Thanks to an accelerated drilling campaign across its assets in Trinidad, oil & gas firm Touchstone Exploration (LSE:TXP) has soared by nearly 40pc this year to sit at its current 18p. With the business holding a c.£8m cash balance as it reaches profitability and plans to continue boosting its output next year, investors are getting plenty of bang for their buck at a market cap of just £23.2m.
Next year will also see Touchstone begin work at its Ortoire block in Trinidad, where a multi-year research effort recently revealed three huge prospects. Here, chief executive Paul Baay updates ValueTheMarkets on Touchstone’s progress at its core assets before laying down the company’s planned approach to the ‘world-class potential’ on offer at Ortoire.
Refusing to rest on its laurels after a record 2017, Touchstone has spent this year focusing on a ten-well drilling campaign spanning its Coora 1, WD-4, WD-8, and South Palo Seco properties in Trinidad. As of July, the firm had fully completed five of these planned wells, was completing operations on the sixth and seventh and had begun pre-drilling activities on an eighth at WD-8.
Encouragingly, Touchstone’s efforts already appear to be yielding results, with the company revealing Q2 production of 1,717bopd last month, up 11pc from Q1 2018, and 29pc from Q1 and Q2 2017. This output translated into c.$12.5m of petroleum sales, up 68pc year-on-year, and also puts the business within touching distance of its 1,800bopd profitable production benchmark. Baay told us that the firm has now hit the all-important 1,800bopd level. However, he said a technical delay has prevented it from reaching 2,00bopd production, which it aimed to hit by Summer-end:
‘Our production has been stuck at around 1,800bopd because we have been drilling wells on the same pad for several months now. We are unable to bring in the service rig until the drilling rig has left the area. It is the service rig that will allow us to perforate these wells and reach optimum production. The delay is just one of those things, and means we have ended up with a temporary backlog of four wells.’
He said the delay is almost certain to pass shortly, putting Touchstone back on track to hit 2,100bopd production by year-end:
‘The rig completed at our eighth well recently and should be moving off in the next week. That will free us up to get the service rigs in and ramp everything up, getting us to where we need to be. Hopefully, in mid-September, we will be through that 2,000bopd range, and once we have two weeks of production at that level, we will put out an update with more details. We still hope for our exit rate to be 2,100bopd this year.’
Last month, Touchstone announced plans to expand its 2018 drilling programme to 14 wells at an additional cost of around $4.8m. The business expects the wells – which will likely be drilled on its WD-4 and WD-8 properties- to add incremental production volumes in early 2019, ‘further improving’ its growth plans. Beyond this, Baay told us to expect more of the same activity across the four blocks going forward. Indeed, he said the firm plans to drill 15 further wells in these areas throughout 2019, starting in January.
Aside from steadily building production, an exciting new area of focus for Touchstone next year will be Ortoire, its 80pc-owned exploration block in Trinidad. Ortoire covers 35,765 acres and contains four structurally complex oil and gas pools called Balata West, Mayaro, Maloney, Lizard Springs.
Over the last two years, Touchstone has been gradually building up a proper picture of the potential offered by Ortoire, bringing together seismic information and well reports for the 70 wells historically drilled on the block. Although painstaking, Baay says the process has ultimately turned out to be highly rewarding for the company:
‘We were finding it quite frustrating for a while, but in the last four months we ended up with some key pieces of information. One particular party that had worked out here in the late nineties had key information on the drilling of several of the wells. We also got a glimpse of a brand-new seismic line and some insight into wells at CarapalRidge, the main producing property out here in Trinidad’s central block. All of a sudden, we laid that information out on the table, and it became obvious that we are looking at a very large opportunity.’
Crucially, it became clear that the Herrera sandstone reservoirs, on which Ortoire sits, are turbidite deposits. In basic terms, turbidites are deep deposits formed by massive gravity flows down the offshore continental shelf and slope that, over time, can turn into vast hydrocarbon reserves. Importantly, as oil and gas firms did not begin to focus on turbidites until the 1970/80s, they have often been left untapped in previously explored areas, creating substantial new potential. Indeed, over the last 20 years, many of the world’s largest hydrocarbon discoveries have been identified within turbidite deposits in areas like New Mexico and Scandinavia. With most of the wells in Ortoire drilled between 1950 and 1970, Baay tells us it is this untapped potential that is key to Touchstone’s approach in the area:
Baay tells us that Touchstone has identified three exploration locations on the Herrera sandstone reservoirs and expects to begin drilling next year. The first target will be Corosan, a prospect located just north of Shell’s Carapal Ridge discovery, Trinidad’s largest onshore gas/condensate discovery in 50 years. Touchstone has identified potential gas opportunities on three different fault blocks at Corosan, but it expects to kick things off with a well called Corosan-1 in Q2 next year. Baay tells us the result from Corosan-1’s previous operator suggests the site could hold much more promise for Touchstone:
‘Corosan-1 tested about 8MMcf/d day at several different zones, but the operator didn’t drill it all the way to the base of the Herrera, so we plan to drill down to 7,000ft and investigate the full potential on offer. More practically speaking, the benefit of operating in the Corosan area is that we are only about 3km from Shell’s gas plant so we can tie in directly to the south of us. Essentially, the well will provide excellent proof of concept for the turbidite approach, the area is already proven to have hydrocarbons, we know it has some pay, and it is very close to market.’
Beyond Corosan-1, Touchstone expects Corosan to offer plenty more potential, with Baay calling it a ‘potentially world-class deposit’. For example, another fault block identified by the company, known as the Corosan West prospect, contains estimated volumetric gas in place of 30 bcf (risked) and 121 bcf (unrisked). These are seriously big numbers.
After Corosan, Touchstone will target a prospect called Balata West where it has identified a fault block in the north containing an estimated 15-58MMbbls of oil and another in the south containing 70-281MMbbls. Finally, it will move to a third exploration area called OL-4, which Baay described as the most prospective of all Touchstone’s Ortoire targets:
‘This was originally drilled in 1965 and encountered gas at about 9,000ft. We plan to move slightly up-dip to the highest structural point, called the Central North Seismic Anomaly. Now, this has estimated volumetric gas in place of 240bcf (risked) and 960bcf (unrisked). It is probably broken into three or four blocks, and it will take a few wells to drain it, but it could truly be a game-changer for us. These are massive numbers.’
Touchstone’s market performance in 2018 has been strong so far, with shares rising by 38.5pc to 18p, well above its 11.5p placing price in December. With Baay promising to deliver more of the same – aided by the chance for greater netbacks thanks to strong oil prices after a 92pc jump in 2017 – its bull run could continue.
Also exciting is the prospect of progress from Ortoire, a company-maker in waiting. Any positive news flow here may enhance returns even further. With shares coming off slightly from highs of 21p over the last month, this alone could make Touchstone worth a serious look.