Today’s news that Leyshon Resources (LON:LRL) will have to frack the ZSJ5 well should come as no surprise to investors, says Seymour Pierce oil analyst Sam Wahab.
His comments come as the AIM quoted company's shares shed over 20% after this morning’s statement, which confirmed that fracking operations will get underway in the spring.
ZJS5 is the company’s first well in China’s prolific Ordos basin. At the end of last month it revealed that the well had encountered hydrocarbons and initial testing had begun.
Leyshon had hoped that the identified pay-zones may yield commercial gas flows without a frack; however, testing showed insufficient flow.
“The company had previously highlighted the need to frack any potentially commercial reservoirs to stimulate flow rates,” Wahab said in a note to clients.
“We remain confident that given the low cost of drilling, fracking and flow testing the three well programme (est:US$5mln); coupled with the close proximity of existing infrastructure (including the Lin-Lin pipeline), Leyshon’s share price represents a discount to risked NAV [net asset value].
“Whilst we do expect an element of profit taking following this morning’s update, the company does have US$45mln (12p/share) in cash which underpins their long term growth story in our view.”
Drilling continues on Leyshon’s second well, ZJS6, which is now at a depth of 800 metres.
It will be drilled to a 2,320 metre target depth, and wireline logging is scheduled for mid-to-late January. ZJS6 will also be tested pre-frack, and like ZJS5 it will be fracked after the Chinese New Year.
In total, three wells are planned for Leyshon’s acreage, which is found in an unexplored area near to the Sanjiaobei discovery.
All of these wells are located within 10 kilometres of a recently commissioned gas pipeline supplying the Shanxi Province -where gas is currently being sold at well-head prices of US$6 to US$7.5 per thousand cubic feet.
Leyshon, which currently has A$45mln of cash, owns 100% of the project though PetroChina has the right to buy 40% at the field development stage.
In early deals on AIM Leyshon shares fell 4.25p, or 22%, to trade at 15p each.
