Oilex (ASX:OEX, LON:OEX) shares advanced yesterday as it reported the successful milling out of the Cambay-77H well in India.
Cambay-77H started unaided controlled flow back with gas observed at surface while successfully milling out four isolation plugs, including one that had previously failed to seal properly.
Eight fractures into the reservoir have been connected to the well bore, the company added, and production testing equipment has been positioned and commissioned.
Flow back and clean-up will continue under controlled conditions to minimise the risk of damage to the fractures, Oilex said.
The coiled tubing unit will remain on location for several days as a precautionary measure during the initial flow back and clean-up, it added.
Hydrocarbons produced with the returning frack fluids will be monitored and all water-based frack fluids are being stored in a purpose built pit at site, Oilex revealed. According to the company, monitoring these fluids will provide valuable information regarding the quality of the eight fracture stimulations.
As soon as sufficient well stability is achieved, the production test will start and the deliverability of the reservoir will be quantified.
“The elevated over-pressure of 5,000psi [pounds per square inch] and the strong flow back characteristics are very positive results,” said Ron Miller, Oilex’s managing director.
House broker RFC Ambrian reckons that a meaningful flow test should now take place within the next six to 10 weeks.
Ron Miller added: “Further analysis of the fracture stimulation programme and production data will be needed to quantify the reservoir deliverability.”
RFC Ambrian notes the one million cubic feet per day (cfpd) initial production rate of the nearby hydro-fractured Cambay-73 well, and says Cambay-77H could have an initial production rate of anywhere between 3-5mln cfpd, by its estimation.
“Our modelling suggests that anything above 3MMcfpd is likely to be commercial at the current budgeted well cost (US$13.2mln). If well costs can be brought down to US$10mld in a full field development, then we estimate that the commerciality threshold is even lower (around 2.3MMcfpd). We estimate that Oilex’s interest in the Cambay Tight Hydrocarbon Project is worth US$183mln (A¢24.0/share, 13.2p/share), assuming a 50% chance of full-scale development,” the broker’s number crunchers declared.
The shares are currently trading at around 6.75p, up 0.4p on the day, still some way short of RFC Ambrian’s valuation of 15.3p after the broker doubled its fair value estimate from 7.7p.
“We think that the equity market is continuing to discount the chance of success of this ‘proof-of-concept’ tight gas well excessively. We also believe that the equity market is placing no value on Oilex’s Canning Basin licences [in Australia], which seems harsh given the industry’s interest in the basin over the last few years,” said Stuart Armor, RFC Ambrian’s Oilex coverage man.
Armor also believes the recent election of a BJP government in India is likely to be good for the sub-continent’s economy in general and the energy sector in particular.
“Low domestic gas prices (US$4.3/MMBtu) have contributed to the nearly 40% decline in Indian domestic gas production over the last four years. We think Modi’s strong electoral mandate could allow him to be more successful than previous prime ministers in reforming the energy sector and tackling the widespread price subsidies/distortions that have led to significant underinvestment in the upstream petroleum sector,” Armor suggests.
