- The market has very wrongly written off Royston, in fact it looks like a brilliant result.
- Oil is better than gas as it provides short term cashflow possibilities.
- Discovered resources easily cover the current market cap and more, several fold upside through drilling comes on top.
At the analyst meeting on 9th November Touchstone laid out their Royston well log on the table, I’m no expert on well logs but Paul was brimming with excitement as he spent half an hour walking through things and explaining the log data, this was after the first test result the day before but ahead of the second and third test starting.
The first test press release states; ‘The completion spanned a 92- foot gross interval (30 feet of net pay) below 10,434 feet that was identified on wireline logs as being hydrocarbon bearing’ in paragraph 3. The area perforated is from 10,434ft to 10,526ft but the hole stops at 10,700ft leaving 174ft below the perforated tested section (not all of this is logged but a good section below 10,526ft but stopping before 10,700ft is). Paul said they were unable to test this lowest part as you couldn’t get the equipment in properly, you needed some spare hole depth below the equipment. However when you look at the logs in this part they look better than the area they actually perforated and which flowed in the test 1 zone. The well clearly stopped drilling still in the oil zone and if you take the seismic data there is still another continuation section below 10,700ft hole bottom. Paul’s back of the envelope view at the meeting was that the 92ft interval perforated and flowed would have about 100m barrels of oil in place, if you included the drilled but untested 174ft this could increase to 250m and if you added in the estimated seismic part continuing below the 10,700ft then 500m barrels in place was possible. At this stage it’s unclear what view a reserves auditor might take on the sizing of this oil find and things are clearly very preliminary. However a $2 type number per barrel in place gives an excellent valuation prize from the Royston well lowest zone and first test. They also believe that the crestal location is away to the North and a subsequent well from the same pad could target this easily for maximum pay and maximum production flow rate, they would be excited to drill this ASAP!
Ahead of the second and third test Paul discussed his excitement around the logs at the meeting which Touchstone believed would be mainly gas and liquids rich. Test 2 area was over a much wider section for perforation but it contained various breaks in between, they were looking at about 200ft to perforate out of 270ft with varying thickness sections. With the benefit of hindsight they should have perhaps been more cautious and perforated smaller sections at a time then looking at each, however they were expecting gas (not oil and water) so did a single large perforation and we got the results of this on 6th December that the stockmarket/investors disliked. It’s my view they have perforated the water contact at some point and this has crowded out the oil section, hence we have no idea how thick the oil section might be, it could be very thin or actually quite thick, only a second well and more careful testing will answer this fully. However as a guestimate, given the huge areal extent of Royston sheets, they might have found 100m barrels perhaps.
That brings us to the third test which is a clear 84 feet with no breaks at all. Pre the second test Paul felt the third test could be the best of aa three. Assuming this is all above the water contact and they are now set up for an oil test it’s possible this could be the best of the three.
Oil is better than gas?
Pre Chinook I was hoping for oil at Chinook, it can be brought on stream much faster than gas and brings near term cashflow. Investors appear to have ignored this with the relative surprise of Royston being oil not gas. Management have been clear that they would be happy to use debt for development, well that possibility now looks very near term with Royston. The well took around 35-40 days to drill to 10,700ft (spud Aug 12th, press release of logs Sept 24th) and circa U$5m capex. In 3Q result when discussing the new Star Valley drilling rig there is the line; ‘PS-610ST commenced drilling on October 31, 2021 and reached a total depth of 6,975 feet on November 9, 2021.’ That’s around 10 days for 7000ft, it seems fair to assume that they can drill a rapid follow up oil producer well into Royston come early 2022 for production at maybe 20 days. Given faster drill time this might only cost U$3m as a guestimate too. A flow rate of 1000BOPD and netback of U$40 which matches well with current oil prices gives (30*40*1000) U$ 1.2m monthly cashflow, hence a payback of circa 3 months. I’d reckon a fully designed crestal producer through the whole thickness of Royston might do 2000BOPD (we got 550 from the recent test which was very sub optimally designed, perforated etc), that can be extremely valuable to Touchstone in early 2022. One well with U$2.4m monthly cashflow would be a game changer for the business, let alone the follow on production plan that could be outlined. 2000 might be a little too hopeful, the highest rate from any similar Herrara well in Trinidad is around 2300BOPD. The stock market has completely missed the huge near term value of oil and the rapid cashflow that can come from this at Royston. All would have agreed Touchstone Balance Sheet was not the strongest, hence this oil cashflow is actually relatively more valuable to Touchstone than it would be to a larger or well capitalised other oil business. It brings increased flexibility and optionality for 2022.
An embarrassment of future opportunities
Quote from test 2 press release; ‘In the future we envision two additional wells to be drilled from the existing Royston surface location subject to required approvals. The prospects include Royston Deep-1, which will evaluate the entire Herrera section. As an exploration well, Royston Deep-1 would seek to establish the base of the oil zone in the intermediate thrust sheet as well as investigating the underlying subthrust Herrera reservoir. The second exploration prospect, Kraken-1, is targeting the deep Cretaceous turbidite sands.’ The first well here would be a producer from the first test and drill all the way through the intermediate sheet of the Herrera Formation, it would also be exploration into the ‘underlying subthrust Herrera reservoir’ which could be another exciting discovery. The second well into Kraken is a whole different ballgame in terms of sizing. Hence we have 2 wells that are both possible Royston producers AND exciting exploration options. This is well before discussing Steelhead, Bass or Guabine and other follow on prospects. We can be sure that when cashflow arrives it can be put to excellent use.
The stock market reaction to the second test has provided a monumental buying opportunity for new investors. The importance of finding oil at Royston instead of gas has been totally overlooked. By July next year we could have 3 oil producers from Royston on stream, Cascadura on stream and the often discussed ‘wall of cash’ quote would come true. If we are really fortunate both Royston deep subthrust and Kraken could also be a discovery by then. Already discovered resources easily covers the current market cap and more, several fold upside through drilling comes on top. Any sort of share price target should be £3 to £10 on a two year view.
Previous Touchstone articles
Nov 17th 2020
22nd September 2020
26 April 2019
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