Arrow Exploration Corp. (AIM: AXL): CN-3 encounters thick oil pay but flow test hampered by poor cement job
• The CN-3 well encountered 67 feet of oil pay in two Ubaque zones plus 23 feet of oil pay in the C7 and 59 feet in the Lower Gacheta formations.• The oil pay encountered in the Ubaque at CN-3 is thicker than at CN-2 (~60 feet). The characteristics of the reservoir are very good and similar to those encountered in the CN-1 and CN-2 wells.
• The Lower Ubaque zone was initially tested at 593 bbl/d of oil with a 30% water cut. The water cut subsequently increased and the test was terminated. The Upper Ubaque tested at 129 bbl/d of oil with 92% water cut and the test was also terminated.
• The unexpected water breakthrough is explained by a combination of (1) a poor cement job, (2) high reservoir quality and (3) the fact that the deepest perforations were only 50 feet above the oil water contact. The Lower Ubaque had only 65 feet of pay above the oil water contact.
• Arrow believes that some of the cement went into the formation (given the very high permeability) resulting in poor cement integrity as identified on the casing bond logs with the formation water channeling to the perforations. This did not happen at CN-1 or CN-2 as these wells were structurally higher with no visible oil water contact indicating an oil column of 115 feet from the top of the Ubaque to the oil water contact. The perforations were much further away from the oil water contact.
• The C7 formation will now be tested with results expected next week.
• Pending the results of this well test and the opening of the Ubaque zone at CN-1, we have not changed our forecasts.
• With three new RCE-3 wells to be drilled by year end and a new reserves report for Carrizales Norte expected imminently, we re-iterate our target price of £0.55 per share (~our ReNAV). This excludes any contribution from exploration success in 2024.
Horizontal wells should mitigate the risk of early water breakthrough
The future development of Carrizales Norte is expected to be based on horizontal wells. This allows the perforations to be located further from the oil water contact. The draw down (the difference in pressure that “pulls” the oil out of the formation) would be spread over a wider area reducing water coning. The cost of a horizontal well is ~1.5x the cost of a vertical well but a horizontal well could have an IP 3x higher.
Valuation and cashflow
Our ReNAV is unchanged at £0.55 per share. Assuming US$85/bbl for Brent until YE24, we forecast that the company will hold~US$12 mm in net cash at YE23, >US$50 mm at YE24 and US$80 mm at YE25.
Front Range Resources is engaged in oil and natural gas exploration and production focusing on horizontal multi-stage frac development in Montney, Bluesky, Wilrich and Falher formations in the Deep Basin area of west central Alberta.
Auctus Advisors is a specialist Equity Capital Markets and Advisory business with a focus in the Energy Sector.
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