Winchester Energy

Australian junior taking on the Permian heavyweights



Since RGN last spoke to Winchester Energy the Australian oil and gas junior has been busy developing its position in one of the most bounteous oil basins in the US, the gigantic Permian Basin stretching across Texas and New Mexico, along with further building its board and management team. ASX-listed Winchester was formed in 2014 and quickly snapped up 17,400 net acres in the Permian, a bold and unprecedented move for a junior cap company in the middle of the lowest global oil prices seen in at least a decade. Winchester’s acreage in the Permian’s Eastern shelf provides a multitude of conventional and unconventional oil targets from two ancient formations, which have been subject to extensive drilling in the last year.  


The company’s activity thus far has resulted in eight producing wells, operating at varying rates from just a couple of barrels per day (bpd) up to 200 bpd, with a view to completing further drilling on the wells to provide a more uniform overall output. 


The greatest basin outside the Middle East 


“We have eight wells all on production in the Permian, which is probably the most prolific basin outside of the Middle East, and we’ve got great leases and expect great drilling opportunities going forward,” asserts managing director Neville Henry. 


Over the last year, Winchester’s drilling programme has focused on a range of wells, achieving significant success with two vertical wells of over 200 bpd. However, as is the case with most drilling programmes, results have been hit and miss with other wells returning in the range of 50 bpd. 


As a result, the company has had to reconsider its understanding of the reservoir variability of the Ellenburger Formation, one of the oldest oil producing rock formations in the world at close to 400 million years old. 


The ancient formation has undergone multiple surface erosional events and then alteration from hydrothermal fluids prior to the deposition of Pennsylvanian and Permian sequences. Consequently, Winchester has extensively utilised 3D seismic mapping technology to improve its understanding of the geological formation. 


“We are currently in the middle of drilling a series of short horizontals from an existing vertical well using ultra-short radius (USR) drilling technology, exclusive to us in our leasehold the company has completed three horizontal lateral legs in its first operation with USR Drilling as Winchester’s partner.  


Drilling results to date have provided proof of concept that ultra-short radius lateral drilling provides the company with a relatively inexpensive, viable technique with which to significantly enhance the intersection of oil productive porosity, fracturing and permeability within the oil-saturated Ellenburger Formation.  


In the first well, where the USR technique has been successfully used, it has provided Winchester with a ten-fold exposure to oil and gas bearing zones within the Ellenburger Formation when compared to a standard vertical well and, as such, is a potential game changer for the company. 


“Where we are today, we are on the brink of proving the viability of this technology as a way to significantly enhance oil production rates and we are preparing to drill a multi-well programme which will include both similar short multiple horizontal wells and limited vertical wells over the next nine months.  


“We believe the enhanced production from the USR drilling method at the end of the initial USR drilling program will create an increased positive cash flow that should self-fund drilling from that point onwards,” says Henry.  


Another significant development within the company in the last year arrived with the appointment of supremely experienced geologist John Kopcheff as non-executive chairman. Kopcheff is well-known across the industry for his exploits spanning a 39-year career, prior to his retirement in 2010. 


Henry approached Kopcheff with an offer to join the board at Winchester based on his expertise in the junior cap sector, having taken independent Australian oil explorer Victoria Petroleum from a market capitalisation of US$10 million in 1984 to around $330 million. 


“I’d been approached by several junior explorers since my retirement but nothing took my fancy, until Neville approached me,” says Kopcheff. 


“They say you should always back people, so with Neville and Winchester I agreed to come on board to direct the public announcements side of things and keep the company in the profile of the investment public in Australia.” 


In addition to having the right people in place at Winchester, Kopcheff also saw that the company was in a unique position as a junior with a large acreage position in the Permian Basin and production from the get-go, but felt it just needed a greater injection of publicity across investor markets. 


Having Kopcheff at the helm of Winchester’s public profile has opened up a new dynamic for the company while Henry continues to lead the process of drilling wells, although the former has also been influential in the application of a more aggressive drilling programme. 


Henry and Kopcheff agree that an aggressive drill programme is what will deliver results (especially in the Permian Basin where it is almost impossible to drill a dry hole according to Kopcheff) and ultimately what shareholders want to see.  


Consequently, Winchester has drilled, and plans to drill, lots of targets and some wildcats across the net acreage, but crucially has married this aggressive programme with a highly technical approach. 


A technological approach 


With the use of 3D seismic technology, the company has been able to define some enticing stratigraphic traps in the Strawn Formation, particularly at a prospect called Crystal Falls which has a significant resource potential of up to 15 million barrels.  


“We are looking at lots of different technological approaches, including how we can improve productivity and recovery from the wells by using chemical treatments to get the highest rates of recovery per dollar spent,” says Henry. 


By combining these technical approaches with a large acreage position, Winchester hopes to deliver significantly increased shareholder value over the next 18 months in a layered fashion, drilling vertical wells, followed by horizontals and laterals.  


“If we can layer all the drilling up, you can build a pretty substantial resources base for the company and for the shareholders to hang their hat on, with a very low downside,” Henry adds. 


The company currently finds itself in a healthy financial position with available cash and no debt, but needs sustained capital to fund its aggressive drilling plans in the coming years.


Therefore, Henry and Kopcheff recently visited London and received a welcome reception, attracting interest from a couple of institutional investors. Follow-up road shows in Australia have also resulted in a successful $2.6 million raising from professional investors. 


Winchester also hired experienced independent geologist Peter Strachan to undertake an independent financial review of the company, the results of which were published in the Strachan Report.  


Kopcheff asserts that Strachan has a ‘healthy cynicism’ of oil and gas firms from an investment perspective, which is somewhat reflected in his valuation of the company at 10.3 cents a share, with a ceiling of 55 cents a share. 


“Some of the investors and board members thought this was a bit low but I said this is reality, we operate off a low base and go upwards,” says Kopcheff. “Certainly, with the type of plays we’ve adopted we are looking at giving the shareholders the opportunity of having a higher price and if we are successful we will see it rise.” 


The Strachan Report was also published without incorporating the Crystal Falls play and prior to a successful round of lateral well drilling, which should add an extra slice of value on the share price in the eyes of shareholders and investors. 


A changing climate in the oil sector 


The recovery of the oil price, which has spilled over the $60 a barrel mark in recent months will prove to be an additional boon to the company, as investors realise that value is returning to the sector. Winchester hopes that greater pools of capital will be available to be pumped into its drilling programmes. 


“I believe the climate is changing within the industry,” contends Kopcheff. “The oil sector has been beaten down for a long time, but I think people are now becoming aware that there has been a stabilising in the price and investors will turn to this sector and see that there is potential for an improvement in value.” 


Winchester is well protected from oil price fluctuations on the downside, down to the mid-$30s thanks to the low costs of its ongoing activity and the attractive leases it has negotiated during the oil price downturn. 


“The particular leases we’ve been able to negotiate during the down turn, when the lessors were willing to negotiate and not be too hard on us, has meant we’ve ended up with five leases and each one has a one well per year commitment to extend the entire acreage.” 


These deals will allow Winchester to maintain its growth even if the oil price was to move downwards significantly, whereas other companies in the Permian have countless leases and would have to drill continuously or risk losing their acreage position they spent thousands of dollars on, even if the oil price remains stable. 


Winchester has not only weathered the storm of the 2014 oil price crash, but turned adversity into opportunity during the down time to secure a significant net acreage position in the Permian, with the potential to extract a gross resource of up to 30 million barrels of recoverable oil trapped across two formations. 


With a series of successful drill results under its belt, the aim for Henry and Kopcheff is for Winchester to continue its aggressive drill programme, build production, prove up its total resource figure across the acreage and open up new exploration channels with the ultimate goal of significantly increasing shareholder value.