88 ENERGY LIMITED (AIM:88E) Hartleys Research Notes

88E has spudded the Icewine#2 well to flow test the prolific oil generating HRZ Shale in Alaska. Based on the results of Icewine#1 well (just 20 metres away) expectations are that Icewine#2 will flow oil to surface in the range of 100-200bopd.

Obviously one well does not prove a Play, but success as prescribed would likely be sufficient to attract a major farm in partner and support the current valuation. We do note that it is unusual for a Company to prioritise unconventional shale over conventional leads, especially with an inventory of over 1bn barrels. This we believe has simply been a case of timing (plans for unconventional testing were already in place). However, regardless of the result of Icewine#2 we expect the focus to shift to the conventional oil leads over the next year or two

Unconventional before Conventional?

88E’s initial focus in Alaska was to test the ‘producibility’ of the prolific source rocks of the North Slope. Just a few years ago the industry consensus was that there remained relatively little conventional potential to pursue. Recent drilling success particularly in the Nanushuk Play has shown the latter to be incorrect. 88E in the past 12 months itself has released results of its own seismic study, which has identified up to 15 conventional leads and a potential resource of over 1bn barrels net. We currently believe this to be the primary target but has little or no value in the current 88E share price.

Current Valuation – Unconventional Only

Given the high standing of 88E management and the appraisal results from Icewine#1 we actually believe a successful result from Icewine#2 is already largely factored into the valuation (so any further upside post a successful result on this basis alone is unlikely to be sustained). A successful result however would almost certainly attract a farm in partner and this would be the next catalyst for a further re-rating of 88E’s unconventional acreage position. We do not believe however that the market is giving 88E sufficient credit for its conventional opportunity and we believe most of the upside over the next 24 months may come from further testing of this potential.

HIGHLIGHTS

Icewine#2 Overview: 88E has announced that drilling at the Icewine#2 Production Test has commenced. This vertical well is aimed at testing the potential of the HRZ shale play (and is located within 20 metres of the Icewine#1 well, so they know what they are drilling in to!).

Optimism based on Icewine#1: Given the source/reservoir conditions encountered in Icewine#1, the Company expects this follow up well to achieve a high rate of flow to surface (the Company believes there is a 50% probability of achieving a flow rate in excess of 100 barrels per day, which would, in their view, provide look through to potential commerciality and justify progressing the project.).

IP30 of 100-200bopd: An IP30 result in the 100-200bopd range for a stimulated vertical well would place it comfortably in the expected range for a potential premium unconventional shale play. Given the Icewine Projects remoteness and with acreage largely undrilled previously for conventional, we prefer to compare it to a couple of developing plays in North West Canada and the Vasa Muerta Shale play in Argentina (the only large commercial shale play currently operating outside the Lower 48 and Canada).

Compares favourably with premium shale plays: A 100-200boe/d result compares with a sample of early vertical delineation wells provided by YPF for the Vaca Muerta. Production testing is expected to begin in June.

In terms of a high-water mark for the Icewine#2 well to aim for we would make the comparison with the LTE.x-1 vertical well (a 5 stage frac) drilled in the Vaca Muerta in late 2012 by Americas Petrogas and Exxon Mobil. It achieved a 309boe/d flow rate (254bopd) over a 30-day period against similar pre-drill expectations. Is success already in the price?

Given the high standing of 88E management and the appraisal results from Icewine#1 we actually believe a successful result from Icewine#2 is already largely factored into the valuation (so any further upside post a successful result on this basis alone is unlikely to be sustained). A successful result however would almost certainly attract a farm in partner and this would be the next catalyst for a further re-rating of 88E’s unconventional acreage position.

We do not believe however that the market is giving 88E sufficient credit for its conventional opportunity and we believe most of the upside over the next 24 months may come from further testing of this potential

88E – More than just the Unconventional

88E currently has exposure to a gross acreage position of 271,119 contiguous acres (210,250 acres net to the Company). In December 2016, the Company successfully bid on additional acres. On award the Project Icewine gross acreage position will be further expanded to 693,039 contiguous acres or 404,452 acres net to the Company assuming all both options are taken up

The Company has released an internal estimate for prospective recoverable resources in the unconventional shale of 1.92bn net at the P50 level. Recent updates to the conventional prospective oil resource has taken 88E’s net mean exposure to over 1.1bn barrels.

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