Winchester Energy to drill into “unfinished business” at White Hat

Winchester Energy ASX WEL oil White Hat Texas
Winchester Energy is set to embark on an extensive drilling program commencing next week.

Texas-focused oil and gas explorer and producer Winchester Energy (ASX: WEL) is about to commence drilling its second lateral horizontal well at its White Hat Ranch Oilfield in a bid to wrap up “unfinished business”.

The company told the market last week that an intensive work program would begin at the end of May, involving drilling and testing a horizontal leg of its existing 39#1 vertical well at the Texan project.

The three-month program will also include the recompletion of four existing wells with the aim of boosting oil and gas production beyond its current net level of 177 barrels of oil per day.

According to Winchester managing director Neville Henry, the work program is “very cost-effective given the vertical components of the wells have already been drilled, meaning that all costs related to the forthcoming well activity will be covered by existing oil revenues, existing cash and contributions from farm-in partners”.

Mr Henry said over the next three months, the company aimed to double net oil production and capitalise on its low production costs “at a time of buoyant prices and rejuvenated interest in the oil sector”.

Restoring confidence

Winchester’s share price slid from A$0.14 in December last year to its current levels of around A$0.04 due to the disappointing production testing of its first horizontal well, which was touted as a “potential game changer” last November but turned out to be drilled into a depleted oil reservoir.

The company is hoping to recover some investor confidence with this latest well, which will be a horizontal leg drilled from the vertical 39#1 well.

In a letter to shareholders last week, Winchester chairman John Kopcheff said the horizontal well would test a fractured oil zone of the Ellenburger formation “a considerable way away from any known significant Ellenburger oil production”.

“Unfortunately, as we found out, due to the uncertainty of the area of oil drainage from fractured carbonates, the vertical 38#3ML well [drilled with three horizontal legs last year] was sited too close to an adjacent oilfield,” he explained.

Mr Kopcheff said the company was confident this new 39#1 horizontal well would be drilled in a “virgin” reservoir pressure zone.

“If this is the case, as horizontal wells in the Permian Basin are known to produce at multiple rates compared to a vertical well, we have high expectations that this will occur,” he said.

Technical success

Despite the disappointing production testing at 38#3ML, the work was still considered a technical success as it proved Winchester’s engineering concept that lateral horizontal well bores could be drilled in the Ellenburger formation from a re-entered vertical well bore.

The company is also aiming to prove that this drilling method is the most inexpensive and viable technique for significantly enhancing oil production, initially from the Ellenburger formation then subsequently from its use in several of the shallower overlying oil producing formations.

Mr Kopcheff refers to this goal of determining whether the horizontal well will flow good rates of oil compared to a vertical well producing from the same zone as the “unfinished business” that the company intends to complete with its latest drilling plan.

Winchester Energy 2018 planned drilling schedule
Winchester Energy’s drilling schedule for 2018.

“The aim of the first phase of drilling and recompletion activity over June and July is, with success, to add more than double the current net production of 177 barrels of oil per day,” Mr Kopcheff told Small Caps.

“This would move Winchester’s net oil production past the previous highs of 277 barrels oil per day.”

“The higher oil price regime – now higher than back in December 2017 – is a bonus,” he added.

Taking a conservative approach

Late last year, Winchester had drilled three out of a planned four horizontal legs in the 38#3ML well before it proceeded to the unsuccessful extended production testing program.

This time, the company has decided to be a little more conservative and will only drill the one lateral leg before moving onto production testing.

“In the event of production success with this well 39#1L, Winchester will drill multiple lateral horizontals in other vertical wells or new wells,” Mr Kopcheff said.

All of the company’s wells targeting the Ellenburger formation have encountered shallow zones with varying oil production potential, ‘stacked pay’ in industry parlance. Winchester announced initial output rates of 200 barrels of oil per day from the Fry/Strawn formation in  White Hat well, 20#2, in April 2017.

Although the 38#3ML was unable to produce oil from the laterals in the Ellenburger Formation Winchester’s will carry out an initial test of the oil producing potential of the shallower Strawn formation in the vertical section of 38#3ML, as a prelude to fracking.

Stock analysis

In September last year, Winchester commissioned and paid for an independent stock analysis report by Strachan Corporate. Peter Strachan is independent and not an employee of Winchester.

The report concluded a risked value of A$39 million or A$0.103 per share for Winchester, with exploration success on identified targets offering an upside valuation to over A$0.50 per share.

One noted risk was the company being able to successfully drill horizontally with ultra-short radius (USR) drilling technology, which it proved later in the year with the three lateral horizontal legs of 38#3ML.

Mr Kopcheff said some of Strachan’s risking was “a little conservative” in his opinion “as these projects are all development projects, but that is Strachan’s independent opinion and Strachan is a respected independent industry analyst”.

2018 planned drilling schedule

Winchester holds a significant working interest ranging from 45% to 78.5% in about 70sq km in the Texas’ Permian Basin, including the White Hat Ranch, in joint venture with private US companies Carl E Gungoll Exploration and USR Drilling.

It also has 50% to 100% stakes in the adjacent Arledge and McLeod leases. All three leases cover the interpreted 40sq km oil trap in the Ellenburger formation that Winchester is targeting.

Winchester Energy project location map White Hat oil gas
Winchester Energy’s project location map.

As well as the horizontal drilling at White Hat 39#1, two of the White Hat recompletions are scheduled to begin at the end of May.

The other two recompletions for conventional oil production, plus vertical drilling on the McLeod lease, are planned for June. Vertical drilling at Arledge is planned for July.

Later in the year, another horizontal well has been planned at the White Hat Ranch for November.

Production testing of the various wells in the planned 2018 drilling program is expected to continue through to the end of the year.

A well to watch

Mr Kopcheff said “one well to watch” in the upcoming drilling schedule is the fracturing and production testing of the Wolfcamp shales in the Bridgford#1 vertical well, being carried out by project operator US Energy.

“Although Winchester has a very small interest in this well [1%], this is an unconventional oil shale test. Should this well produce oil at comparable rates to other Wolfcamp shale fracked vertical wells in the Permian Basin, then this well would be a strong candidate for a horizontal multi-stage frack with anticipation of attractive oil flow rates as seen elsewhere in the Permian Basin,” Mr Kopcheff said.

“Winchester will watch the results of this well test closely, as success would upgrade the Wolfcamp shale fracked production potential of Winchester’s surrounding large acreage position initially in the Arledge, McLeod and Bridgford leases, where it has interests in the range of 50% to 100%,” he said.

As a side fact, Winchester was floated in the heady oil price days of US$100 per barrel as a Wolfcamp shale horizontal drilling frack project with attractive conventional oil targets in the Ellenburger Formation to capitalise on the initial large acreage position acquired.

Crude oil price chart Winchester Energy ASX
WTI crude oil price chart.

When oil prices dropped in December 2014 to less than US$35/bbl, the conventional Ellenburger and shallower formation oil plays held by the leases were still economic due to production costs of the order of US$10/bbl.

Hence, the focus of development drilling switched to these conventional Permian Basin oil producing zones.

“With the current resurgence in oil prices to above US$60 per barrel, the unconventional oil potential of horizontally drilled and multi-stage fracked Wolfcamp shales in Winchester’s leases has become a target worth testing, in the view of US Energy,” Mr Kopcheff said.

A brighter future

In the days following Winchester’s announced drilling plan last Thursday, the share price has started to creep up from its very recent near-historic low of A$0.034 to A$0.045.

“As I have previously said, I consider the horizontal lateral drilling coming up to be ‘unfinished business’. There is risk with everything, but I consider this development drilling to be relatively low risk compared to wildcat drilling,” Mr Kopcheff said.

“I believe investors will start to realise the upside in Winchester’s value if success in significantly increasing current oil production is achieved.”

Mr Kopcheff and Mr Henry are both backing their confidence in a positive horizontal drilling result for Winchester by buying shares on-market, as seen in their announcements of increase in director’s shareholdings released to the ASX this week.

Mr Kopcheff believes the next round of horizontal drilling and production testing with success could be the “game changer” for Winchester.

“The future could be bright for Winchester with lateral horizontal drilling and production success with this technology to be applied to several wells in its large leasehold and high working interests in the most active and productive onshore basin in the US – the Permian Basin of Texas,” he said.

This opinion is supported by the most recent Baker Hughes report on US onshore drilling and production activity, which showed that of the 1023 wells being drilled in the US, 467 wells (or 46%) are drilling in the Permian Basin.

The Permian Basin is also producing 3.3 million barrels of oil per day, which equates to 32% of total US oil production.

As Mr Henry has been quoted, “Winchester is the Australian junior taking it up to the Permian heavyweights”.

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