88 Energy finishes March quarter in ‘a solid financial position’
[source: 88 Energy]
In an update for the quarter to 31 March 2022 (1Q22), 88 Energy (88E )reported its first cash inflows from Project Longhorn of A$0.6m net of OPEX / CAPEX and successfully drilled to a depth of 7,334 feet at the Merlin-2 appraisal well in Alaska.
Project Longhorn
Meanwhile, the Company said its recently acquired Project Longhorn conventional oil and gas production assets in the proven Permian Basin have been performing well to date.
88E executed a binding Securities Purchase Agreement (SPA) to acquire an around 73% average net working interest in Project Longhorn in February 2022. The purchase price for the acquisition was US$9.7m, consisting of $7.2m cash and $2.5m in 88 Energy shares.
The acquisition represented 88 Energy’s first move into producing oil and gas assets and is in line with its strategy to build a successful oil and gas exploration and production company.
As part of the acquisition, 88 Energy agreed to a low-cost work program for FY22. The initiatives are expected to approximately double production rates by the end of the year.
The acquisition of its working interest has delivered 88E immediate cash flow, as well as further low-cost capital development upside providing “appealing” forecast economics. First cash receipts from the project received last month comprised a payment of around A$0.6m.
The project remains on track to complete the targeted seven capital development activities this year, which is expected to around double current production rates by the end of FY22.
Project Peregrine (100%)
The Alaskan-focused explorer spudded the Merlin-2 appraisal well, which is in Project Peregrine in the NPR-A region of the North Slope of Alaska, on Tuesday 8 March 2022.
The Arctic Fox rig had exceeded expectations in terms of drilling performance, with the well reaching TD safely and efficiently. All three Nanushuk targets (N20, N19 and N18) were penetrated during drilling, with elevated mud gas readings and oil shows noted in cuttings.
Merlin-2 was largely consistent with the Merlin-1 well drilled in 2021, showing strong fluorescence, oil sheen, petroliferous odour and cut noted in the drilling cuttings, elevated C2-C5 mud gas readings over the target zones with total gas significantly above background gas readings and evidence from the reservoir sampling tool of moveable hydrocarbons
The decision to plug the well and commence demobilisation from the Merlin-2 site was made just prior to the end of the quarter. 88 Energy will now undertake detailed analysis of all data obtained and evaluate potential future appraisal activities within the Peregrine acreage.
Project Icewine
During 1Q22, 88 Energy initiated discussions in relation to a potential farm-out of the Project Icewine acreage. Currently, the company says due diligence activities and negotiations are advancing with a third party, including the related work program terms and structure.
It said initial screening economics of the Umiat Oil Field, which 88E acquired in 1Q21, suggest that this development option adds further value to a future Umiat development, considering the high cost of diesel (currently ~US$6-7/gal) on the North Slope of Alaska.
Positive Market Dynamics
88 Energy said it is also benefiting from recent increases to oil prices which have strengthened cash returns from the high-margin oil production within this portfolio
During 1Q22, 88 Energy initiated discussions in relation to a potential farm-out of the Project Icewine acreage. Currently, the company says due diligence activities and negotiations are advancing with a third party, including the related work program terms and structur.
The Company says initial screening economics of the Umiat Oil Field, which 88E acquired in 1Q21, suggest that this development option adds further value to a future Umiat development, considering the high cost of diesel (currently ~US$6-7/gal) on the North Slope of Alaska.
View from VOX
1Q22 Financial Review
From a cashflow analysis perspective, we can see cash outflow from operations of A$1.7m, which is broadly flat on 1Q21 of A$1.5m (see figure 1). However, investments in producing and developing assets during the period increased to A$27m (1Q21: A$11.2m) mostly in relation to exploration and evaluation expenditure of A$16.4m and primarily associated with the company's Merlin-2 drilling operational activities at the Project Peregrine in Alaska.
To maintain its strong balance sheet, 88E raised A$32.1m, which, together with existing cash reserves, will be used to fund the Merlin-2 well drilling appraisal and activities including cost overruns as well as new ventures, portfolio expansion opportunities, and working capital.
Further significant cash outflows included 88E’s investment in Longhorn of A$10.7m, lease rental payments of $0.8m as well as administration, staff and other costs of A$1.7m. As at 31 March 2022, 88 Energy therefore holds A$32.6 million in cash and remains debt free.
| Figure 1 – Consolidated Statements of Cashflow | ||
| Net increase / (decrease) in cash and cash equivalents for the period | 1Q22 | YTD |
| Cash and cash equivalents at beginning of period | 32,317 | 32,317 |
| Net cash from / (used in) operating activities | (1,727) | (1,727) |
| Net cash from / (used in) operating activities | (27,374) | (27,374) |
| Net cash from / (used in) financing activities | 30,001 | 30,001 |
| Effect of FX | (586) | (586) |
| Cash and cash equivalents at end of period | 32,631 | 32,631 |
Shares in 88 Energy fell at the end of March 2022 after a wireline logging program at the company’s Merlin-2 well demonstrated that target zones had lower than anticipated porosity/permeability, resulting in difficulty obtaining fluid samples of significance.
Commenting at the time of the wireline program, Managing Director of 88E Ashley Gilbert told investors: "We appreciate that this result will be disappointing news for shareholders, that we were again unable to obtain a fluid sample at surface or perform a flow test.
He further commented: “However, we will now take the necessary time to fully analyse the data from the Merlin-2 well. This will provide a basis upon which the company can provide further updates on the future potential appraisal program for the Project Peregrine acreage."
Since then, 88 Energy has told investors that it remains in “a solid financial position,” with zero debt and a healthy cash balance that is expected to be further strengthened with projected cash flows from Longhorn’s Texas production assets. This program is expected to result in strong cash flow outcomes as well as further direct exposure to high energy prices.
88 Energy’s Managing Director and CEO, Ashley Gilbert, further highlighted: “We are also highly encouraged by the successful delivery by the Operator of the first planned work-over, as well as the continued progress of the agreed capital development program for 2022.”
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