Touchstone Exploration (LSE:TXP) sat at 12.3p on Tuesday morning after launching a £3.8m private placement to support the development of its highly prospective Ortoire block in Trinidad. The raise is directed towards UK-based institutional investors and will see Touchstone issue c.31.7m shares at 12p each. This represents a 4pc discount to the business’s 12.5p closing price on Monday.
The money will be used to launch a drilling programme at Ortoire, where Touchstone owns an 80pc position. The 35,756-acre block is based to the east of Touchstone’s current producing blocks in Trinidad and contains four structurally complex oil and gas pools. It is based on turbidites, which are deep deposits formed by massive gravity flows that can turn into vast hydrocarbon reserves.
Touchstone has identified three exploration prospects located on Ortoire’s Herrera sandstone reservoirs, which it expects to begin drilling this year. The first and smallest target will be Corosan, a natural gas prospect located just north of Shell’s Carapal Ridge discovery, Trinidad’s largest onshore gas/condensate discovery in 50 years.
Speaking to ValueTheMarkets, Touchstone’s president and chief executive Paul Baay said independent engineering suggests Corosan could contain up to 50Bcf of gas. In the success case, he expects this to support the production of around 2,000boed.
The second prospect is called Balata West, where Touchstone has identified a fault block in the north containing an estimated 15-58MMbbls of oil and another in the south containing 70-281MMbbls. Once Touchstone has followed up on a historic well drilled by Shell, Baay says the site could support up to 30-40 further wells to bring in the production of between 3,000-4,000bopd in the success case.
Finally, Touchstone will move on to a third exploration area called OL-4, where it will follow up on a well drilled by Shell several decades ago. The business believes this asset has the potential to be as big as Carapal Ridge.
A report by GLJ Petroleum Consultants last month highlighted Ortoire’s true potential. It estimated that Touchstone’s contingent resource targets in the block have a 95pc chance of commerciality. The consultant also suggested that Touchstone’s share of prospective resources will be between 4.39m to 53.2m barrels while its portion of contingent resources will be in the region of 1.5m to 5.3m barrels. Finally, the report put Ortoire’s Net Present Value (NPV10) at between $10.5m to $86.86m.
With this potential in mind, Baay told us that success at even one of its Ortoire prospects could be transformational for both Touchstone and the whole of Trinidad:
‘After three years of preparation, it is now game time for us at Ortoire. These are big prospects, and if any of them are successful then it will lead to the creation of a multi-year drilling programme, said Baay. ‘The wells we are drilling are offsetting previously drilled wells. If these initial wells are successful, there are many other structures and anomalies we have identified on seismic that do not have any wells drilled into them. Exploring these would be the second phase of Ortoire’s development.
‘The way I look at it is that if we are successful, Ortoire is a five-to-ten-year project. If this new turbidite geological concept we are playing works, then it really sets up a fairway across the southern part of the island for us to chase, and maybe for some other players to chase as well.’
Specifically, the proceeds from Tuesday’s placing will finance the drilling of an exploration well on the west side of Corosan. This will continue on from a historic well that tested at around 8MMcf/d but did not reach the base of the Herrera reservoir. Touchstone intends to drill to a total depth of 9,000ft to investigate the full potential on offer.
Baay tells us that Touchstone expects to spud the well in Q2 2019, with drilling results expected by the end of July. He adds that the site is based near Shell’s gas plant, meaning it should not be difficult to bring production online in the success-case:
‘From a production point of view, we think we will be able to tie the well up within three to six months because it is just north of Shell’s natural gas plant. The company has told us that they have lots of capacity and want to get more gas into their plant.’
Baay also said that success at Corosan has the potential to de-risk Touchstone’s other Ortoire prospects significantly:
‘The idea is to test into this turbidite model, and if it is correct, then it definitely de-risks our other sites as we go forward. Although each of the prospects looks a bit different, if we can show a big commercial volume out of Corosan then I think it gives everyone a higher rate of confidence moving forward,’ he said.
Elsewhere in Tuesday’s update, Touchstone provided an update on the ongoing development drilling programme across its Coora 1, WD-4, WD-8, and South Palo Seco properties in Trinidad. Last year, the firm drilled a total of 11 wells, taking its production from around 1,200bopd to its current 2,100bopd.
However, in response to crude oil price volatility experienced in Q4 last year, Touchstone said on Tuesday that it had held back from starting up the programme again in 2019. This decision remains under active review, and the company expects to use cash flows from operations to finance future development drilling based on prevailing commodity market conditions. With oil prices stabilising somewhat in the New Year, Baay told us that drilling could begin as soon as March:
‘Oil has moved up around 20pc since the end of the year, so we are now looking at when we get that programme geared back up,’ he said. ‘Where the oil price is right now you could see us starting up as early as March. One of the other things we want to wait on is the Government is talking about making some tax changes, and their budget is usually in March. So, we might wait to see what those tax changes are before we ramp it up again. Regardless, there are lots of rigs on the island. Indeed, there are three or four idle rigs so we can ramp up pretty quickly. We currently have three leases built so there would be no delay there.’
Baay said that, if conditions allow, Touchstone would like to drill a similar number of wells in 2019 as it did last year, potentially adding another 800-1000bopd of production. He adds that the business has the bonus of possessing a greater understanding of Trinidad’s geology as it moves forward:
‘The wells are about $1m each, and they come on production at about 70bopd. They take roughly two weeks to drill, and they are on a couple of weeks after that, so it is basically a month from start to finish. Last year’s wells exceeded expectations, and as we now understand them a little better we can high-grade where we are drilling,’ said Baay. Also, we do not have any more commitment wells, we have met all of these under our contract, so we can really high-grade now and drill where we want to rather than being dictated to a point to where some of the contracts required us to drill.’