88 Energy (LSE: 88E) has captured the attention of investors over the past three years. Shares in the company have risen by more than 200% since 2015 as Alaska-focused shale explorer made some apparently impressive oil discoveries.
Breaking out
In late 2016, the company told investors that it had identified some preliminary oil prospects as part of its conventional oil exploration programme. And after processing these leads, the company told investors in January of this year that its Project Icewine’s conventional oil potential could be as much as 1.5bn barrels of resource, based on 2D seismic data.
Drilling of the Icewine-1 well well confirmed that the company had indeed struck oil gold and to confirm, management pressed ahead with Icewine-2. This is where cracks started to emerge in the company’s facade.
88 Energy drilled its Icewine-2 well in May and then in June, informed investors that it had gained enough insights into the underlying rock formations that it could proceed to the fracking phase.
Problems arise
Fracking began in June, but it soon became apparent that the two wells drilled “weren’t communicating” as only 8% of the frack fluid was recovered. The plug between the two zones was drilled out, and “flow-back” was continued.
Unfortunately, once again this failed to stimulate the rocks again, and at the beginning of July, management announced that the company was planning to “shut the well in for six weeks to allow for pressure build up and imbibition to occur.” This announcement understandably spooked investors as it hinted that the Icewine-2 well might not be the gusher everyone had hoped.
Operations restarted at the end of August, and so far, there’s been little in the way of positive news from the well. Earlier this week the company that it is still waiting for the well to start providing it with “representative results” that can be used to judge the commercial feasibility of Icewine.
The latest update shows that the well is still slowly yielding fracking fluid and some gas is starting to come through, but the targeted hydrocarbons remain elusive. Currently, the well is flowing 55 barrels of fluid and 2-4 thousand cubic feet of gas per day.
Time to buy?
While the recent news from 88 Energy has been disappointing, I don’t think investors should give up on the company just yet and believe it still has potential. Oil & gas exploration is not an exact science and often does not go to plan. Nonetheless, each attempt yields more information about the prospect improving the chances of success down the line. If 88 Energy does not strike oil this time around, a second or third attempt may follow, and each time the chances of success will increase.
Management believes that the company is sitting on 1.5bn barrels of oil, and if this is the case, the risk/reward ratio for investors is highly attractive. Granted, it might take some time before any results emerge, but the potential payoff is certainly worth the wait in my view.
That being said, I should say that this company is only suitable for the most risk averse investors. If Icewine turns out to be a complete flop, 88 Energy might be forced out of business.
