I have only one task Monday to Thursday – find and invest in winning trades to make money. On Friday my job is to communicate to readers winning ideas so you can profit. Unfortunately, the biggest problem is that with roughly 50 Fridays in a year, finding and timing 50 different great ideas is not only a difficult exercise it is also impossible. As I like to say – I would rather find one great idea and trade that 50 times, then try and find 50 different great ideas.
For that reason I am going to highlight Helios Energy (HE8) again, because this is a magnificent story that has only strengthened since I last discussed it on May 3, 2019 Helios – How Good is the Oil? and actually on my count, this is the sixth time I am writing about it since it listed in back in August 2017. Can’t say I haven’t tried to inform you about this spectacular story! It is a position that now dominates my portfolio and the prop book as I have expressed in the past to the tune of 45%.
Helios on the 12th August informed they started the process of fracking the Presidio 141 #2 well across 7 stages in West Texas. Recalling that in June 2018 the company completed a one stage frack in the Quinn Creek 141 well to test the lower Ojinga Formation and that flowed 37 barrels a day of oil for 7 days. 37 is a very, very good number.
Earlier this week the Company gave its first update to the flowback rates from the Presidio frack and the results were very encouraging. I would expect a further update within the next week and the market is clearly excited by pushing the share price to 24c today from 18c at the start of the week. At 24c, Helios is trading at an approximate value of $4,000 an acre across their 70,000 acre lease (planning to move to 100,000 acres soon over the 200,000 total field size). By comparison Permian Basin acreage still sells for north of $50-60,000/acre and Aurora (Helios management’s previous play) was sold for $100,000/acre. A lot of upside still remains for a proven, economic oil field discovery in that per acreage value.
So in basic terms how do we interpret the results so far and what can be expected this week? When completion fluid starts to flowback from a frack, if the discovery is any good oil should flow before a total of 20% of the completion fluid is recovered. It was about 18% in the first frack however, traces of oil began to show at just 2% in this 7 stage frack and according to this week’s announcement, after just 8% of flowback oil production is already at rate of 10 barrels a day per stage (for a total of 72 barrels). No wonder the market is excited given the Company flagged anything above 20 barrels a day would be satisfying – already halfway there in the first 8%!
In the next update, the question will be how much the flow of oil has increased (as well as the gas flows). I would assume that at a constant flow of say 40 barrels a day for 5-7 days Helios will be ready to make its first oil sale, given a truck holds 180 barrels of oil. Just drive up the road to El Paso and start selling. Anything above 20 will be good, moving to magnificent above 40 barrels/day and above 50, in my view would be an A+. Furthermore, after all the flowback is complete and the well has been on pump for approximately 30 days is when from a “quality” perspective we can understand more about the true economics of production.
The plan of management is to quickly drill two more wells north and south of Presidio 141 #2 to continue to prove up this discovery and I can only assume have this current well on a pump selling oil for their first revenues. This will only rapidly increase the value per acre that Helios trades at and if the extra acreage can be secured, Helios has the potential to skyrocket.
Really, skyrocket? Let me do some back of the envelope calculations. The Company currently has 70,000 acres and at a valuation of $50,000/acre (remember, management sold Aurora for $100,000/acre) this equates to $3.5 billion. Take ~30% away for royalties to land owners etc but then add 30% back for conversion to Australian dollars and we remain at $3.5 billion. Divide by 2.5 billion fully diluted shares on issue and the valuation per share is $1.40. A couple of more wells drilled to further confirm the economics of this discovery and yes it can skyrocket.
As an example to drill a 35 stage frack at this project costs approximately US$7 million due to the nature of the rock formation and proximity to surface. At other fields in Texas that do not enjoy the same natural benefits of this field, have drilling costs of $12-$15 million. This makes an enormous difference to the economics of the project and in turn the value of the acreage. Producers will pay a lot more for a cheaper well, as production remains profitable even during periods of low oil prices and a world of zero interest rates.
The share price has surged through to new highs and with further good news from this current 7 stage frack, it is hard to see how a permanent move above 30c will not be rewarded by the market. Additional acreage acquisition will add further value. Two more wells replicating success (so far) and we have the next real oil play.