Touchstone Exploration’s (LSE:TXP) share price has been surprisingly resilient over recent months. In a market that punishes companies light on news flow, Touchstone’s stock has held onto most of its gains since February’s 12p placing. Volume has been thin, but any share price weakness has been bought into. Touchstone’s shares currently trade at 16.5p on the mid, which is very good all things considered. With the first Ortoire drill around the corner could this company be set to become one of the summer’s blockbuster performers?
Followers of the Touchstone story are well aware of the Ortoire Block’s potential on Trinidad. Originally explored and then abandoned by Shell in the 1950s and 60s, advances in drilling technology have opened this play up once again.
In January Touchstone released an independent evaluation of the Block, which concluded Ortoire contains a gross contingent resource of 3.75M barrels of oil equivalent (“boe”) pending development (3Mboe net to Touchstone) and a prospective resource of 23.5mboe (18.8Mboe net to Touchstone). Although these figures are unrisked, the numbers are big and with the company getting ready to kick start its 3-well Ortoire programme in the coming weeks this could mark the beginning of a step change in the business’ growth trajectory.
Touchstone has already established itself as Trinidad and Tobago’s most active oil and gas operator. During 2018 the company drilled 11 of the 31 onshore wells drilled across the islands, beating its AIM compatriot Trinity Exploration (LSE:TRIN) into second with only 8 wells. The firm’s goal throughout this campaign was to build a solid foundation of cash flow generation and to reach production of 2,000bopd.
The strategy worked and by March this year, Touchstone was able to report average production of 2,358bopd.
Having sailed through its production target, the company’s focus switched in 2019 to a more ambitious play; unlocking value at Ortoire.
In May Touchstone CEO Paul Baay gave a detailed presentation and hosted a shareholder Q&A session on ValueTheMarkets.com about Ortoire (which you can view here). This is worth watching, as Baay went into a lot of detail about the background to the project, its potential and how the company plans to prove up the asset.
With 18.8mboe to go for, the opportunity for the £26m valued Touchstone is clear. If Baay’s enthusiasm for Ortoire passes the judgement of the drill bit, the company’s stock will more than likely trade at a multiple of where it is now.
If it doesn’t then the downside risk is somewhat limited by the company’s existing robust cash flow generation and ability to resume drilling across its proven assets. The risk/reward on offer seems nicely weighted in favour of the upside.
So, with the first spud approaching we caught up with Baay to find out the latest developments. Starting with the first expected spud date and we asked when might shareholders expect this to happen. Baay replied:
“We’ve previously announced we expect spud of the first well in our 3 well programme at Ortoire to happen by the end of June. We are broadly on target to meet that deadline. The drill pad is built and the rig with another operator just 5 miles to the north.
The well that that operator is drilling it down to a depth of 9, 700 which is good news for us. That is about 1,500ft deeper than our first target, so will mean the rig will be warmed up mechanically for us when we take it over. ”
So what about the first drill target? What is Touchstone targeting?
Baay told us:
“Our first well is called COHO-1 and, if anything, it is more of an appraisal well. It is targeting a gas discovery of up to 19.6bcf, to a depth of 8,500ft. We expect to drill this well within 35 days and, if successful, to carry out a comprehensive test programme over the rest of the summer.
This is the smallest target on our block, but offers the potential for the quickest return. Our model indicates it could generate a return of anywhere between 400-1,000boepd to 3,000boepd.
If unsuccessful, it should deliver a minimum 10bcf. We are confident of this because a test well was drilled here in 2001, so we have what should be a dependable geological model.”
Of course nothing is ever certain when drilling for oil & gas, but it does appear Touchstone is initially going for the lowest hanging fruit at Ortoire. Beyond this and the targets become even bigger.
The company’s next planned well at Ortoire will be a conventional oil target at the CASCADURA-1 well. This is on-trend with known production at two neighbouring fields. Previous attempts to drill here hit unexpected technical issues and the primary oil zone was not penetrated. Touchstone will drill this well to 8,160ft and has previously announced it expects a 95% chance of discovering an unrisked 944,000boe and a 34% chance of discovering an unrisked 6.2Mboe. Baay expects CASCADURA-1 to spud in late Q3 or early Q4, with a similar timeline expected to COHO-1.
Beyond this and Touchstone’s third planned well is, in Baay’s word, “the big one”.
The Royston Gas Prospect is deeper than the company’s first two targets, with an estimated target depth for ROYSTON-1 of 11,500ft. Baay told us the “rig on the island, which is large enough to drill this well, will not be available until Q1 2020.” While this means a little bit of a wait for shareholders, this could end up being well worthwhile. Touchstone believes it has a 34% chance of success at ROYSTON-1 of hitting an unrisked 11.3Mboe.
Although it goes somewhat against the grain on AIM, Touchstone’s approach to its Ortoire drill campaign reflects management’s commitment to building a serious oil & gas company. Rather than drill the well with the biggest target first, and promote the behind off the stock on the back of that, the company has instead elected to drill first the wells it expects most likely to deliver commercial returns. With the COHO-1 spud only days away and Touchstone’s stock stable at 16.5p, this strategy is about to be put to the test. If it is successful then expect to see the company’s shares move materially higher.