On Thursday, Touchstone Exploration (LSE:TXP) announced the spudding of its COHO-1 gas exploration well. This is the first well the firm will drill on its Ortoire Block in Trinidad and Tobago. The company’s stock remained flat on the news at 15p and only 310,000 shares changed hands. Admittedly, the climate is awful at the moment, with both the oil price crashing and widespread fears of a looming global recession. However, the lack of market response is surprising when you consider COHO-1’s headline grabbing economics. This well has a strong chance of being a game changer for Touchstone.
To learn about the economics of COHO-1 you need to read slide 12 of Touchstone’s latest presentation (found here), from which the table below is taken.
Since COHO-1 is a gas exploration well, the company’s production estimates are presented as “barrels of oil equivalent a day” (“boepd”). This is an aggregate figure both for any liquid hydrocarbons encountered together with any commercial gas.
In summary, Touchstone has calculated three probabilities in its efforts to estimate the potential for commercial success at COHO-1. These are:
95pc chance of achieving peak production of 1,084boepd over 8 years
73pc chance of achieving peak production of 1,965boepd over 9 years
30pc chance of achieving peak production of 3,336boepd over 14 years
By any measure, these figures convey an impression of high confidence. That Touchstone hasn’t sought to promote these numbers too heavily is also (perhaps oddly) encouraging. There is a sense that something significant is about to happen here.
Considering that Touchstone’s first half oil sales in 2019 totalled 1,944 barrels of oil a day to the end of June (a 19pc increase on the previous year), COHO-1’s transformational potential is clear. The firm is already an established operator on Trinidad and Tobago, so any discovery it makes will be relatively simple to commercialise. COHO-1 is only 3.5km from existing gas pipe infrastructure, which would mean linking the discovery to the sales network should be straightforward. If the production numbers meet the its expectations, then this could have a hugely meaningful impact on the company’s valuation. At 15p Touchstone’s market cap is £25m.
COHO-1 is located in the Corosan area of Ortoire. This is the first of three potential drill targets here, with a successful exploration well having previously been drilled here in 2001. In fact, it was the success of that previous well that has proven to be the foundation of Touchstone’s current confidence. The data from that well helped guide the company in designing COHO-1 and building the economic model.
There is however, one significant difference between COHO-1 and the 2001 well. COHO-1 is going for a deeper target. Where the previous well stopped at 5,500ft, COHO-1 is being taken down to 8,300ft. No other operator has drilled to this depth before and, in the words of Touchstone CEO Paul Baay (speaking to ValueTheMarkets.com): “we are in effect looking at two prospects with this well. The upper target, which has the highest confidence factor assigned to it, has already been proven. However, it’s the lower target we are most excited about. If we hit what we’re aiming to then this could potentially immediately double the size of our company”.
And there’s much more potentially to come. COHO-1 is the first of two fully funded, back-to-back exploration wells, which Touchstone is going to drill this year at Ortoire. The second well, CASCADURA-1, will aim for a conventional oil discovery. The same rig will be used for CASCADURA-1 as for COHO-1, but the target is much bigger (up to 18.77m barrels of oil, with a range of chances of success from 34% to 95%).
This all makes the market’s ambivalence towards Touchstone so much more surprising. As difficult as conditions are, Touchstone’s track record of delivery since it came to AIM in summer 2017 has been superb. For the company to have made such confident public claims about what it believes its chances of success are, it is reasonable to have a degree of faith in these. Of course nothing is without risk. Any number of things can go wrong when drilling for oil, but over the last two years Touchstone’s directors have built a reputation of trust in London. If one, or both, of the next two exploration wells deliver then they could be set to become superstars.