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Pantheon Resources says operations are not water saturated – but is cash now a concern? (PANR)

Pantheon Resources (LSE:PANR) rose 15.5pc to 20.9p today after telling investors that the large volume of water that flooded its VOBM#5 well in Texas should not be a cause for concern going forward. However, with Pantheon failing to produce anything from the well and its cash balance currently looking unclear, a placing could potentially be on the cards when the business drills again. Having previously highlighted Pantheon as a recovery play, today’s announcement has caused us to rethink.

Pantheon’s shares crashed by 54pc in April when it announced that VOB#5 – which spudded in January at the firm’s West AA prospect – had not produced any oil thanks to the presence of an ‘unexpected’ amount of water. However, the company said today that analysis on the well found that the water is unlikely to have come from perforated intervals in the targeted sandstone. Instead, it is ‘more likely’ that the water has appeared as a result of frac operations communicating with a deeper water source below the perforations.

The business added that future wells will most likely only perforate the upper portion of the sandstone and will be designed to avoid possible communication with deeper water sources. Chief executive Jay Cheatham dressed up the news as ‘extremely good’ for Pantheon’s shareholders because the analysis concluded that its prospect is not water saturated. He said:

‘Certainly, any future fracking operations will be undertaken carefully to avoid possible communication with deeper water sources, but we will carefully consider this in well design and planning, and in this regard, I am also pleased to report that Pantheon and the operator have made a concerted effort to improve our future operational capabilities with some key appointments.

I hope the conclusions of this independent analysis restores shareholder confidence in our play, which Pantheon and the operator are firmly committed to. Our issues have been operational, and we are being vigilant in doing everything possible to minimise such issues going forward.’

Cheatham’s comments may indeed be accurate, and it is also encouraging to hear that potential P50 Prospective Resources remain unchanged at West AA at 301mmboe. However, the fact remains that VOBM#5 has been commercially unsuccessful. The financial implications of this are likely to be negative for Pantheon.

In its results for the six months ended 31 December 2017, released in March, Pantheon reported a cash balance of $5.98m as at 26 March 2018. The balance looks healthy on the face of it, but it is worth noting that it has not provided a net cash figure since it spudded the well on 3 January this year- three days after the end of the last results period.

This point is significant because it means that all of the costs incurred from drilling the well may not feature in the business’s cash balance – we do not know. If Pantheon is yet to subtract drilling costs from its cash balance, then its face value strength should be taken with a pinch of salt.

Furthermore, to compensate for the failure of VOB#5, Pantheon is likely to want to go out and drill another well as soon as it can – the company has said as much itself. However, this costs money. If the firm is unable to fund the new well from its existing net cash balance, then we believe it is entirely possible that a placing could be on the cards. Proceed with caution. There could well be better opportunities elsewhere.

Author: Daniel Flynn

Disclosure: The author does not own shares in the company mentioned in this article

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