Oil & Gas
88 Energy
Speculative Buy
Two Fat Ladies
8 April 2015
Price (A¢)
1.1
Target Price (A¢)
1.9
Ticker
88E
Market cap (A$m)
10.0
Estimated cash (A$m)
7.0
Shares in issue
Basic (m)
1,139
Fully diluted (m)
1,646
52-week
High (A¢)
32.5
Low (A¢)
0.6
3m-avg daily vol (000)
6,385
3m-avg daily val (A$000)
65
Top shareholders (%)
Computershare Clearing
15.3
Donald Smith
6.1
Eloten Group
3.5
Clairault Investment
2.3
Lydian Enterprises
2.2
Total
29.4
Board/ Management
Michael Evans
NE-CHR
David Wall
MD
Brent Villemarette
NED
Stephen Staley
NED
Share Price Performance (A¢)
70
$0.30
60
$0.25
50
$0.20
40
$0.15
30
$0.10
20
$0.05
10
$0.00
Mar‐14
Millions
$0.35
Jun‐14
Sep‐14
Dec‐14
0
Mar‐15
Source: Bloomberg
88 Energy, formerly called Tangiers Petroleum, has
reinvented itself as a US shale oil company. The company is in
the process of acquiring an initial 87.5% interest in 99,360 contiguous
acres onshore the North Slope of Alaska: the Icewine Project. We believe
this is a high-risk, potentially high-reward project.
The company benefits from being an early mover in chasing
shale oil resources on Alaska’s Northern Slope. It was able to
acquire most of its acreage at rock-bottom prices in the last licence
round as there was little competition due to collapsing oil prices. The
Icewine Project also benefits from having the Dalton Highway and TransAlaskan Pipeline System pass through it; this should allow year-round
access, lower the cost of early exploration and allow the export and sale
of liquids at global prices should the project prove successful. Recent
changes to Alaska’s fiscal regime have made North Slope exploration and
production much more attractive than previously.
DeGolyer and MacNaughton estimates that the Icewine
Project has gross mean unrisked prospective unconventional
resources of 493MMbbl. These unconventional resources are split
across four distinct shale horizons: the HRZ, Hue, Kingak and Shublik
shales. Of these shales, the HRZ has the most resources and is 88 Energy’s
primary target. The HRZ Shale is thought to be a high porosity organicrich shale, with good top and bottom seals, that is in the volatile oil/wet
gas window within the Icewine Project acreage.
The project acreage also has significant, as yet unquantified,
conventional oil potential. In 2013 the USGS estimated that the
Central North Slope has 4Bbbl of mean undiscovered resources. In 2012
Great Bear Petroleum made a small, but promising, conventional oil
discovery to the north of the Icewine Project.
We estimate that 88 Energy’s shares have a fair value of
A¢1.9/share (1.0p/share). This is based on Great Bear Petroleum’s
recent winning bids for four blocks just to the north of the Icewine
Project. Great Bear bid an average of US$212/acre for four blocks some
five miles to the north of Icewine. Should 88 Energy be able to prove the
HRZ Shale a commercial success, then the upside is huge. In recent years,
good acreage in the Eagle Ford proven play has sold for well over
US$20,000/acre (and in 1H14 Baytex paid over US$100,000/acre when it
bought Aurora Oil & Gas). We are raising our rating to SPECULATIVE BUY.
88 Energy faces geological, operational, financial, regulatory,
legal, political and commodity price risks. We believe that the
RFC Ambrian acts as Broker and Nomad
to this company
Stuart Amor
+44 (0)20 3440 6826
[email protected]
main risk for the company is that it might be unable to get HRZ Shale oil
wells to flow at commercial rates.
88 Energy  8 April 2015
Contents
Summary
3
Valuation
5
Catalysts
7
The Icewine Project
8
Unconventional Plays
Conventional Plays
Fiscal Terms
9
13
14
Corporate
Capital Structure
Burgundy Xploration LLC
Board and Management
Risks
15
15
15
16
17
88 Energy  8 April 2015  3
Summary
We estimate that 88 Energy’s
shares have a fair value of
A¢1.9/share (1.0p/share)
88 Energy, formerly called Tangiers Petroleum, has reinvented itself as a
US shale oil company. The company is in the process of ditching the
Tarfaya Block, its Moroccan licence where it drilled the unsuccessful Tao1 well last year, and acquiring an initial 87.5% interest in 99,360
contiguous acres onshore the North Slope of Alaska: the Icewine Project.
We believe this is a high-risk, potentially high-reward project. DeGolyer
and MacNaughton estimates that the Icewine Project has gross mean
unrisked prospective unconventional resources of 493MMbbl of oil. These
unconventional resources are split across four distinct shale horizons: the
HRZ (GRZ), Hue, Kingak and Shublik shales. Of these shales, the HRZ has
the most resources and is the primary target. The acreage also has
significant, as yet unquantified, conventional oil potential in Cretaceous
and Jurassic sands. In 2013 the USGS estimated that the Central North
Slope has 4Bbbl of mean undiscovered resources. We estimate that 88
Energy’s shares have a fair value of A¢1.9/share (1.0p/share) based on
Great Bear Petroleum’s recent winning bids for four blocks just to the
north of the Icewine Project.
Timing is important, and
88 Energy has got this right
In Chinese culture the number 8 is meant to be lucky; 88 Energy has two
8s in its name and has been lucky in its timing in two ways:
 First, the Alaskan State Government has recently encouraged new
oil exploration and production by offering substantial cash rebates on
exploration (85% in 2015, 75% in 2016) and by lowering the fiscal
burden on oil production. It has done this because without new fields
being brought on-stream, lower North Slope oil production from
currently-producing fields is likely to put the operation of the TransAlaskan Pipeline System (TAPS) in jeopardy over the next decade.
 And second, 88 Energy bid for its North Slope licences as the oil
price was collapsing, limiting the competitive environment and
allowing the company to gain entry into an exciting potential new
shale oil play at a rock-bottom price. 88 Energy and partner Burgundy
Xploration paid an average of US$29/acre for their licences in the
recent North Slope Areawide 2014W licensing round (the minimum bid
was US$25/acre).
We believe that 88 Energy’s team
has the right mix of financial,
geological and reservoir
engineering skills to take the
Icewine Project forward
We are not superstitious and believe that management has created its
own luck. We think that the Board and management of 88 Energy has the
right mix of financial, geological and reservoir engineering skills to take
the Icewine Project forward. Clearly after last year’s disappointing Tao-1
well result, and the terrible cost overrun by operator Galp, the company
was in a precarious position. Since then management has raised new
capital, screened a number of new ventures and picked and landed the
promising Icewine Project.
88 Energy has a partner with great
shale oil experience:
Burgundy Xploration LLC
Any success at the Icewine Project will depend on having picked the right
acreage. Here, 88 Energy management has been ably assisted by its
partner Burgundy Xploration LLC, whose founder is geologist Paul
Basinski. From 2005 to 2008 Paul spearheaded ConocoPhillips’ programme
to lease over 300,000 acres in what today is the ‘sweet spot’ (the volatile
oil/wet gas window) of the Eagle Ford play. More recently he used his
knowledge and understanding of what geologic conditions are required to
produce the most economic wells gained from this experience to analyse
the shales of the Alaskan North Slope. He came up with a new shale oil
play that others had overlooked: the HRZ/Hue shales to the south of
where most of the North Slope licences had been acquired. Others, such
as Great Bear Petroleum, had focused on the Shublik Shale to the north.
88 Energy  8 April 2015  4
Project Icewine acreage is
thought to sit above where the
HRZ Shale is in the volatile
oil/wet gas window
What Paul was looking for was a high porosity organic-rich shale, with the
right thermal maturity (volatile oil/wet gas), which had good top and
bottom seals. In Figure 1 we show a schematic of how the thermal maturity
of North Slope source rocks changes from south to north. Project Icewine
acreage is thought to sit above where the HRZ Shale (the lower Brookian
source rock) is in the volatile oil/wet gas window (ie, it moves from the oil
window into the gas window, or is on the red line in Figure 1).
Figure 1: Alaskan North Slope Source Rock Thermal Maturity
Source: Rampart Energy Presentation, RFC Ambrian estimates
Expected top and bottom seals
should make HRZ Shale wells
highly productive
The seals are important as they force the hydrocarbons, created by
organic-rich shale at the right thermal maturity, into a supercritical fluid
phase. Supercritical fluids are at a temperature and pressure above their
critical point, where distinct liquid and gas phases do not exist. They can
effuse through solids like a gas and that greatly enhances the liquid
production of wells. This dramatically improves well economics. Paul
believes that the HRZ Shale within the Project Icewine acreage fulfils the
right conditions to have hydrocarbons in the supercritical fluid phase.
Perhaps what makes the HRZ
Shale stand out from all other US
shale oil plays is the expected
high porosity
Perhaps what makes the HRZ Shale stand out from all other US shale oil
plays is the expected (inferred from well log data) high porosity. Both
management and DeGolyer and MacNaughton estimate that the HRZ Shale
has a mean porosity of 14%. Improved overall porosity should increase the
capacity for the HRZ member to retain hydrocarbons, all else being
equal, resulting in high resource concentration. Resource concentration is
highly correlative to well performance and ultimate recovery levels.
Valuation based on Great Bear’s
US$212/acre bid for four blocks
some five miles to the north of
the Project Icewine acreage
In November 2014 Great Bear was the apparent winner of four blocks just
five miles to the north of Icewine Project acreage. Great Bear bid an
average of US$212/acre for these blocks. We have used this level to value
the Icewine Project acreage as we believe it better reflects the true
value than the acquisition cost. Should 88 Energy be able to prove the
HRZ Shale a commercial success, then the upside is huge. In recent years,
good acreage in the Eagle Ford proven play has sold for well over
US$20,000/acre (and in 1H14 Baytex paid over US$100,000/acre when it
bought Aurora Oil & Gas).
Risks
Like most junior oil and gas companies, 88 Energy is a speculative
investment. The company faces, geological, operational, financial,
regulatory, legal, political and commodity price risks. We believe that the
main risk for the company is that it might be unable to get HRZ Shale oil
wells to flow at commercial rates (see the Risks section later for a more
detailed description of these items).
88 Energy  8 April 2015  5
Valuation
We estimate that 88 Energy’s shares have a fair value of A¢1.9/share
(1.0p/share) based on Great Bear Petroleum’s recent winning bids for
four blocks just to the north of the Icewine Project. On a fully diluted
basis, but excluding cash raised from the exercise of options, we estimate
that 88 Energy’s shares are worth of A¢1.3/share (0.7p/share). In Table 1
below we show our fair value calculation.
We estimate that 88 Energy’s
shares have a fair value of
A¢1.9/share
Table 1: 88 Energy Fair Value Estimate
Gross
Net
Interest
Net
Acreage
Valuation
Value
Value
Value
Acres
(%)
Acres
(US$/acre)
(US$m)
(A¢/share)
(p/share)
99,360
77.8%
77,302
212
16.4
1.9
1.0
Alaska
Project Icewine
Cash, G&A and work programme expenditure
Net cash/(debt) Dec 2014
0.6
0.1
0.0
Feb 15 equity issuance
5.3
0.6
0.3
2015 cash expenditure
(5.5)
(0.6)
(0.3)
Cash NAV
0.4
0.0
0.0
Total 88 Energy fair value
16.8
1.9
1.0
Note: Based on 1,139.3m issued shares; Source: Company data, RFC Ambrian estimates
We estimate 88 Energy’s interest
in the Icewine Project to be worth
US$16.4m
Great Bear bid an average of US$212/acre for four blocks just north of
the Icewine Project in the last licence round. Using this metric to value
the Icewine Project’s 99,360 acres gives a value of some US$21m. Should
a well be drilled on Burgundy Xploration’s first licences, 88 Energy’s
initial 87.5% interest in the project would be reduced to 77.8%. We use
the latter interest to estimate the value of 88 Energy’s interest in the
project at US$16.4m.
Great Bear bid an average of
US$212/acre for four blocks just
north of the Icewine Project in
the last licence round
In November 2014 Great Bear was the apparent winner of four 1,440 acre
licences (480A, 480B, 480C & 480D) in the North Slope Areawide 2014W
licence round. Great Bear’s four blocks are just five miles to the north of
the Icewine Project acreage. Great Bear bid US$1.2m for the four blocks,
or an average of US$212/acre. In the same November 2014 North Slope
Areawide 2014W licence round, Burgundy Xploration (on behalf of 88
Energy) was the winner for sixty-three 1,440 acre licences. Burgundy bid
US$2.6m for the blocks, or an average of US$29/acre.
We believe that Great Bear’s bid
is the most appropriate acreage
valuation metric
We believe that Great Bear’s bid is a more appropriate acreage valuation
than Burgundy’s bid as it reflects a competitive bid over acreage whose
main target is the well-known, but as yet unproven, Shublik Shale play.
By contrast, we believe only 88 Energy and its partner Burgundy saw the
potential of the HRZ/Hue Shale play in the Project Icewine acreage,
allowing them to make, and succeed with, low-ball bids. The minimum
block bid was set at US$25/acre.
Acreage in US Lower 48 proven
plays has sold for well over
US$20,000/acre
To put our US$212/acre valuation of the Icewine Project into further
perspective, we estimate that the see through value from three North
Slope farm-outs over the last few years range from roughly US$400/acre
to US$1,400/acre. Acreage in US Lower 48 proven plays has sold for
substantially more than this. Good acreage in the Eagle Ford has sold for
well over US$20,000/acre. For example, in June 2011 Marathon paid
Hillcorp Resources US$3.5bn for 141,000 net acres in the volatile oil and
dry gas windows of the Eagle Ford. This equated to roughly
US$24,800/acre.
88 Energy  8 April 2015  6
At that time this acreage had just 36 producing wells, which generated
approximately 7,000 net (17,000 gross) barrels of oil equivalent (boe) per
day. Marathon estimated that the acreage had the potential to allow it to
book up to 100MMboe of proved reserves by the end of 2011.
In 1H14 Baytex bought Aurora Oil & Gas for C$2.6bn, including debt.
Aurora had 22,200 net acres, containing 167MMboe of 2P reserves and
estimated 2014 production of 30,500boepd in the ‘sweet spot’ of the
Eagle Ford. Thus, Baytex paid over US$100,000/acre. Admittedly, oil
prices were much higher when these transactions occurred, but we
believe this shows the potential for value appreciation of the Icewine
Project acreage should 88 Energy be able to prove the commercial
viability of HRZ/Hue Shale wells.
Risked discounted cashflow
analysis and recent farm-out
valuations are problematic
valuation metrics
We believe it is too early to perform a risked discounted cashflow analysis
of 88 Energy’s interest in the Icewine Project. The uncertainties,
particularly around well performance, are currently just too large to
provide a meaningful value. Industry farm-out valuations of North Slope
acreage are likely to have changed given the new fiscal regime enacted in
April 2013, and in view of the recent dramatic fall in oil prices, making
use of this metric is difficult.
See through value from three
North Slope farm-outs range from
roughly US$250/acre to
US$1,000/acre
We estimate that the see through value from three farm-outs over the
last few years range from roughly US$400/acre to US$1,400/acre.
However, the Alaskan oil industry environment has changed significantly
since these farm-outs were announced; two of these farm-outs occurred
before the 2013 enactment of the better fiscal regime under the ‘More
Alaska Production Act’, which was passed in April 2013. All the farm-outs
took place before the recent dramatic fall in oil prices.
Halliburton farm-in to Great Bear
Petroleum licences
In November 2011 Great Bear farmed out a 25% interest over about a
quarter of its ~500,000 acres to Halliburton for work programme carry.
Great Bear’s acreage lies immediately to the north of Project Icewine.
Exact details of the farm-out have not been disclosed. We estimate the
work programme cost US$60m, implying a look through value of around
US$1,400/acre. Great Bear’s main focus is an unconventional Shublik
Shale oil play.
Repsol farm-in to 70 & 148 LLC
GMT Exploration LLC licences
In March 2011 Repsol farmed into 2,000km2 (~494,000 acres) of North
Slope licences owned by 70 & 148 LLC (an affiliate of Armstrong Oil & Gas
Inc) and GMT Exploration LLC. These licences lie to the north-west of
Project Icewine, and just to the west and south of the Kuparuk River oil
field. Repsol obtained a 70% working interest in the licences in return for
agreeing to carry out the investment necessary to explore the blocks’
resources. Repsol estimated that the minimum exposure of this
investment, including amounts to be paid to its partners and the cost of
exploration to be carried out over several years, was US$768m. We think
that this implies a look through value of around US$700/acre. Repsol and
its partners are focusing on conventional plays in their licences.
Rampart Energy farm-in to Royale
Energy licences
In May 2013 ASX-listed Rampart Energy farmed into 50,000 acres of North
Slope licences in two blocks owned by Royale Energy. These licences lie to
the north-west of Project Icewine. To earn up to a 75% working interest in
the licences Rampart agreed to pay ~US$5.1m in cash, issue options over
US$1.7m of stock and carry Royale through a defined work programme. The
work programme included acquiring and processing 120 square miles of 3D
seismic, and drilling, testing and completing two wells. We estimate the
work programme should cost US$40m, implying a look through value of
around US$400/acre. However, it appears that Rampart was unable to
meet an unexpected 2014 cash call by Royale part way through the staged
farm-in process and the companies are now in litigation.
88 Energy  8 April 2015  7
Catalysts
We believe that third-party
drilling on the Central Northern
Slope has the potential to provide
significant catalysts in the near
term
88 Energy could benefit from some catalysts that it has some control over
(completion of the licence acquisition, prospect/lead identification through
reprocessing of vintage 2D seismic, farming out an interest in the project,
etc). The initial Icewine Project work programme is focused on moving it
forward towards drilling of the first well and/or attracting a farm-in
partner. The estimated 2015 budget of US$2.1m comprises the purchase,
reprocessing and re-interpretation of existing 2D seismic, in addition to
well planning activities and overheads. Furthermore, we believe that thirdparty drilling on the Central Northern Slope has the potential to provide
more significant catalysts as the results of these wells could help inform
the market about the Icewine Project acreage prospectivity.
Great Bear began drilling the
Alkaid-1 well in February 2015
Great Bear Petroleum mobilised the Nabors Rig 106 AC late last year and
began drilling the Alkaid-1 well in February. Two further wells, Phecda-1
and Talitha-2, will be drilled later this year. The Talitha-2 well is just five
miles north of Project Icewine’s acreage. All three wells will be drilled a
few miles west of the Dalton Highway on ice pads supported by ice roads
(the 2012 wells, Alcor-1 and Merak-1, were on rig mats adjacent to the
highway).
It may take some time before the results of these wells are widely
known. Great Bear is a private company and is not obligated to publicise
the results quickly. The company must notify the Alaskan Department of
Natural Resources with a list of data sets available within 30 days of
completing a well. However, well data requested by, and submitted to,
the DNR will only be made publicly available after the expiration of the
24-month confidentiality period, followed by 30 days public notice.
Seismic or other geophysical data will be made publicly available after
ten years, followed by 30 days public notice.
Figure 2: 2015 Regional Exploration Activity
Source: Great Bear Petroleum, 88 Energy
Repsol is planning to test the
Brookian Fairway with a threewell programme
In 1H15 Repsol is planning to test the Brookian Fairway roughly 80 miles
NW of Project Icewine. Three wells are planned in Qugruk area (see
Figure 3). As a public company, Repsol is likely to announce any
significant results relatively quickly.
88 Energy  8 April 2015  8
The Icewine Project
Figure 3: Alaskan North Slope Lease Ownership Map
Source: Company data
DeGolyer and MacNaughton
estimates that the Icewine
Project has gross mean unrisked
prospective unconventional
resources of 493MMbbl of oil
The Icewine Project consists of up to 99,360 contiguous acres located
onshore on the North Slope of Alaska (see Figure 3). 88 Energy has agreed
to work with Burgundy Xploration (BEX) and Arktos Energy Management
(AEM) on acquiring and managing the leases; once these have been
formally awarded and paid for, 88 Energy will be the operator and have
an initial 87.5% working interest in the project (which will reduce to
77.8% on the spudding of the first well on BEX leases contributed to the
project). DeGolyer and MacNaughton estimates that the project has gross
mean unrisked prospective unconventional resources of 493MMbbl of oil
from roughly 8Bbbl estimated oil in place. The acreage also has
substantial, as yet unquantified, conventional oil and gas resource
potential. The leases are advantageously situated adjacent to the Dalton
Highway and Trans-Alaska Pipeline, resulting in year-round access for
operations and immediate market access for crude oil sales should the
project be successful.
There is no urbanisation or
agricultural activity across Project
Icewine acreage
Due to the Arctic conditions, there is no urbanisation or agricultural
activity across the Project Icewine acreage. This is often not the case in
the US Lower 48, where shale development can be challenging in
populated or agriculturally intensive areas. There is also a lack of potable
water aquifers in the central North Slope area, mitigating the possibility
of municipal ground water contamination. There are, however, ample
surface water supplies for drilling and stimulation programmes.
88 Energy  8 April 2015  9
Combined with the attractive
lease term and royalty, we
believe that the fiscal regime
makes the Icewine Project very
competitive with similar projects
in the US Lower 48
The primary lease term is ten years, with a base royalty rate of 12.5%
(16.5% after vendor overriding royalty). The State of Alaska is also
offering an 85% cash rebate on exploration activity through CY15
(reducing to 75% from January 2016 to July 2016 and then to 35%
thereafter). Combined with the attractive lease term and other fiscal
terms, we believe that the fiscal regime makes the Icewine Project very
competitive with similar projects in the US Lower 48.
Lease acquisition
88 Energy, through BEX, bid on leases covering 90,720 acres in the
Alaskan North Slope Areawide Sale on 19 November 2014. 88 Energy paid
the 20% deposit (~US$0.5m) on behalf of BEX under the terms of their
Joint Development Agreement. On 20 November BEX was advised that it
was the apparent highest bidder on the leases. Formal award of the
leases to BEX by the Alaskan Department of Natural Resources is expected
to occur during 2Q15, at which point BEX has 30 days to pay the
remaining 80% of the lease costs, which total some US$3m. 88 Energy has
agreed to pay this sum and will then gain an initial 87.5% working interest
in the project. Prior to the November 2014 licence round, BEX already
held an interest in oil and gas leases over 8,640 acres located on the
Alaskan North Slope, which it has contributed to the Icewine Project. 88
Energy has agreed to free carry BEX in respect of the CY15 budget for the
Icewine Project, which currently totals ~US$2.1m.
Unconventional Plays
Figure 4: Alaskan Central North Slope Stratigraphy
Source: AAPG
Project Icewine unconventional
resources are split across four
distinct shale horizons: the HRZ,
Hue, Kingak and Shublik shales
DeGolyer and MacNaughton estimates that the Icewine Project has gross
mean unrisked prospective unconventional resources of 493MMbbl of oil.
These unconventional resources are split across four distinct shale
horizons: the HRZ (GRZ), Hue, Kingak and Shublik shales.
88 Energy  8 April 2015  10
Of these shales, the HRZ has the most resources and is the primary
target. Given the limited data (seismic and well logs) over the licences,
the uncertainty surrounding the level of prospective oil resources is large.
The HRZ Shale has P90 gross prospective resources of 65.8MMbbl and P10
gross prospective resources of 501.5MMbbl.
Table 2: Project Icewine Unconventional Prospective Resources
Gross Prospective Resources (MMbbl)
P90
P50
P10
Mean
HRZ Shale
65.8
192.5
501.5
250.4
Hue Shale
15.9
56.1
160.7
76.1
Kingak Shale
19.6
80.4
213.1
104.0
Shublik Shale
Total Project Icewine
13.5
45.8
135.4
61.9
244.3
446.4
813.2
492.5
Source: DeGolyer & MacNaughton
Promising source rock
characteristics
A comparison of the four main Alaskan source rocks with the Bakken and
Eagle Ford source rocks is given in Table 3 below. Whilst individual source
rock characteristics do not correlate that strongly with success, the
Alaskan source rocks all show some promising characteristics. In
particular, they all have Total Organic Content (TOC) above the minimum
threshold, and have thermal maturities that range from immature oil to
dry gas. Thus, there will be Alaskan licences that will have each of the
source rocks in the volatile oil/wet gas window, which we would expect
to have the best well economics. Different licences are likely to have
optimum thermal maturities for each of the different shales. We believe
that the only way to be sure that an Alaskan shale oil play will be
successful is when the production results from several/many horizontal
hydro-fractured wells are available.
Table 3: Source Rock Comparison of Geologic Characteristics
Bakken
Eagle Ford
HRZ/Hue
Kingak
Shublik
Total Organic Carbon (%)
10% avg
2-7%
3% avg
5% avg
2-3% avg
Main Kerogen Types
I/II (oil)
I/II (oil)
II/III (oil-gas)
II/III (oil-gas)
I/II-S (oil)
42°
30-50°
38°
40°
24-45°
Thickness (ft)
up to 100ft
50-250ft
100-800ft
175-550ft
0-600ft
Thermal Maturity
Imm-Oil-Gas
Imm-Oil-Gas
Imm-Oil-Gas
Imm-Oil-Gas
Imm-Oil-Gas
Sh-Slts-Sh
Sh-Slts-Ls
Sh-Tuff
Shale
Sh-Slts-Ls
Yes - Quartz
Yes - Calcite
No ?*
No ?
Yes - Calcite
Natural Fractures
Yes
Locally
?
?
Some Zones
Overpressure
Yes
Locally
Locally
Probably
?
Oil Gravity (°API)
Lithology
Brittleness
*However, Great Bear reported HRZ/Hue Shale to have brittle lithology in Alcor-1 and Merak-1 wells; Source: Alaskan Department of Natural Resources
The HRZ Shale is the primary
unconventional shale oil
The HRZ Shale is the primary unconventional shale oil target at the
Icewine Project. DeGolyer and MacNaughton estimates that the Icewine
licences have gross mean unrisked prospective unconventional resources
of 250MMbbl in this formation (P50 gross mean unrisked prospective
unconventional resources of 193MMbbl). The Cretaceous HRZ Shale is an
already proven and prolific source rock on the North Slope, having
sourced the Tarn Oil Field and co-sourced the Prudhoe Bay Oil Field
Complex (the largest oil field in North America). The Project Icewine
acreage was chosen because management models suggested that the HRZ
Shale is in the volatile oil/wet gas mature window over these licences.
The Cretaceous Hue Shale is a secondary unconventional target, lying just
above the HRZ Shale. The Jurassic Kingak shale has a relatively high clay
content, which we believe will make hydro-fracturing ineffective. The
deeper Triassic Shublik Shale is the main source of the Prudhoe Bay Oil
Field, but we believe that it is likely to be in the gas window over the
Project Icewine licences.
88 Energy  8 April 2015  11
The HRZ Shale exhibits important
shale attributes found in other
successful US tight oil plays
The HRZ Shale exhibits important shale attributes found in other
successful US tight oil plays. These include:
 Source Rock Total Organic Content (TOC) — A decent TOC is required
to create a concentrated hydrocarbon reservoir. Reasonably high TOCs
(up to 8%) have been reported in wells from the HRZ/Hue Shale on
adjacent acreage. TOC averages 3% across the North Slope.
 Source Rock Kerogen Type — The source rock must be oil prone —
Type I or II kerogen. The HRZ Shale contains deepwater marine Type II
kerogen. Organic matter type also can contribute organic porosity and
could augment storage potential within the shale.
 Source Rock Thermal Maturity — Ideally the source rock should be in
the volatile oil/wet gas window, as this would maximise the value of
produced hydrocarbons. The lower viscosity of the light oil, gas liquids
and gas mixture in this window allows for higher production rates,
while the presence of liquids increases the value of the production
(over dry gas). Well data (rock-eval and vitrinite reflectance) from
wells located in and near the project area confirm management’s
burial history and heat flow models. These indicate a depth and
maximum bottom hole temperature that should generate the desired
ratio of gas and high value liquids.
 Shale Porosity — The HRZ Shale contains a significant airborne glass
and ash component contributed by volcanic activity during the time of
deposition. This component has the potential to increase favourably
the HRZ Shale’s capacity to retain hydrocarbons through increasing the
porosity of the rock as a result of differential compaction and
subsequent dissolution. Well logs of three historical wells drilled in
adjacent acreage and one well within the Icewine Project licence area
support a mean porosity level of 14%.
 Overpressure — Shale overpressure aids the commercial recovery of
hydrocarbons as it assists the lifting of hydrocarbons to surface.
Petrophysical analysis of the bottom seal provided by Pebble Shale
(immediately below the HRZ Shale) indicates overpressure of
>0.55psi/ft. Management believes that the HRZ Shale should also have
a good top seal (Hue Shale). This is important because the top and
bottom seals should help keep any generated gas, gas liquids and light
oil within the shale and cause the internal shale pressure to be higher
than it otherwise would be.
 Brittle Lithology — Great Bear Petroleum has reported that wells on
adjacent acreage have encountered brittle lithology in the HRZ/Hue
Shale. This bodes well for the ‘fraccability’ of these shales.
 Tectonic Setting — The best shale plays are in tectonically relaxed
regions providing good reservoir continuity. This is because hydrofracturing near faults does not work (newly created fractures head
straight to the fault and stimulate a low reservoir volume). The
Icewine Project acreage is outboard of the Brooks Range
compressional complex in a structurally simple and tectonically
relaxed foreland basin.
88 Energy  8 April 2015  12
Figure 5: Well Logs of HRZ (GRZ) and Hue Shales: Total Organic Content Estimates
Source: Alaskan Department of Natural Resources
High porosity should increase the
capacity for the HRZ member to
retain hydrocarbons, all else being
equal, and allow good (economic)
well performance
Perhaps what makes the HRZ Shale stand out from other US shale oil plays
is the expected high porosity. Improved overall porosity should increase
the capacity for the HRZ member to retain hydrocarbons, all else being
equal, resulting in good resource concentration. This resource
concentration, or oil in place per acre per foot, is highly correlative to
well performance and ultimate recovery when combined with other
requisite attributes for a successful shale play.
Management believes that HRZ
Shale hydrocarbons are likely to
be in a supercritical fluid phase,
which should lead to excellent
well performance
The other part of the geological situation that sets the HRZ Shale in the
Icewine Project apart from many other US tight oil plays is the presence
of both a top and bottom seal. This, combined with the modelled thermal
maturity of the shale, should mean that the hydrocarbons are in a
supercritical fluid phase. Supercritical fluids are at a temperature and
pressure above their critical point, where distinct liquid and gas phases
do not exist. They can effuse through solids like a gas, and dissolve
materials like a liquid. Any hydrocarbons in the supercritical state in the
reservoir form gas, condensate and light oil when brought to the surface
(below the bubble point). This should improve well performance and
economics dramatically. The other US shale play where this occurs is in
certain parts (the volatile oil window) of the Eagle Ford. Wells in the
volatile oil window of the Eagle Ford have some of the best economics of
all the US tight oil wells drilled.
Great Bear Petroleum is chasing
unconventional production from
the Shublik Shale
Great Bear Petroleum’s main focus is chasing unconventional production
from the Shublik Shale on the Central North Slope to the north of Project
Icewine, where it has found the thermal maturity of this shale to be in
the volatile oil/wet gas window. However, it is unclear to us whether
there is both a good top and bottom seal surrounding this shale that could
force the hydrocarbons into a supercritical phase. Although the Shublik
and Kingak shales account for most of the oil found on the Alaskan
Northern slope to date, this could be because their seals are ‘leaky’.
88 Energy  8 April 2015  13
Conventional Plays
The Central North Slope has only
seen limited exploration to date
given its potential
The Central North Slope has only seen limited exploration to date given
its potential. There have been less than 500 exploration wells; by way of
comparison, Wyoming (roughly two-thirds the area of the Central North
Slope) has more than 70,000 exploration wells. In 2013 the USGS
estimated that the Central North Slope has 4Bbbl of mean undiscovered
resources. The only US region with more undiscovered resources is the
protected Alaskan reserve area.
Recent improvements to 3D
seismic imaging technology now
allow better resolution of rock
strata
Part of the reason for the limited exploration to date is because the
Central North Slope has a thick permafrost layer that makes seismic
imaging challenging. However, recent improvements to 3D seismic
imaging technology should now allow better resolution of rock strata.
Figure 6: Schematic Brookian Seismic
Source: Company data
Management has identified three significant conventional plays that work
well to the north of the Project Icewine acreage that may extend onto its
acreage. These are:
 Brookian Turbidite Sands — These Upper Cretaceous slope and
deepwater sands are relatively widespread on the Central North Slope.
Successful discoveries have been made predominantly in stratigraphic
traps, often in base-of-slope settings. The reservoirs are sourced by
the HRZ and Hue shales. Some examples include the Tarn and
Meltwater oil fields (+100MMbbl combined reserves).
 Beaufortian Transgressive Sands — These sands are on the Lower
Cretaceous Unconformity. Oil has been found in combination
structural/stratigraphic traps. Successful examples include the Kuparuk
River (>2,000MMbbl OOIP) and Fiord (+50MMbbl reserves) oil fields.
 Beaufortian Shelf Sands — These are Lower Cretaceous to Upper
Jurassic sands. Reservoirs have been found in stratigraphic traps,
often characterised by seismic amplitudes. The Alpine oil field
(430MMbbl of reserves) is an example of this play type.
88 Energy  8 April 2015  14
The initial focus of Project
Icewine’s conventional
exploration programme will likely
be on the Brookian turbidite sand
play
The initial focus of Project Icewine’s conventional exploration programme
will likely be on the Brookian turbidite sand play. The USGS estimated
that Brookian Clinoforms (slope and fan sands) on the Central North Slope
have 1,600MMbbl of mean undiscovered oil resources. In 1989 Texaco
drilled the Wolfbutton 25-6-9 well with good oil shows in the Brookian
roughly 20 miles north-west of the Project Icewine acreage. E&Enews
have also reported that, according to state officials, Great Bear
Petroleum's 2012 drilling operation hit a small but promising pool of
conventional oil. Great Bear, a private company, won’t say whether it
encountered commercially-viable resources.
The Icewine Project’s ability to drill an exploration well that targets both
a coventional prospect and the HRZ unconventional play is tantalising.
However, we believe that it might be some time before 88 Energy drills
an exploration well targeting a conventional prospect as the the company
will need to shoot and analyse 3D seismic first. In late 2013 Great Bear
acquired some 280 square miles of 3D seismic over its acreage to the
north. It has only just started to drill the first well (Alkaid-1) based on an
analysis of this data. Before 88 Energy can shoot 3D seismic over its
acreage the company will need to complete the acquisition of the
licences and farm out an interest in the project for work programme
carry.
Fiscal Terms
The 2013 ‘More Alaska Production
Act’ has improved the Alaskan
fiscal terms
We believe that the 2013 ‘More Alaska Production Act’ means that the
fiscal terms for Project Icewine’s acreage are better than those in some
other prolific onshore producing basins (such as those in Nigeria or
Russia). Oil and gas producers pay three main taxes. The State Royalty
rate is 12.5%. Producers must also pay Severance Tax (production tax) at
a flat rate of 35%. This tax is based on the net value of oil and gas, which
is the value at the point of production less all qualified lease
expenditures. Qualified lease expenditures include certain capital and
operating expenditures, with 20% of new production being exempt from
Severance Tax. The tax code also allows for Severance Tax to be offset by
certain tax credits. These include a small producer credit of up to
US$12m pa and a US$5/bbl new production credit. Finally, companies
have to pay US Federal Income Tax at 35%, and State Income Tax at 9.4%.
Generous exploration cash rebate
programme
In order to encourage exploration, the state operates a generous
exploration cash rebate programme: 85% of 2015 qualified exploration
expenditure, 75% of 2016 expenditure and 35% thereafter will be rebated.
88 Energy has entered into a Net
Profits Partnership Agreement
with Arktos Energy Management
To get access to Project Icewine, 88 Energy entered into a Net Profits
Partnership Agreement with Arktos Energy Management (AEM, who did
most of the initial work on the project) under which it pays AEM a 4%
overriding royalty on the project and a net profit interest (NPI). The NPI
starts at 5% of net profit once Energy Alaska’s investment has been repaid
(ie, once cumulative net profit is at a multiple on invested capital (MOIC)
of 1x), increasing by 5% with each MOIC increment up to a maximum of
45% of Energy Alaska’s net profit at 9x MOIC.
88 Energy  8 April 2015  15
Corporate
Capital Structure
88 Energy has 1,139m ordinary
shares
88 Energy has 1,139m ordinary shares in issue after its February 2015
capital raising. It also has 404m listed options and 103m unlisted options.
The strike price and expiry dates of the options are given in Table 4 below.
Table 4: 88 Energy’s Options
Options (m)
Strike Price (A¢)
Expiry Date
0.5
50.0
Apr-15
3.3
60.0
Apr-15
3.5
70.0
Apr-15
0.3
70.0
Apr-16
0.2
39.3 (25.6p)
Nov-15
0.5
38.3 (24.2p)
Nov-15
2.0
28.0
Nov-15
3.0
28.0
Nov-15
2.5
45.0
Mar-16
2.5
45.0
Mar-16
1.0
42.0
Jun-17
2.0
28.0
Jun-17
1.0
30.0
Apr-16
0.3
16.0
Jun-17
12.0
1.0
Oct-17
20.0
1.4
Mar-18
45.0
1.5
Feb-18
3.0
1.5
Feb-18
403.7 (listed)
2.0
Mar-18
Source: Company data
88 Energy raised A$6.9m of new
equity in February 2015
88 Energy had A$0.8m in cash and no debt as at 31 December 2014.
Working capital was slightly lower at A$0.7m. On 18 February 2015 the
company announced the completion of a placement to raise A$6.9m,
before costs. The placement of approximately 691m shares was
undertaken at A¢1.0/share. Placement participants also received one
free attaching listed option for every two placement shares, with the
options exercisable at A¢2.0 and expiring on 1 March 2018 (see above).
We estimate that currently 88
Energy has A$7.0m in cash
We estimate that currently 88 Energy has no debt and A$7.0m in cash, of
which US$3.0m (A$3.9m) is earmarked for Project Icewine 2015 lease
payments (remaining acquisition costs and rental) and US$2.0m (A$2.6m)
is set for 2015 G&A and exploration expenditure.
Burgundy Xploration LLC
88 Energy has partnered with Burgundy Xploration LLC in Project Icewine.
Burgundy is a private US company founded by geologist Paul Basinski.
From 2005 to 2008 Paul spearheaded ConocoPhillips’ programme to lease
over 300,000 acres in what today is the ‘sweet spot’ (the volatile oil/wet
gas window) of the Eagle Ford play. More recently he used his knowledge
and understanding of what geologic conditions are required to produce
the most economic wells gained from this experience to analyse the
shales of the Alaskan North Slope. He came up with a new shale oil play
that others had overlooked: the HRZ/Hue Shale to the south of where
most of the North Slope licences had been acquired.
88 Energy  8 April 2015  16
Board and Management
We believe the Board and management of 88 Energy has the right mix of
financial, geological and reservoir engineering skills to make a success of
the Icewine Project. It is also encouraged to increase shareholder value
as they own millions of shares and options (see Table 5 below). We
provide brief biographies of the Board below.
Michael Evans
(Non-executive Chairman)
Michael Evans, a Chartered Accountant based in Perth, has extensive
executive and Board level experience with publicly-listed companies in
the natural resources sector spanning 30 years. Mr Evans was the founding
Executive Chairman of ASX oil and gas explorer FAR Limited, a position he
held from 1995 until his resignation in April 2012. Under Mr Evans’
stewardship, FAR established and built up an extensive international oil
and gas portfolio spanning Africa, North America, China and Australia,
with industry partners including Amoco, Shell, BHP, BP, Exxon, CNOOC,
Woodside and Santos, amongst others. Mr Evans is currently the Nonexecutive Chairman of ASX-listed TNG Limited.
David Wall
(Managing Director)
As a leading oil and gas equity analyst for the past six and a half years,
David Wall has extensive experience with junior oil and gas companies,
with a particular focus on exploration. His skill set spans asset evaluation
across many fiscal regimes and play types as well as corporate
advisory/M&A and equity capital markets experience, having led
>US$300m in capital raisings. Prior to his career as an analyst, Mr Wall
managed a small team at Woodside Petroleum Ltd that reported to the
executive committee. This team was responsible for vetting reports from
all departments within the business prior to board approval, including
exploration, development, operations, commercial and M&A. The team
was also responsible for the annual budget as well as significant input
into the five-year plan and the company strategic plan.
Brent Villemarette
(Non-executive Director)
Brent Villemarette is a reservoir engineer with more than 30 years’
experience in the international oil and gas industry. This spans a wide
range of disciplines, including reservoir engineering, development,
operations, exploration, acquisitions and new ventures. He is currently
Chief Operations Officer for Transerv Energy, which has assets in the
onshore Perth Basin in Western Australia and in Alberta, Canada. He has
been Operations Director for Latent Petroleum, a private oil and gas
exploration company engaged in commercialising the Warro tight gas field
in the northern Perth Basin. He has also held the roles of international
reservoir engineering manager for new ventures with Apache Corporation
based in Houston, Texas, and reservoir engineering manager for Apache
Energy Limited based in Perth.
Dr Stephen Staley
(Non-executive Director)
Dr Stephen Staley has 30 years’ of management and technical experience
in the European, African and Asian oil, gas and power sectors, including
with Conoco and BP. More recently, Dr Staley was founding Managing
Director of upstream start-ups Fastnet Oil & Gas plc and Independent
Resources plc and a Non-executive Director of Cove Energy plc.
Table 5: 88 Energy Shares and Options Owned by the Board
Shares
Options (Strike Price, Expiry)
Michael Evans
Director
4,166,667
1,000,000 (A¢42, Jun-17)
David Wall
5,416,666
Nil
Stephen Staley
4,166,667
2,000,000 (A¢28, Jun-17)
Brent Villemarette
1,221,222
1,500,000 (A¢60, Dec-14)
Source: Company data
88 Energy  8 April 2015  17
Risks
88 Energy is a highly speculative
investment
Junior exploration and production companies like 88 Energy are, by their
nature, high-risk. They face many areas of common risk, including
commodity prices, geological, operational, financial, regulatory, legal,
political and security. The main 88 Energy-specific risks are outlined
below.
Geological and Technical Risks
DeGolyer and MacNaughton put
the geologic probability of success
at 40.7%
As with all exploration, we consider the degree of geological and
technical risk to be high. On a relative basis to other exploration
companies, however, we consider this risk to be moderate due to
confirmatory well log data from an old well on the project area (and
three wells nearby). The proximity of work done by Great Bear Petroleum
and its reporting of brittle shales and a small oil dicovery also de-risk the
Icewine Project acreage to some extent. DeGolyer and MacNaughton put
the geologic probability of success (the probabilty of discovering shale
reservoirs that flow petroleum at a measurable rate) at 40.7%. Drilling
and coreing a well should provide data that would narrow the possiblities
considerably.
Well performance is probably the
key risk for Project Icewine’s
unconventional play
However, getting the rocks to flow some oil and getting them to flow oil
at commercial rates are two quite different things. Given the Arctic
conditions and lack of infrastructure away from the Dalton Highway and
Trans-Alaska Pipeline corridor, all-in well costs are relativelely high
compared with US Lower 48 onshore wells. This is likely to set a higher
bar for commercial initial production rates than is seen in the US Lower
48 states (although access to global oil market pricing should offset some
of the effect of higher costs). Having said that, the Dalton Highway and
Trans-Alaska Pipeline cross the eastern part of the Icewine Project
acreage, and initial test wells are likely to be drilled here. Management
believes that the HRZ/Hue Shale hydrocarbons should be in the volatile
oil window, which if true should allow for high initial production rates.
Only the drilling and hydro-fracturing of a horizontal well can prove this
to be the case. Indeed, given the high variability of individual shale oil
and gas well performance, it is only when the production of around 30
wells is known that a proper assessment of the comercial viablity of a
play can be made.
There is no local market for gas
on the Alaskan North Slope and no
current export route
The Icewine Project acreage was picked because management estimates
that the HRZ and Hue shales should be in the volatile oil/wet gas window.
If this is found to be the case, this means that the deeper Kingak and
Shublik shales are likely to be in the gas window. These latter two shales
make up 166MMbbl of DeGolyer and MacNaughton’s 493MMbbl gross mean
unrisked prospective unconventional resource estimate. There is no local
market for gas on the Alaskan North Slope and no current export route. In
March 2012 ExxonMobil, BP, ConocoPhillips and TransCanada announced
that they would work together on the Alaska Pipeline Project, which
would take gas from the North Slope south to an LNG plant on the Kenai
Penninsula and into Canada’s trunk pipeline system. However, given the
project sponsors’ current capital constraints, this huge project (a capital
cost of US$45-65bn) is unlikely to be sanctioned anytime soon. Currently
producing North Slope conventional oil and gas fields reinject any gas
produced into the reservoir to maintain pressure. Should the Icewine
Project be successful, we believe 88 Energy will also have to reinject any
produced gas into a reservoir. This probably doesn’t matter that much, as
the economics of wells in the volatile oil/wet gas window of the Eagle
Ford depend largely on the value of liquid sales, not gas sales.
88 Energy  8 April 2015  18
Operational Risks
Operational risk remains key for
all junior companies with limited
operational experience
Operational risk remains key for all junior companies with limited
operational experience. It is likely that any farm-out will be to a large oil
and gas company with significant operational experience, in our view.
Funding Risks
As for all junior oil and gas
companies at this time, we
believe funding risk is substantial
We estimate that 88 Energy currently has around A$7m in cash after a
recent funding round. Most of this is earmarked for 2015 lease acquisition
and rental, vinatge seismic acquisition and processing, geological studies
and G&A. Although the company will be eligible for a 85% rebate of 2015
exploration expenditure, it will have to farm out an interest in the project
or raise more capital in 2016 to fund a 2016 work programme. Great Bear
and partner Halliburton have spent over US$150m to date on a large 3D
seismic survey and two cored, but not flow tested, wells. This year they
are planning to spend a further US$100m on seismic and three wells.
Fiscal Risks
Alaska’s fiscal regime has seen
several changes in recent times
Alaska has experienced a number of changes to its fiscal regime over the
last few years, all of which have been favourable. Whilst this is positive,
the fact that the regime is subject to change indicates that risk remains
for further changes, be they positive or negative.
Environmental Risks
We consider environmental risk to
be low in Alaska
We consider environmental risk to be low in Alaska as areas where
operations can take place are clearly defined. There is no urbanisation or
agricultural activity across the Project Icewine acreage. This is often not
the case in the US Lower 48, where shale development can be challenging
in populated or agriculturally intensive areas. A drilling and completion
operation during winter leaves a minimal footprint.
Project Icewine Entry
We believe that the risk of
licences not being granted, or
them not being transferred by
BEX, is minimal
The granting of the new Project Icewine leases to Burgundy Xploration
(BEX) by the state is subject to the Alaskan Department of Natural
Resources completing its internal approval processes (expected in 2Q15)
and the payment of outstanding lease costs. Once the leases have been
granted, BEX will transfer them to an 88 Energy subsidiary, under the terms
of 88 Energy’s agreements with BEX. We believe that the risk of the
licences not being granted, or not being transferred by BEX, is minimal.
Tarfaya Block Exit
88 Energy is in the process of
divesting its 25% interest in the
Tarfaya Block, Morocco, to Galp
88 Energy is in the process of divesting its 25% interest in the Tarfaya
Block, Morocco, to Galp. Under an agreement with Galp, if the exit has
not been completed by 19 September 2015 (or later as mutually agreed),
88 Energy is liable to Galp for US$3.4m. Given that the permit expired in
February 2015, but was extended by Galp to November 2015, and that 88
Energy did not elect to participate in the extension, we believe that this
contingent liability has a low chance of realisation. All documents to
effect the licence assignment have been executed, with only ministerial
execution required. Pre-approval by the minister has been granted and
execution is expected prior to mid-2015.
88 Energy has also agreed a payment to Galp of US$3.4m, in shares or
cash, if the market cap of the group exceeds US$50m within seven years
of the agreement. This payment will also be required if the group delists
for any reason, such as due to a change of control.
Centre
88 Energy  8 April 2015  19
Research Team
Metals & Mining
Jim Taylor
Imogen Whiteside
Oil & Gas
Stuart Amor
Corporate Broking
Jonathan Williams
Charlie Cryer
John van Eeghen
Kim Eckhof
+44 (0)20 3440 6821
+44 (0)20 3440 6822
[email protected]
[email protected]
+44 (0)20 3440 6826
[email protected]
+44 (0)20 3440 6817
+44 (0)20 3440 6834
+44 (0)20 3440 6816
+44 (0)20 3440 6815
[email protected]
[email protected]
[email protected]
[email protected]
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