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 and NTR.TO
Since I pointed out just how skewed the risk-reward had become on Touchstone Exploration (TXP.TO, last at $1.95) back on May 11th, the stock has done nothing but go up and to the right, which has made holding on to it pretty easy. Of course, you could say that about a lot of things since May 11th, but this morning Touchstone provided an update on its Chinook-1 exploration well that is sure to get some attention. Based on wireline and mud log data, TXP announced that the Chinook-1 well has encountered 589 feet of net natural gas pay in Herrera sands (the same formation that is productive at Cascadura) with an additional 20 feet of gas pay in a shallower formation called the Cruse. The well was drilled to a total depth of 10,039 feet (9,776 feet true vertical depth) with pay logged as deep as 10,003 feet in a (separate) anticlinal structure located 1.5 kilometres to the south of the Cascadura discovery from earlier this year. The Chinook-1 well was drilled to the operational limits of the rig.
The company has not commented on the mapped area of the Chinook structure, but previous corporate presentations from the company suggested an area of ~600 acres, which is approximately 50% larger than Cascadura. The Cascadura anticline is a steeper, taller structure, whereas Chinook is described as being a simpler, broader fold. The Chinook pay sands were found in three different stacked thrust sheets, including a previously unknown one in the lowermost section of the well. The presence of this deepest, previously-unknown thrust sheet sets up a new exploration play in this structural complex.
I’ve run some back-of-the-envelope math on what could be in play at Chinook in much the same way as I did for Cascadura and I can quite easily get a range of 200-300 BCFe of incremental potential (net to TXP’s 80% interest) based on the area/pay thickness information that a guy can scratch together from dated presentations on the internet and a calculator. That would handily put Chinook in the same ballpark as Cascadura in terms of scale, but at this point I that’s all I can do, ballpark it… which at least gives me something to ponder in terms of overall project scale and potential value. If the Chinook testing comes back anything like the Cascadura testing did earlier this year, TXP’s “wall of cash” is going to more closely resemble a tsunami given the low development costs for this project. Dare to dream.
In short, TXP’s description of the discovery as being “significant” appears to be apt, and the stock is showing that in early market action with 2.8 million shares trading hands in London and 1.8 million shares trading in the first few hours in Toronto. My sense of the market here is that the interest level in TXP is broad and deep (and getting broader and deeper), ranging from retail, to high-net-worth, to institutional investors. The potential for “industry” interest should not be ignored either. Bit by bit, TXP is scratching out a sizeable piece of business at Ortoire that would be attractive to any natural gas producer in Trinidad, not to mention on-island end users in the petrochemical/fertilizer sectors like Methanex (MX.TO, last at $35.38) and Nutrien (NTR.TO, last at $52.90). I think it’s really important to remember that there is a structural onshore supply deficit of around 400 mmcf/d of gas in Trinidad and that the lack of gas onshore has represented a major threat to the country’s installed industrial base. Meanwhile, TXP’s discoveries are within a few kilometres of an existing large trunk-line with enough spare capacity to take anything that TXP can produce. That’s a nice combination of factors in my books.
Overall, I think that Touchstone has a significant project on its hands at Ortoire which is literally of national importance to Trinidad and Tobago, with drilling and/or testing ongoing at any given time through to at least the end of 2021. That makes for a fairly full news calendar unless you need news weekly. The rig is now moving to drill the dual-purpose Cascadura Deep exploration-development well (it will go through the known accumulation at Cascadura while also targeting a deeper untested thrust sheet and should reach total depth in December), after which testing of Chinook-1 will commence. CEO Paul Baay runs through today’s update in the brief video interview linked below and he asks shareholders for a little bit of patience, as he has before. I too would like everything to happen overnight, but these things do take time and in the meantime, I like how Touchstone is moving the ball down the field. A natural gas sales agreement should be completed by year-end, as should the Cascadura Deep well, which would also be tested in early 2021.
Touchstone rightly points out that Chinook still must be tested to determine its economic value (i.e., flow rates), but given that Chinook is only about a mile from the Cascadura-1ST discovery well in the same geological formation, I’m willing to accept that TXP does in fact know what gas pay looks like in the Herrera formation based on the wireline and mud logs in both wells. The market seems to agree. Incremental Chinook volumes could really bump up the gas production plateau rate for the project, which could result in a commensurate bump up in analyst-projected cash flows and price targets. Some quick math tells me that Cormark’s last-published $3.25 target feels about right to me if I price in Chinook, and the dreamer in me thinks about what might be beyond, with Royston and the balance of the other (roughy two-dozen) exploration leads/targets in this new trend of Herrera sand prospectivity in the Ortoire block.
It’s likely that 2021 will see one rig dedicated to development drilling in the Chinook-Cascadura structural complex with another rig devoted to drilling block-wide exploration targets, probably beginning with the ~500 BCF Royston target to the southeast (that target has an old well into it that had abundant gas shows and gas effect on logs when it was drilled some 55 years ago when gas in Trinidad was basically worthless). If you’re not getting the sense that this could scale up quickly, then I’m not doing a very good job of communicating, but I do want to point out that Chinook-1 testing is still a ways out, so that’s going to take some patience to see through.
No matter how you look at it, TXP does appear to be set to gather more attention. The story will be in the news in Trinidad, in international E&P trade magazines, newspapers, and business news here in Canada. The stock has a very loyal following in the UK as well, which makes for another great pool of investor interest, as UK investors tend to be more adept when it comes to evaluating international exploration stories these days. Given TXP’s relative independence from the broader market, it would seem that TXP is carving out a niche for itself in the international energy investment arena that could have some staying power along with some good tailwinds. TXP the kind of company that you always hope to find when getting into the junior international exploration arena and it’s nice to be along for the ride as a shareholder today. As they say, the waiting is always the hardest part.