either side are effectively what we did in the Eagle Ford when we drilled the Hookes well which is 55 miles away. The point is that if you do this and then you get the data and you find something that's very similar, then effectively, with your reserve classification, right now, it's 2C, we'll get an elevation across the board just because a major risk factor has been taken out if we show the continuity which is really the first step in order to be able to move a project forward. If you can get your contingent resource evaluated or classified as an elevated contingent or an undeveloped resource, then it becomes much more valuable.
Dave Wall: Sorry. There's a guy at the back.
Questioner: Hi. Again, two quick questions. First one, has the Trump administration had any major effects or minor effects? Second question, what is your most optimistic outlook for the whole play?
Dave Wall: The second question I'm not going to answer, but don't worry I think about it a lot.
Questioner: Not as much as we do.
Paul Basinski: Can you see the invisible duct tape?
Dave Wall: The first question is an interesting one. He's a pretty polarizing guy. When you boil it down for the oil industry, it's pretty positive. If he can't deliver on what he is trying to do, which I believe is to make America the most competitive place to do business in the world, and resources and oil particular. So, what that would mean potentially is there's this double-sided argument. It makes it easier for oil companies to get their projects executed quicker and at lower costs. That means there are going to be more oil, which means there's more supply and the price goes down, right?
However, the other side of that coin is if I can bring this project for the year, and then decrease cost by 30%, the NPV is going to up by 80%. I can absorb a $5 or $10 hit on the oil price and return the same value and margins. I'm just getting the project executed more efficiently. If you talk about efficiency, isn't that what we want? We want a more efficient market in the supply/demand for oil. We are seeing that already in the last couple of years in the Lower 48 because of low oil price.
Then, if you've got someone in the administration that's trying to further enhance that effect, that could be really good for companies that have projects in the US because if I'm more competitive because I'm in the US than somewhere else, our project is going to get up before that one does. It could be very positive, but it all comes down to whether it can be executed, how long that will take, and things like that.
Questioner: Hi there, guys. A private investor and oil major employee. Just a quick one around oil majors. I know you talked a bit about ConocoPhillips snipping around a bit. Exxon recently paid a large amount of money for Permian acreage. At GC, the Permian, that bubble is becoming unsustainable. Do you anticipate oil majors starting to look north where potentially it's more attractive at this stage?
Paul Basinski: A very good question. I can respond with a partner that we have, Burgundy has. It's a three-generation oil company in Houston. They got started because the original chief geologist for General Crude which became Mobil was the founder of the company. Now, they got production in 15 states. They're selling everything they have in the Permian because they're getting $60,000 plus an acre. They've been in the business a long time. They realized that, I think, people right now are ... There's a flight to risk aversion. I think that the odds of being able to not sustain a loss are reasonably high, but the odds of getting much upside when you effectively invest over $2 million at land per well starts to become pretty de minimis when you look at the distribution.
I think that what we're seeing is that there's a flight to the Permian because it is a sure thing and everyone is looking for something to do where you can invest money. Now, with respect to Exxon, I'm quite familiar with that deal. One of the primary drivers for that from the Bass brothers was that was a contiguous acreage position which is basically the last of its kind in the Permian that I'm aware of. What the majors look for is operational efficiency. Even though they pay this ridiculous amount of money, they're looking long-term because they're going to really be able to optimize this. Having a contiguous block is really key.
That's one of the things that we are going to be able to deliver because even when you look at the other shale place like the Vaca Muerta in Argentina, where Exxon and others are getting in, the acreage is very parcellated. What we're going to be able to offer if we show that we have the resource and we got the right classification is an operational efficiency upside which is going to highly leverage a lot of the other conditions that we're currently facing.
Questioner: Thank you.
Paul Basinski: Yeah, you bet.
Questioner: Looking at the end game, is it still to sell or to be a producer or perhaps both?
Dave Wall: Technically, if we get a flow rate this out of the next well, which we should, it's just a question of how much we'll be a producer. If you're talking about large-scale production, really, I think the first phase of that potential monetization strategy is to get to a point where we have delineated the resource and prove that production is coming from multiple horizontal wells on the acreage.
At that point, really, we've increased the optionality of the project to, I guess, a juncture where we can make a decision, which path we want to go down. Obviously, it will be very tempting to just monetize it and sell it. Ultimately, if this turns into a full field development company, I don't think either Paul or I will be around to see that even if it is still under the 88 Energy and Burgundy banners, and whatever happens to those vehicles, because that's just not our wheelhouse, right? Ultimately, those decisions get driven by the shareholders.
If we've got a bunch of shareholders at that stage, it would probably be, unfortunately, not you guys, but larger institutions driving the strategy in terms of financing and saying to us, we want to take you through. We think that that is path as the board to create more value for shareholders even though by that stage, we're talking about 15%, 20% a year or something like that which is pretty good. It's not going to be the type of uplift that we're in this project for, so we won't be around.
Questioner: Also, what would it take for a major then to say like, "Well, 88E, we're going to buy you"? Would it need to have just the one well? Would it need to have several wells? Is it-
Dave Wall: I think it is possible. If we get success in this next well, we could go and lift the skirt, so to speak, to all the majors, and we definitely get offers, but how much will we get, right?
Paul Basinski: The kilt might be ugly initially.
Dave Wall: It wouldn't be great. How much would you get in that scenario? I can tell you it wouldn't be a maximized value, or what we refer to the “creaming the curve” which is a common industry term which is creating the most value in the shortest period of time. We would get, say the curve looks like this, we're here, we could get to there with the next well. If we execute the next 10 wells to delineate, we could get up to here, and then we leave something on the table for those guys. We just sell here. You want to execute that delineation program. That's the point that we think is the most appropriate way to move this forward in the success case.
Paul Basinski: If you're producing four wells or X number of barrels even on the north slope, you're going to be able to get a pretty big realization on the flowing day barrel price which is going to hugely leverage the value of the project. Not only will it reduce the risk, but the upfront money you're going to get on those flowing day barrels is going to be pretty huge.
Questioner: Dave, back in September, you spoke a little bit about Otto to our north, not very far away, as possibly giving you some guidance when they were intending to start drilling convention, I believe. Could you just recap there what's happening? Maybe say a little bit about other competitors around us who are currently drilling or planning to drill, and what you might be expecting as guidance from some of there if there are any around us.
Dave Wall: I guess we don't see ourselves in competition with anyone. There's no competitors. We have peer companies. Otto partnered with Great Bear to the north of us, and we don't fully understand what their strategy is. Obviously, Great Bear is the operator and the very large working interest holder in that deal. They're 90%, Otto's 10-ish. We don't know what they're doing is the short answer. We know what had been publicly released, and so we made everyone aware of that saying, "This is what these guys have said they're going to do," but then they've obviously changed their strategy. We don't understand why because we're in their board room when they're talking about it. That's, I guess, the short answer there. In terms of what some of these other guys are doing, they're making big discoveries up here to be a little bit flippant. That's the short story. These guys are aggressively getting after it. These guys have slowed down down a little bit, but we don't really fully understand why.
All right. That is pretty much perfect, spot-on to ... Hi. I was just about to call drinks.
Questioner: Good afternoon, gents. Can I ask you, although we all fully appreciate that this is a step-by-step-by-step, is money the driver or is the data the driver? In other words, could we get another rig in there as an argument? If we had double the money in the bank, what would that do? Is it driven by your log and your data, et cetera?
Dave Wall: There's certain things that we can do concurrently and there's certain things that we have to do sequentially in the step-by-step process. At the moment, we're still in the step-by-step process. We figure out how much we can buy, which is a lot for us, and we buy it and then we chew like crazy. We don't want to take on too much. Also, we'd have to raise obviously more money at lower prices in order to go and drill two wells when, really, we only need to drill one. Why drill two when you only need one? In order to maximize the value of the project after this well, we've talked about that at length. That's something that we would try to execute as much as possible concurrently. Then, it will be a question of capacity, the number of rigs on the slope. Rigs can be bought in from out of state. All those things, the things that we've looked at, and we'll be trying to execute those.
Paul Basinski: Effectively, what we'd be looking at when we got to that point, assuming that we the green flag and going forward with the development from the technical and from an above ground, from the location point of view, you get about 10 wells per rig per year.
Dave Wall: All right. Thanks, everyone, for your questions. I hope you'll join us for some drinks and nibbles downstairs. We'll be there as well so you can come and ask us those private questions you're too embarrassed to ask in front of everyone else. Thank you.