Pantheon Resources Catalyst Imminent: The shorts could be very wrong

Recently, the Pantheons online cohort of investors has been tracking the progress of Alkaid-2 and has spotted flaring activities and oil trucks moving around the production facilities, giving the best indication yet that a flow rate announcement is getting close.

Pantheon recently required a coil tubing unit to clean out the borehole, stating that the frack sand had permeated into the oil column, which can be alluded to the move-ability of the oil. At the same time, they mentioned initial flows in the thousands of barrels but were cautious to warn this was too early to discern any actual oil flow rates until fracking sand had been recovered.

“It is encouraging that the reservoir response to the stimulation procedure has been very good, as we have experienced strong initial fluid flows measured in the thousands of barrels per day. Remember, these are conventional reservoirs that have superior reservoir qualities compared to shales, and given it is our first well completion applying stimulation techniques in these reservoirs it requires a little patience as we better understand our reservoir characteristics on the North Slope.”

– Pantheon CEO, Jay Cheatham, 25th October 2022 — RNS

Management chose to use the delays to clean out the borehole to also upgrade the modular facilities to handle double their capacity.

Short Attack

Big numbers, uncertainty, and the void left by management keeping a straight face have led to a recent successful short attack on the company’s share price. Seeing the price decline from highs of around 150p to 70p over several months. Recently, Muddy Waters went public with their short interest along with Viceroy Research founder, Fraser Perring, who took to Twitter to claim Pantheon’s findings as “too good to be true”. Fraser Perring’s Viceroy Research has been in front of a South African legal system in recent years with FSCA Commissioner stating:

“Although we are aware that we should not be banning short selling as an activity in the market, it should not be on the basis of people who deliberately peddle falsehoods around the business models of listed securities or companies in our regulated markets”

– Commissioner Unathi Kamlana

Both parties failed to substantiate their claims against Pantheon, but it has lighted a flame for short sellers.

On Wednesday afternoon we saw volume increase substantially to 6.5m shares, up from the 30-day average of 5m shares, boosting the share price up 22.47% on the day for the main listing, and 26.8% for the ADR; which is likely a sign of what’s to come at the open.

In recent weeks short sellers have made up as much as 30–40m shares, currently, the only publicly available data on Pantheons main listing PANR from the UK Financial Conduct Authority indicates 1.3% of current shares have been shorted. This represents only large holdings with positions greater than .5% and thus, total shorts can be assumed to be much higher. With Pantheon’s 775.03 m shares outstanding, this indicates 10.07 m shares are currently shorted by the largest firms and given the situation many smaller shorts may have been enticed into the situation. Making an educated guess, we could say 20 m shares, or 2.6% of the shares outstanding are currently shorted. This would mean on the average volumes it could take 4+ days to cover.

PTHRF, Pantheon’s US based ADR listing, is also interesting, with another 3.74m shares shorted, and an estimated 4.88 days to cover.

Others on Twitter such as Scot126, Cube and Contrarian8888 have these figures as much higher, indicating a multi week short squeeze. Short sale figures are not easily accessible to retail investors. This leaves the shorts in an awkward position; do they hold out and hope all the data coming through is wrong, or close out and shift the share price upwards.

In any event, positive news, and long-term investor resiliency could see Pantheon break back to recent highs.

Alkaid’s Importance

Pantheon Resources purchased Great Bear in 2019 for less than US$50m in equity. Great Bear had utilized an ill-fated tax credit scheme put forth by the State of Alaska to conduct over $200m in extensive 3D Seismic testing around the abandoned Pipeline State Well #1, a well drilled by ARCO in 1988 which found oil but did not poses the techniques at the time required to extract the oil due to its relatively low porosity and permeability; when compared to Prudhoe Bay. 1988 after all was the peak of oil flows into TAPs.

At the time of acquisition, Great Bear had shown that the oil was present in vast quantities to the tune of 2.1 billion barrels of oil (gross) P50 Technically Recoverable Resource. This was to be tested in Q1 2019 with the Alkaid #1 well, which achieved ~108 bopd through a six-foot interval. This was followed in 2020 by an Independent Expert Report by Lee Keeling Associates certifying 76.5 million barrels of recoverable reserves with a calculated NPV (10) of $595m for this singular project (at the then prevailing realized oil price of $55/Bbl held flat).

The sale of Great Bear to Pantheon wasn’t without its risks, it required Pantheon to take on a major investor in Farallon Capital. An investor in debt instruments, Farallon brought the SOA credits at a steep discount and as part of the deal entered into a concert agreement with Great Bear and would sell off shares in Pantheon to recoup their investment. This has since concluded or at least has been sold as far as to pass the minimum reporting threshold required by major shareholders to report their share movements. This aggressive selling into positive share price appreciation has put a glass ceiling on the successes of Pantheon in recent times.

Theta West and Other Horizons

Pantheon has purchased acreage each year in lease sales, including more recently adding to Theta West, which prior to recent sales covered a ~17-mile stretch of land. In March 2022 Pantheon successfully flow-tested Theta West.

Theta West’s success has seen Pantheon put out eye-watering numbers, including 1.4B recoverable for Theta West alone. Theta West is farther west than Alkaid-2, but has better permeabilities and porosities; such that success at Alkaid-2 can translate to the albatross across the acreage.

With the recent lease purchases by Pantheon, the oil-in-place estimates are poised to increase at Theta West simply due to the company having ownership of the leaseholds. The leaseholds are yet to be fully awarded, with the process taking 6–12 months to complete.

Pantheon’s Alaskan acreage has several other horizons which have been intercepted at both Alkaid-1 and Talitha-A.

Alaskan Recent Sales as a Basis of Valuation

Exploration on Alaska’s North Slope has been dominated for decades by oil giants such as BP, Exxon Mobil, and ConocoPhillips who have tapped into the largest oil field in North America, the Prudhoe Bay Oil Field. Found in 1977 production peaked at 2.1m barrels of oil per day in 1988, filling the TAPs to near capacity. Since then, production has slowed such that TAPs flowed 477,798 barrels in 2021. This among other factors led to BP’s exit from Alaska and Hilcorp purchasing their upstream and midstream Alaskan Interest for $5.6 billion in 2019.

Since then Hilcorp, who specializes in maximizing the life of declining wells has successfully breathed new life into the Alaskan venture, seeing joint venture production increase about 5% year-on-year in December from 2019–2021.

Alaska has seen several greenfield projects on the North slope in recent years, including the highly publicized Federally located Willow project for ConocoPhillips.

Armstrong Energy is one of the most recent bellwether sales for oil-in-place valuations on the North Slope; having sold their interests in Pikka to Oil Search (now Santos) in 2017.

The purchase was priced at US$3.1/bbl by Oil Search and US$1.3/bbl by their joint venture partner, Repsol. This was for explorative assets which were at the time estimated to come online in 2024 but have since been delayed due to road access disputes with ConocoPhillips. The US$400m sale was a “discovered resource of approximately 500 million barrels, with material prospective resource upside.”

Valuation

If management can achieve their stated goal of ~150bopd per 1,000-foot interval; proving the commerciality of the firm’s assets, interest in Pantheon is sure to rise. Given the de-risking of such an event, we can expect farm-in interest to heat up. Therefore, using the Pikka valuation of $3.1, and discounting down to US$1 to include risk and likely fundraisers for future drilling, we find a risked valuation of US$2,470.5 or 238.9 pence/sh. Utilizing the un-risked sale price of US$3.1 we could see the share price appreciate to 740.7 pence/sh. The risked valuation represents a near-term 3 x upside to the current 77.85p share price.

Calibrating this to reality, Pantheon announced in a webinar earlier this year that they had an offer on the table from a management group to buy in for a “10-figure sum”, for non-controlling interest. This would mean a minimum buy-in in the price of US$1B for a maximum of 49.99%; valuing the company at a minimum of US$2B. Likewise, Peel Hunt recently initiated coverage at 50p, this was an arbitrary figure with no reference to its valuation. We did find that the investment bank conducted a sum of all-parts valuation — like the above valuation — resulting in a risked valuation of 252 pence/sh.

This valuation should be seen as conservative as any sale would eclipse the stated US$3.1 paid for Pikka. Oil prices have risen since 2019 and there is a shortage of large-scale scale exploration wells in the onshore USA, so long-term valuations could see this valuation multiple increase. Likewise, this valuation excludes several horizons including the SFS and other horizons accessible by Talitha pads.

Conclusion

All eyes are on Alkaid-2 flow results, a pilot production well along the Dalton Hwy and close to high-value infrastructure. With prior successes and management recently upgrading the production facilities to handle double the flow rates initially expected, the odds are in the favour of success.

Disclosure: I am long Pantheon.

See more of my posts at www.marchetti.co