88E Long-Term Investor Presentation 9th September 2016 in London

Hosted By: 88E Long Term Investors Group (Graham McHardy / Tim Ashdown)
Transcribed by steve068 of the HotCopper 88E Forum: https://www.evernote.com/l/ADdoMYZfBdxGdohHkrfwxFoU9ccF44IGvEs

Presented By:
Dave Wall - CEO - 88 Energy
Paul Basinski - CEO - Burgundy Xploration
Stephen Staley - Director - 88 Energy

Tim Ashdown
Welcoming remarks

Dave Wall:
Thanks everyone for coming and a special thanks to Graham and Tim for putting this together.

You know I’m not going to talk for very long, I’m not going to go through the whole presentation because most of you guys do understand it and we do have a long period of time for Q&A afterwards, so I’ll speak for about 10 minutes, then Paul will speak for about 10 or 15 minutes and then we’ll get stuck into the Q&A ‘cause that’s where I think we can really create the most value - by us understanding where we’re not communicating effectively with you guys and managing your expectations and things like that.

Let’s just flick through this quite quickly… so… standard disclaimer…

You guys know all about this. Where we are… down here in the red… 271,000 acres it’s obviously a very big parcel of land particularly for a relatively small joint venture. Typically this type of acreage position you would be seeing in a much larger company. And it’s fair to say that, in the lower 48 states we wouldn’t be able to do this because you would only have 3 years to drill out every 640 acres to hold the acreage by production. So this is kind of unique just in that sense, and then obviously the project has a lot of other unique aspects to it.

So just running through… you guys know all this stuff

Some of the highlights… obviously we’ve got an above-ground story here as well as the below-ground story.

The above-ground story:
Incentives from the State of Alaska allowed us to drill our first well relatively cheaply;
We were able to do a deal with Bank of America who co-funded the well, and now we have debt, which is offset by a receivable:- debt with Bank of America and the receivable from - it’s now AAA+ - State of Alaska;
Our acreage is bisected by the Dalton Highway, which is the only all-year-round operational access road in Alaska, and,
We have the Trans-Alaska-Pipeline System (TAPS) running through the acreage, which is running out of oil - and that’s the reason why the incentives were put in place in the first instance.

So that’s just a couple of the above-ground stories.
Obviously - we’re on the infrastructure - we can get to market - we have some all-year-round drilling locations, whereas the rest of Alaska on the tundra you can only drill in winter when the ground freezes - so there are some other advantages there as well.

And then if we get to the below-ground story and we’ll talk about the well now…

So… we drilled the first well and that was designed to mitigate risk.
So it wasn’t designed to tell us if this play was definitely going to work. But we’re trying to figure out if the things that would make it definitely NOT work were NOT present.

So - that’s kind of a slightly different way of looking at things.
If we were going to fail, we wanted to fail as fast as possible - which sounds kind of funny - but that’s the best way to stop all of us from wasting our time and money. We wanted to do it in as efficient a manner as possible from a cost perspective as well.

And we think we were able to do that - and obviously the result was very good.

All of the things that Paul (Basinski) knows, and we now know as well that are required for this vapour-phase, which is like the “holy grail” for these shale plays - we know that all these elements exist.

It doesn’t mean that it’s definitely going to work though. It means that we’re about 50% Chance of Success (CoS) is our internal estimate.

So the next well, which we had originally designed as a lateral, was designed to test the productive potential of the HRZ.

We know the reservoir is amazing.

But can we frack it efficiently, keep the fractures open, maintain good conductivity through the fractures, which means you get a high flow rate?

The reservoir can flow at high rates, but you need to be able to design an effective fracture simulation.

We think we have enough information on hand to be able to do that, but there’s always uncertainty.

So typically in these plays what you’ll do is you’ll have a geological theory, which Paul spent many years putting together; you test that theory which was Icewine #1, and then you move to the evaluation on the flow potential - which in every other play is done with a vertical well with a multi-stage stimulation.

We thought we might be able to skip that step and go to the next step, which is lateral wells - but what ultimately ended up happening once we spent the last nine months analysing the results from Icewine #1 - we couldn’t get to a point where the uncertainty was low enough for us to be able to take that next step.

So the objective of the well - and this well (Icewine #2V), or the lateral (Icewine #2H as originally proposed) - is to prove the productive potential of the HRZ.

So our job is to maximise our chance of achieving that objective.

And this (Icewine #2V) is the design that does that and that is the main reason why this design was chosen.

Things like cost-reduction… it’s a by-product.
Things like being able to test the HUE… that’s a cherry on the top.

But they’re not the drivers. The real driver is reducing risk, mitigating uncertainty and increasing the chances of achieving the objective which is flow-testing the HRZ.

So this is the design that does that, and Paul will talk a little bit more about that as well.

And this (table) we thought spelled it out pretty clearly but I guess it is hard to put in a table, which is kind of a sterile way of disseminating information, really what we’re thinking.

Are we less bullish on the potential of the HRZ?
Nothing could be further from the truth!

Do we want to maximise our chances of achieving success?
Hell yeah!

So how do we do that?
And really it's this strategic going back, re-assessing the strategy, again and again and again, until we’re comfortable that we’ve got it right. And now we are, which is why we’ve come out and said we’ve finalised the design.

So that’s that - and obviously Q&A - I’m sure there’ll be a few more questions.

In terms of the seismic, I think people probably expected to see something a little bit more mature, or maybe we mis-managed expectations there - but what we tried to communicate was that the first look, which we’ve come out with in this presentation was always going to be a bit of a tease.

So this green area here, this was the 3D seismic that was shot in 2015 using dynamite. And we’ve just purchased some 2D extracts - lines from within that box.

And that was obviously done last year so the processing was finalised earlier this year, only a few weeks ago really.

And then we obviously acquired the big blue box.

So… what we’ve seen is extremely good quality of data.

That’s obviously important. Investors just kind of assume that that’s going to be the case, but there’s actually quite a bit of work that goes into that - and it is possible for that not to occur if you haven’t done the planning right.

So having seen that - it’s very important for us.

You know - some of these images… it’s just squiggly lines and all the rest… and to me, to be honest… they are a little bit too… and Stephen (Staley) is here who is a geophysicist and a director - so if there’s anyone who wants to ask questions about the squiggly lines in a more technical fashion, he’s well equipped to answer those questions.

But what you can see quite obviously here - is, you can see these clinoforms which are really just all beach-fronts. So when you talk about pro-gradational - it just means that what we have is an inland seaway and eventually it was closed in over time - and you had all these beach-fronts that formed.

And what these are is they’re very ideal kind of geological setting for deposition of sand and reservoir. it’s obviously what you need for conventional oil and gas - and also the source rock as well - which is obviously important for both the conventional and the unconventional.

Something like this - it’s probably a little bit hard to see - but this is quite significant for us in that this tiny little green blob - we’re already seeing something that we had hoped to see - but we didn’t know whether we would see or not - especially not in such a small area.

And we can see this on a number of seismic lines which means that it could be of significant size. We’re not at a point where we can say how big and what does “significant" mean and all that - I won’t be able to answer that question - but you won’t have long to wait.

This here again - you can kind of see this mound of sand which is effectively what it is.

So that’s kind of it… and this is the recap of stuff that you guys already know about - so I’m going to leave it at that… you understand all of this stuff…

I’ll maybe just touch on this one just briefly (Cost Analysis slide), so this is something that we put out which we thought was pretty exciting as well - and then Brexit happened so we got caught out a little bit with that one - but ultimately, when we look at the parameters in the HRZ, the quality of the reservoir is exceptional.

Like I said - it doesn’t mean that we can fracture stimulate it effectively - but if we can get it to flow at its potential and you overlay a bunch of different cost assumptions and the fiscal regime in Alaska, what you come up with is a breakeven in our mid-case of less than $40 a barrel - and that’s very significant particularly in a low oil price environment that we’re finding us in at the moment… although hopefully that will change one day in the not-too-distant future.

And then just one last thing in terms of upcoming news flow…
- seismic results… the interpretation of the larger piece of acreage.
- the finalisation of the interpretation of the smaller piece (around Icewine #2V location)
That’s the kind of stuff into the end of the year… over the next 4-8 weeks

And then also we are in commercial negotiations with a number of parties about different deals to lower the cost of the well in some way. We are funded for the well now that we’ve changed the design but as I said - it’s a by-product. So we don’t need to come back to the market. Really what that does - it puts us in a very strong negotiating position and means that we can opportunistically take advantage of investments - whether they be from a strategic source - which might be somebody who wants to take equity in the company - but not at a discount, at market price, and committing to fund us on an ongoing basis.

So I think some people have questioned what I mean when I say “strategic” - but that’s pretty much it in a nutshell.

And then obviously on the industry side - bringing in parties on that front as well.

But as I said - we don’t need to raise money so we’re in a very good position.

So that’s kind of it from me - and I think Paul’s going to come up and say a few words…

Paul: Thanks Dave

Q: So your little bit just there about… (without being cheeky…) not needing to raise money… are you 100% sure about that?
‘Cause you said that last time Dave… (DaveW: There’s “needs” and “wants”) …and a few weeks later we had a Capital Raising

Dave: So I think people do get a little bit confused by some of this which is - there is a difference between a “need” - so “is your forward program covered by your current cash position?" - and the answer at that point in time was “yes" - but then if we wanted to drill another well, which everyone knew we did - and it was obvious that we didn’t have the money for that - so, how are you going to do that?

You have to raise money, or do a farm-out.
Q: I agree

DaveW: And what happened was… we had demand to raise that money… and so we did - and it was kind of opportunistic - the share price had gone up and that’s what we did.

Q: It put us in a very good position so I’m not complaining…

(Organiser: Q&A will be at the end and there is plenty of time for questions…)

DaveW: There will be plenty of time and we’ll answer all the questions.


Paul Basinski
Well thank you all this is quite an honour for me and thank you Tim and Graham… it’s extraordinary what’s happened since this group sitting at the front, we met at the Globe, had more than a few cocktails, and it’s astounding what the Long Term Investors Group (have done) - it’s been extraordinary.

And the impact that it’s had on the company that Dave and I share and private(ly) I want to thank each and every one of you for your support and for actually being here. We would like to make this a fun opportunity as well as an educational one.

So I remember last year when we were visiting at the Globe…

…one of the questions that came up is… this project is quite a long time in the making… and the question was… how do you come up with it?

How does this happen? Because basically… this is a representation of using a toolbox that we put together, that we established in 2004 and 2005.

Anyway, people ask… what is this about? What is this thing? How did we get to this point?

And what I wanted to do first off - a number of people asked “tell me about this ACB thing” - and I just wanted to touch briefly on that - we’re gonna hit a few of the other high points - I don’t wanna be up here a belabour all of this stuff - I just wanna give you a feeling of the contexts for how we got here in the first place.

So - how was Icewine identified?

Well, we used the same technique that we used in the Eagleford in 2005 - and it’s kind of ironic because the workflow we’ve come up with now that we have all of the data is basically a page out of that same book.

The first well we drilled was called the Kundi (sp?). It looks almost exactly the same as the Eagleford - all of the characteristics - other than our reservoir’s quite much better. And we ended up doing a completion and that was for deeper objective and it ended up being the discovery at Eagleford. And we’ve taken kind of a page out of that - it’s a “best practises”. And so we’ll have plenty of time to be able to explain what that’s all about - but effectively the way we do this is… that I’m a big fan of studying history. And about the science of innovation and thought. Because - you know - you don’t find billion barrel fields all the time.

I was taught by John Masters - a gentleman that took me under his wing a long time ago - and effectively the approach that I’ve taken - and I think this approach works in all of life - is that, if you can become proficient in many different spheres then it allows you to be able to recombine things in ways that they haven’t been recombined before - to see things - to imagine outcomes that haven’t happened.

So when you do that - I call that “A” - then you get to “C” - that’s the “wow” - we have this idea, now it’s a crazy idea generally, it horrifies everyone - right - how can you get oil out of a shale? - that was the situation at Eagleford… well, real simple, you just had to get it into the right properties and make it a gas in the sub-surface and the rock wouldn’t know the difference, and when you bring it to the surface it’s mostly oil.

But like Dave said - the secret is… you can have a bunch of ideas - but most of them don’t work. So the ideal is, to fail fast, fail frequently, and fail smart. Cycling. Thomas Edison said “I didn’t fail 10,000 times discovering the incandescent light-bulb - I just eliminated 9,999 things that couldn’t work”.

So the point is, that the whole idea is once you get to this “a-ha” moment, that doesn’t mean anything. Now what you have to do is bring in subject matter experts - and now it’s not about knowing the answer. The problem with the regular scientific method. This is the original scientific method that happened before the scientific method. This method is the empirical method.

So what you do is when you have this idea you would [combine and recombine it with fundamentals] (?) who are the subject matter experts and these (Why? Why Not? What If?) are the “three W’s” in the Harvard Business Review - this is what they teach in business school - “Why?" "Why Not?" and "What If?” - and this is the basis of disruptive innovation. (Clayton) Christensen came up with this in 1997.

So the point is that, then what happens is - you start to “ping” - you ask questions - you “flesh it out” - and when you get to a certain point and it looks like it’s not going to work you learn from it, and you move on to the next one.

So what you are seeing here is the results of a zillion failures - but every once in a while the meteor hits - and this happened to be one of those after the Eagleford when we were using the same techniques.

I love quotes - another Edison quote: “I failed my way to success”
(I’m the living embodiment of that)

Thomas Jefferson: “The harder I work, the luckier I get”
(and guess what - that’s the secret!)

Winston Churchill: “If you’re going through hell, keep going”
(Churchill was right! We’ve been doing plenty of this talking about the stock price)

So - we are moving forward with this, and we are very very excited - and we’re really looking forward to clarifying some of the questions and uncertainty you have.

So we all know this - I think you’ve been picking it up as we go forward - but “what are the characteristics of a World Class Resource Play?”

These things don’t grow on trees - they’re very rare.

The first thing is - you have to have Resource Concentration. You have to have the oil in the ground. You have to have a lot of oil in the ground per acre/foot. If you don’t have that - you’re dead.

So that’s Porosity, Oil Saturation and Net Pay.

And that’s something that we have. And we had a searchers(?) company - name’s gonna go unsaid - who took a look at this and said this is the best shale reservoir they’ve seen in the world. I don’t know about that - but it’s the best one I’ve seen.

We have the resource concentration - we have an extraordinary reservoir.

As Dave said - that doesn’t mean anything about getting it out of the ground - that means we have the oil there.

The next thing is that you have the oil - but it has to be in this volatile phase.

And the reason why the volatile phase is so important - it’s very rare oil.

If you go out and ping the internet and look for the oil production of volatile oil - you won’t see any numbers. Because it’s only recently understood even what it was. It’s always gone with either black oil or wet gas. But the point is that it has extraordinarily different properties.

So in the sub-surface it’s in what they call super-critical phase.

And what we’ve learned at the EagleFord is when you produce it - it flows like a gas. When it gets to the surface, most of the gas is very, very rich oil. But - as it leaves the pores, and the pressure goes down and then gas forms in the pores - the gas in the pores creates another energy system in order to increase the recovery factor. That’s the reason why you get recovery factors because you basically have another artificial assist. And that’s the reason why EOG and ConocoPhillips have such extraordinary wells.

So this is an unusual phase and it provides it’s own energy in order to be able to get recovery factors that are like 15%, 20%, 25%. So this is extraordinarily important.

Once we have the Volatile Oil Phase - this is where we are now… do we have the right Rock & Fluid Mechanics?

Because at the end of the day it’s about the stimulated rock volume and the amount of hydrocarbon in the stimulated rock volume we can keep propped open?

So - we can frack this thing, but how high does it go? Is there propane embedment? How will it last as you bring down the pore pressure, because then effective stress goes up?

So these are the important questions. And right now - we are on the edge of this.

But the first thing we’ve got to be able to understand is - we have to collect the data so that we can understand these things - ‘cause if we just get a flow rate, that doesn’t tell us. Because the only thing you’ll know if you get a flow rate like in the Eagleford which was 320 wells - they were lousy wells - took them a long time to figure out how to do it. But we don’t have 320 wells.

So what we’re going to do is we’re going to use a vertical well and we’re going to do these injection followup tests and these neat little tools we’re going to be able to characterise a lot of these parameters so we can take the well flow that we get out of the vertical and scale it up because industry is very well aware of what the scaling factor from a vertical to a horizontal well is. Like in the biggest shale play going on in the Bakken (/ Latin ?) America, it’s mostly vertical wells - only now that they’re starting to convert over.

There’s a lot of stuff going on under the hood we don’t talk about - and I just wanted to give you a feel for it. We’re looking at kerogen - comparing the visual kerogen to the pyrolysis - we’re being able to identify what the nature of the kerogen is, what it’s kinetics are, that tells you whether it’s going to be… how much oil it’s going to produce, what phases it’s going to have. Everything we do is mathematics… everything’s based on physics. Everything’s based on these relationships - and if we don’t have an R-squared of at least 85, we don’t use it.

And so, that’s why it takes such a long time in order to be able to figure out - there’s a lot of IP that goes into this, in order to be able to find these relationships. Because if you have a return-reflectance of say 1.1, what does that mean? Is that oil? Is that gas? What is it? It can be all kinds of different things, and unless you understand these transforms you’re just guessing. We can’t afford to guess in Alaska - it’s too damn expensive!

We have these unbelievable spreadsheets - we have zillions of numbers - we have all this IP where we’re doing these maturation profiles. We’ve got thermal gradients all the way from Tierra to Fuego up to where we are - these are all constraining parameters. It’s easy to take a look and say “well yeah” - but that’s not how you get there. We have one well and 500 square miles. If you take the conventional approach, with the wave with the technique that we came up with in the Eagleford - we had actually less control in the Eagleford when we put that together than this.

And the whole point is that - if you’re looking for volatile oil then you’re looking for thermal gradients and you’re looking for seals. And that’s a very different exercise than what everyone else (is doing) - and that allows you skip a lot of steps and basically weed out huge areas - because you just know that it can’t work. And that’s the secret. It’s not finding it - it’s ruling out everything that can’t work. And that’s the origin of the Achilles Heels. Because if you’re trying to prove it - you can never prove anything - but you can sure prove that it’s impossible - and that’s how we’ve focused on doing this.

And we have core gas - and we’ve been able to convert that into a critical phase and API gravity - now we take the viscosity and these are run in all of our simulators when we talk about the flows we know the viscosity - and the viscosity is an amazing thing. If you go 10 miles to the north of us (Great Bear?) the viscosity is 15 times higher than we are - and when you put that into the flow equation that means 15X the flow rate. That means a (great well?) or something on the North Slope that you’re dead. So viscosity is key.

And on this core we have these ash beds we’ve done a lot of research on those - because it’s something we have to contemplate in our completion plan. We’ve looked at thorin(?) - we’ve looked at all these other characteristics because what we have to understand is the holistic package and how it will frack.

Lastly what I wanted to say is - Dave and I have an unusual relationship - we’re kinda Mars and Venus (Dave: “I’m Mars”) - the thing is we have this really unique relationship and somehow it’s working. It’s amazing - I mean sometimes we wanna kill each other, but that’s ok - we both have skin like an elephant!

The point is - that what we have between us - in these little itsy-bitsy companies - we have this differential expertise. We have proven methods. Dave has got a proven track record. We have proven methods that have worked before. We have the world's leading experts. In Houston we have the world’s leading experts - everything we do is QC’d by all of these guys - and if there’s a flaw we go back - like Dave said, we’re always evaluating.

The bottom line is - people may think we’re pivoting - that maybe we’ve lost interest. I can tell you that the project that we are representing in the HRZ has never looked better. And we are close on the tic-tac-toe board to the last step. But at the end of the day if we can’t stimulate it, we can’t keep it open and we can’t keep it propped then we’ve got a problem. But we have all the pieces in play and frankly I’m not aware of another play in the world that’s got this materiality - ten year term - plenty of time great leases - a state that’s bending over backwards - right next to the pipeline… we’ve got all the fundamentals and now we've just got to execute - do that vertical well and see what happens.

It’s risky. We don’t know what the outcome’s going to be. But we’ve sure come a hell of a long way from where we were even 18 months ago.

Organiser: So we’re going to do a the Question and Answer session now… (remarks on how Q&A will work)


1) Paul B mentioned in his presentation who was quality-controlling the data analysis. Can you elaborate on that and tell us who those people are?**

2) Now that we’ve decided to go with a vertical well, will we need to follow it up with a horizontal well?

3) We’ve got seismic from a very small portion of the whole play and we’re going to drill one well - I just need to know how do we extrapolate that so we get an idea of the total reservoir on the whole play and what the volume’s going to be and how much production we can expect - and where to put the other wells?

4) You say that after the vertical well we’ll need horizontal well or wells which would effectively take us to production. I thought 88 Energy would not go into production.

5) Do you have any projected point you want to get to before the sale?

6) So, we’d be looking to finance those wells before getting a joint venture / farm-in (partner)?

7) Since we’re talking about flow rates can you perhaps expand on the expected flow rates from Icewine #2

8) Paul - what do you see as our final price buy-out - is it £30,000 per acre, £35,000 per acre, £40,000 per acre

9) One of my questions has always been the migration of oil - from north to south, south to north, etc. What are your the reasons and the geology behind the migration of oil and which way it goes - from Prudhoe Bay down or from down to Prudhoe Bay from the HRZ or the Hue or whatever?

10) The Alaskan Government - there’s a lot of changes going on there. What are the impacts on 88Energy?

11) Are you treating the non-conventional and conventional completely separately?

12) How much of the field can support all-year round production?

13) Where is the risk exactly? If you’re saying the reservoir is there, where is the risk once you do the vertical drill - and why did you want to go for horizontal in the first place and then change it?

14) Can you use Icewine #2 to do the horizontal once you’ve done what you need to as the vertical (well)?

15) When we will know about the rock mechanics? Is it March?

16) You mentioned the mechanics of how the gas in a super-critical phase is released and it has a second energy - can you explain that a bit more and maybe relate that to the recovery rates you mentioned above 25%?

17) If the 2D comes in as expected or even better than expected - what’s in your head currently as the time scale for monetising the conventional?

18) What sort of volume of conventional would you deem is big enough for anyone to be particularly interested in?

19) How would you compare it to Cove (Energy)?

20) You see your market cap value being possibly $10B - which puts around a £2 share value each - but that’s based on 4.6B shares at the moment. How much more dilution do you see before we get to that value?

21) There is some more acreage coming up - what’s our chance of getting some more?

22) A couple of years ago you offered shareholders the opportunity to participate in a placing. Would that be a possibility in the future?

23) The cash raising you did a few months ago to sophisticated investors and institutional investors at a price around 1.9p - do we know if they are still invested or have they taken their cash and flown?

24) Can you explain a little about the options (ASX:88EO) - particularly for the UK investors?

25) Is it possible that the rock mechanics from their wells come from our acreage or vice-versa? How does it stop? I’d rather we nicked their play than they nicked our play!

26) There’s a lot of space between Icewine and Prudhoe Bay and you’ve mentioned a bit about conventional that people are looking at (in this space) - what are they looking at in terms of the unconventional between Icewine and Prudhoe Bay?

27) Are you able to tell us when you would commission the next Independent Resource Report (IRR) - and how easy is it to find a company that can analyse your data because it’s so unique?

28) I see the acreage there and I see companies but what I want to understand is - are there any producing companies around our acreage?

29) There’s rumour that Alaska may put a gas pipeline in - if we have gas within our acreage, is that of interest to us?

30) I read somewhere that the oil we will be producing will gain a benefit when it goes through the pipeline because it’s adding quality?

31) The “marriage” (between 88E and BEX) seems to be working really well - what happens if a “divorce” happens or we “cream the curve” and we want to exit, or one party wants to exit before the other?

32) How do you stabilise the market cap volatility of the company over the next year?

33) You mentioned volumetrics earlier - when would you put a figure on the conventional - is that in the next announcement in 4 weeks?

34) If this well is a dud, what’s "Plan B”?

35) I understand we’re fully funded for the vertical well (Icewine #2V). If that’s a success and we want to start putting Horizontal wells in, what’s the funding situation for those?

36) You read that the technology of fracking is improving all the time - how do you see this impacting on your production?

37) You’ve outlined the risks that the project will encounter over the next few months and I think we all understand those. I think it’s a very good sign that the three of you are on this stage to talk to us - I feel that somehow you feel the odds are very good in favour of Icewine. Would you agree that it’s really very promising? (audience laughter)


Tim / Graham: Closing remarks

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