New Alaska oil well boosts interest in Pantheon Resources Alkaid-2 well

This potentially crucial well will stamp American soil as a major multi-billion dollar oil asset.

The Alkaid #2 well is located adjacent to the Dalton Highway and Trans Alaska Pipeline System (TAPS) which are the main transportation highway and export pipelines, respectively, and approximately 4.5 miles from the Alkaid #1 discovery well drilled in 2015.

A key objective of this well is to gain robust production test data to accurately assess the ultimate potential of the reservoir. Whilst the Company believes the optimum well design to exploit the Alkaid anomaly would include +8,000 foot lateral sections, in this first well the Company will adopt a more conservative approach with a shorter lateral simply to minimise operational risk.

The Alkaid #2 well will assess three impactful objectives over multiple formations:

(i)  Production testing of a proven oil formation encountered in Alkaid #1

(ii)  Exploring the deeper potential for oil in that zone

(iii)  Appraising an extension of oil discovered in the Shelf Margin Deltaic at Alkaid #1 and Talitha #1.

Pantheon’s success with several wells in the past has led to a substantial valuation. It peaked at £1bn right before equities fell into a bearish market. Today’s price at 93.75p puts the market cap at almost £700mln.

Pantheon’s share prices performance over the past year is a reminder of the high-stakes nature of Alkaid well.

It is huge

The investment proposal can be boiled down to its essence and it will make the opportunity seem quite straightforward – “there’s probably a lot of oil” or at least that’s what the theory says.

Both company and internal exploration experts believe that there is a large amount of oil in the area known as Alaska’s North Slope.

Pantheon’s project area is located further onshore from previous coastal discoveries like Prudhoe Bay (estimated at having some 33bn barrels) and Kuparuk/West Sak (14.1bn barrels OIP). It is also to the east from Smith Bay, Pikka Horseshoe and Willow discoveries that measure in the hundreds to millions of barrels.

Bob Rosenthal, Pantheon’s technical director, highlighted the fact that the AIM-quoted drill-bit was turning in the Alkaid-2 oil well. He said that “a lot of oil has been discovered” in the project area.

The oil-in-place volume has been estimated at 23 billion barrels. Currently, 2.3 billion are deemed recoverable.

Alkaid-2 could result in an upgrade of those already large numbers depending on the results.

Brendan Long, WH Ireland’s oil analyst, said that successful testing of reservoirs at greater depths in this location is likely to increase the scale of the resource.

The WH Ireland analyst pitches Pantheon’s ‘fair Value’ estimate at around 208p (versus today’s price of 90p), while pointing out the other important aspect to Alkaid.

Going horizontal now

Pantheon’s Alaskan wells have been a success. They were all vertical test wells that were used to confirm the presence and collect valuable data. However, future development will include horizontal production wells.

The idea is quite simple and was the basis of much of the US onshore oil boom over the past 20 years.

Vertical pilots are used to drilling down to the reservoir’s depth (in wells such as those mentioned above, the ‘horizon’ and ‘formation’). At that point, one or more of the lateral holes is drilled across the entire oil-bearing area.

This increases the area where the wellbore is exposed and allows for higher oil production.

Theta West was the most recent vertical well and produced oil at a rate that reached 57 barrels per hour in a short period of testing. Before that, the Talitha A well tested at 32 bopd and its predecessor, Talitha, gave out 73 bopd.

Alkaid was the first vertical discovery well by Pantheon in Alaska. It was drilled in 2015, and it flowed approximately 100 barrels during testing for 2019.

Pantheon’s valuation of £700mln is unlikely to be understood by someone who doesn’t know much about the oil industry.

However, the company’s view has always been clear.

Bob Rosenthal stated in March that Pantheon was on the right track to unlocking a huge basin play.

“Pantheon has the opportunity to develop large, discrete oil accumulations in an existing oil province adjacent to export infrastructure. This is a unique opportunity.”

Jay Cheatham, Chief Executive, stated that “we have enough data to confirm what we expected and have now appraised an extensive resource which meets or exceeds our predrill estimates.”

A horizontal well such as Alkaid-2 will produce higher volume production statistics, which will undoubtedly help to strengthen the commercial case for developing oilfields across Alaska’s Pantheon acreage.

Detail of the Alkaid drill

Pantheon explained to investors that Alkaid-2 would have multiple objectives and will be used in multiple formations.

It will test oil zones previously discovered by the Alkaid-1 well. Additionally, it will drill deeper to assess an oil target that’s expected to be an extension of oil resources seen at Talitha-1.

Alkaid-2 will have a ‘conservative lateral section’, according to the company. This is significantly shorter than the 8,000 feet section that is envisaged for full development scenarios. It will also minimize operational risk.

Similar to other wells on Alaska’s North Slope (ANS), it is expected that the well will use unconventional oil production techniques, which are applied to conventional oil reservoirs in order to maximize the potential reserves and production.

Pantheon observed that such stimulation is now a standard procedure in the entire ANS.

The company could potentially make a lot of money by extending the testing that was done in a successful case.

“The Alkaid-2 well was the first to be produced in this new field of unconventional technology. Jay Cheatham, chief executive of the company, stated that, as is customary in the industry, they will apply what they learn from this well to other wells to optimize future drilling, testing, and production.

Pantheon would see a transformation in its commercial success with any single project. This is in addition to our geographical location onshore and adjacent, as well as export infrastructure in a low sovereign risk jurisdiction.

Analysts’ opinions

Brendan Long, WH Ireland analyst, recently described the previous drill campaign in a note as “unambiguously positive” and called the Lower Basin Floor Fan (seen at the ThetaWest well) a “giant Elephant”.

This is Long’s fair valuation estimate for Pantheon shares at 208p. It suggests that there’s more than 100% upside to the current market price of about 90p.

Alkaid-2 is, however, “a baby elephant”, according to Long. He wrote in cover and caveats before the next well.

The Alkaid-2 well, to our knowledge, is not a make-or-break well.

“We believe there is no chance that any Alkaid result would dampen our enthusiasm for our main prize, The Lower Basin Floor Fan, Theta West structure.

It is important to remember that Alkaid#2 can be used for early-stage appraisals. It can be brought onstream for an along-term production test and generate revenue. This is due to the extremely favourable operating environment that Pantheon Resources enjoys, including its access road and pipeline infrastructure.

“It is wrong, in our opinion, to expect the well to come on like a fully optimised developmental well: That is typically not the intention/expectation for the first-ever horizontal well completed in a large-scale resource play, based on our experience.”

The analyst stated that they are interested in understanding the reservoir’s flow behaviour over time.

“If this behaviour is encouraging, we believe that both the initial production rates as well as expected final recoveries per well may be increased over time through drilling longer wells or fracking more intensively.

“Based on market commentary and investor discussions, we caution against putting the horse before the foe due to the extraordinary ease Pantheon Resources has in monetizing oil production from its wells.

“An appraisal well, in our opinion, is an appraisal well, regardless of whether its production is monetised.”

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