(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long TXP.TO)
Well that didn’t take too long. This morning, Touchstone Exploration (TXP.TO, last at $0.67) announced test results from the lowermost (first) zone of its Cascadura-1 well, onshore Trinidad. To use the CEO’s words from the interview linked below, the well is ‘a beast’. The well confirms a “significant” (to quote the press release) gas-condensate discovery, testing at an average rate of 27.1 mmcf/d and 660 barrels of 54-degree API liquids over a roughly 24 hour testing period. Flowing pressure was 3,350 psi on a 40/64″ choke, indicating an 18% drawdown (read a little about well testing here). Further to that end, the well apparently maxed out the testing equipment and it is believed that the tested zone might actually be able to be brought on stream at a rate comparable to the test rate. That’s quite a test, and is over 162 feet of pay, with another 450 feet of pay yet to be tested higher up in the well. The flare is quite a sight and the company was kind enough to put an image of it on its Twitter feed today.
In the interview linked at the bottom of this post, Mr. Baay points out that some patience will be required on behalf of shareholders in terms of getting Cascadura on stream because the company essentially needs to drill its Chinook and Royston prospects (in the same block) before it knows what kind of pipeline capacity and facilities it will need to develop the greater area. That doesn’t take away from his enthusiasm though, which shows through pretty clearly in this morning’s interview. At one point he reminds viewers of the fact that the Cascadura-1 well didn’t even actually reach its (deeper) primary target. I imagine that Mr. Baay feels a bit like he is trying to drink from a firehose right now. Brokers will be all over him to take capital to accelerate the program, shareholders are probably making a few inbound phone calls for a change, and I would imagine that Paul had a lot to talk about with industry players at the energy conference in Trinidad this week. In time, things will come into focus, but right now it’s a bit of a whirlwind in progress.
Next steps involve shutting in the Cascadura-1 well for a two-week pressure build up (that information will give reservoir engineers some sense of the “size of the tank” in terms of volumetrics), followed by completion and testing of the 450 feet of pay identified in higher zones. I’m not sure if that will be oil pay or gas pay, but at this point that’s kind of splitting hairs for me. Cascadura has gone from a ‘prospect’ to a ‘discovery’ and now the real questions are those that have to do with size and value. I’ve run some back-of-the-envelope math and am getting around 40 BCF of recoverable gas per 50 metres of pay per square kilometre. So, if Cascadura covers one square mile (which is 2.5 square kilometres) this lower zone might have something in the order of 100 BCF recoverable, or 80 BCF net to TXP’s 80% working interest. I honestly have no idea of the size of the structure, so I’ll likely just wait and apply my rule of thumb as more data is made available. The value? I’m really not sure. The pre-drill prospective resource estimate was based on Cascadura being an oil target, and I’m not sure what the pre-drill pay thickness was assumed to be. What I did find is an old slide deck that shows some numbers for the Royston target (which is modelled as gas) that suggests of an NPV of about $2 per thousand cubic feet (mcf). How the engineers came up with that NPV is a question that involves infrastructure and processing facilities that may or may not fit with the current view of the future development plan — which is a work in progress on its own — but at least it’s probably in the ballpark.
The stock seems to be acting “maturely” here, which is nice to see. As much as I’d love to see it all play out in a day, it’ll probably be another four weeks or so before the upper zone is tested and there are a lot of questions to be answered in terms of facility and pipeline design, capital requirements, commercial agreements, financing for acceleration of the program, the list goes on. First things first though. Finish testing Cascadura, then move on to drill the Royston and Chinook targets later this year. As is pointed out in the interview below, it’s all going to take some time, but there seems to be a real project developing here that will turn Touchstone into a very different company over the next year. Despite all the good vibes I have, I did sell about 1/5th of my stock today given past lessons learned, but I like the outlook here overall and am glad that something in the energy sector is working for a change.