HISTORY: during January 2021, Joe Biden was inaugurated. The anti-oil crowd backed him heavily during the election. Almost immediately after his inauguration, Biden signed an Executive Order immediately halting on all new oil drilling permits on Federal lands. The BLM informed 88 Energy’s management that there would be at least a 60-day delay – and perhaps longer – before a permit to drill the Merlin-1 well could be issued. Given the limited time frame during which the snow-covered tundra can be crossed with equipment without damaging the tundra. The upshot was that 88E was not going being to be able to drill the Merlin-1 well for at least a year – if ever. Alaska’s Senators and Congressman worked hard to get Biden and the Department of Interior (BLM's Department) to understand the error that had just been made. In the meantime, to save itself from financial ruin, 88 Energy activated the “force majeure” clause in all of the contracts it had with various drilling service companies. 88E was on the hook for a few million dollars that it had already spent before the executive order was signed while preparing to drill the Merlin-1 (e.g., building the snow road, mobilizing equipment and supplies, etc.).
It doesn't escape me that Senator Lisa's Murkowski's father (Frank Murkowski) served in the Senate for several years with Joe Biden back when Republicans and Democrats were civil and negotiated with one another. I'm guessing the personal relationship between Frank and Joe gave Senator Lisa Murkowski a unique level of access to President Biden during his first few days in office. I'm guessing that relationship helped achieve political success for 88 Energy.
Irrespective of how it happened (politics are like making sausage, it's better not to see what goes into the mix to create the final product), Biden was convinced to instruct the Department of Interior to issue the Merlin-1 drilling permit which allowed 88 Energy to put the project back on track. The well was eventually spudded but a lot of time and money were wasted because of the brief “force majeure” hiatus. Once a train is derailed, it’s a difficult process to get it back on its tracks. Because of these delays, the Merlin-1 was only drilled to 5,267 ft, rather than the planned TD of 6,000 ft.
There was one major prospective zone below 5,267 feet that was not penetrated by the Merlin-1. Then, the company encountered a mechanical problem when a tool got stuck in the hole while trying to test the most shallow oil zone penetrated by the Merlin-1 well. The company had to get the rig off the tundra before the spring thaw. Because of these time constraints, it was not possible to drill the deeper zone and/or to test the penetrated zones more completely. Many unknowns remain regarding the Merlin-1 pertaining to the zones penetrated and the zone(s) below TD that were not penetrated.
CURRENT: On March 7, 2022, at 7 pm in Alaska, the Merlin 2 well spud. The company’s announcement said that the first 2,000 ft should be drilled, cased, and a BOP installed within a week (i.e., by Monday, March 14th). Starting during the coming week, the well will be drilled another 6,000’ to TD. That process is anticipated to take about 4 weeks according to the company. Based upon a variety of test data that will be collected during and following drilling, the best zones in the well will be flow tested (time and weather permitting). The company stated that “MDT” data will provide the preponderance of the guidance regarding which zones to flow test.
What is MDT? Quoting from Schlumberger’s website, “The MDT modular formation dynamics tester makes real-time flowline resistivity measurements at the probe module to discriminate between formation fluids and filtrate from water- and oil-based muds. Until an acceptably low level of contamination can be recovered, formation fluid is excluded from sample recovery. In additional to resistivity measurement, numerous modules can be integrated with the MDT tester for optical monitoring, from a single absorption spectrometer through comprehensive analysis at reservoir conditions by the InSitu Fluid Analyzer real-time downhole fluid analysis system.”
So, 88E shareholders are on the brink of learning a lot about the 652 million barrels of oil targeted at the Merlin-2 well (best case estimated is reported by the company to be 1.4B barrels). At $100+ oil, a LOT of value may be discovered and booked on the heels of drilling the Merlin-2 exploratory well.
STARS ALIGNED: Beyond the Merlin Prospect, 88E owns the Harrier Prospect within Project Peregrine identified as having a mean prospectivity for 839 million barrels of oil in the Harrier and Harrier deep zones – conceivably much more.
Then there is the Umiat Oil Field which has P2 reserves of 92 million barrels located immediately south of Project Peregrine. The Umiat Oil Field may contain much more oil than has been identified in the shallow wells drilled primarily to the south of the fault along the anticline at Umiat. North of the fault and deeper, there could be a LOT more oil to be found at Umiat.
Next, consider the Yukon Leases close to the Canadian border but reasonably close to Pt. Thompson’s oil production facilities. Those leases are prospective for 90 million barrels of oil.
And now that Pantheon has drilled and tested oil in the Talitha well, project Icewine is looking much more prospective for oil – again, perhaps a lot of oil (1.77B barrels anticipated according to 88E's website).
Rather than exclusively pursuing exploratory activities, around February 14th, 88E entered into a non-binding agreement to buy a 73% net working interest in Project Longhorn located in the most productive basin in the Lower 48 – the Permian Basin. The deal closed on February 20th or 21st (depending on which side of the International Dateline you are on). Project Longhorn is producing 300 bbl/day today with production anticipated to double to 600 bbl/day by late 2022 premised on some ongoing field activities. This property has certified 2P reserves of 2.1 million barrels oil equivalent. There are many ways to slice and dice the value of Project Longhorn. From a revenue perspective, when the acquisition was finalized and announced on February 20th, oil was at $90/bbl. Today it is at $109/bbl – a 21% increase in revenue each day. From a gross revenue perspective, 300 bbl per day translates into $12 million (USD) per year. If production doubles, that’s $24 million per year. If oil pops up to $150/bbl (which it could… or higher… or lower… who knows?), then gross revenue from Project Longhorn could rise to $33 million (USD) per year – equaling about $45 million AUD. The beauty of Project Pronghorn is that it guarantees a financial base (i.e., cash flow) for the company as it continues to prove up on the prospective elephant fields it owns on Alaska’s North Slope.
In summary, 88E is not a one well (i.e., Merlin-2) Hail Mary company. The chess board is strategically situated for success – perhaps massive success. Granted, the outcome of Merlin-2 will define the short-term pricing of the stock. But 88E has so much more potential valuation than is reflected just in the Merlin-2 well.
If you add up all the various prospective oil quantities (including P2 reserves at Umiat valued the same as all other prospective oil including Merlin 1, Merlin 2, Harrier, Harrier Deep, Yukon, Icewine, Umiat, and Longhorn), you get a total of 3.58 billion barrels of oil. If you only value that oil at $1.09/barrel (i.e., one percent of the current market value of produced oil), you have $3.9 billion barrels of value. If you put a $5 price tag on prospective oil, the number grows to almost $18 billion (USD).
Current market cap for 88E is $699 million (USD). In summary, there is tremendous upside remaining in 88E. The price per share will predictably decline if the Merlin 2 does not contain oil. But if the Merlin-2 is oily, watch out above. In the short run it’s a risky poker game that hinges on the next card turned (i.e., the results of the Merlin-2 well). In the long run, there’s massive value in 88E yet to be realized.
President Biden was on the anti-oil bandwagon when he was elected. But events in Russia and Ukraine have woken up a new generation of Americans to the reality of where our energy comes from – oil and gas. The anti-oil sentiment is declining as fast as prices at the pump are rocketing higher. What the average person fails to recognize is that all sorts of commodities are made from oil and gas, including fertilizer. Fertilizer prices have tripled in the last 24 months. Food price inflation has only begun to sting at the cash register. Again, most people don’t understand the relationship between oil and gas prices and how much they are paying for food – but the connection is fairly direct. Biden has already begun to talk about all of the Federal oil and gas leases that remain undrilled. The anti-oil days in America may be coming to an abrupt halt as Putin disrupts the world order that has prevailed since 1989 when the USSR was dismantled.
As I said in the title of this post, the stars are aligned to shine favorably on 88E. I’m pleased to be holding a very large position in the company.
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