As I noted last week, as we round out the year each week I will highlight my best plays for 2018. There are three factors that I base my trading decisions on; 1) technical analysis which forms the bases for my short-term trades and entry/exit timing of longer-term holdings 2) macro trends where the sheer volume of money and/or fundamental changes create a long-lasting re-rating within an industry and 3) successful management/investors.
I find the last one crucial, especially when delving into the small and mid-caps. In my experience you rarely see great management and expert investors being involved with bad products or poor investment opportunities. Smart people and smart money tend to follow the smart opportunities. Sure they don’t always get it right, but they are not on the losing side very often.
My current largest holding for 2018 is backing experts in the energy field, specifically the discovery of a new oil basin in West Texas – an area that has seen very little exploration despite being in one of the most well-known oil regions of the world. Helios (HE8) is progressing drilling at its Presiodo Oil Project which lies on the western extremity of the West Texas Permian Basin, one of only 25 identified “Super Basins” in the world and within the Marfa sub-basin. Their second project is the Trinity Oil project located South East Texas.
Now, before exploring the opportunity further I always look to see who management is and the major backers of the Company. I find this is a quick way to decipher between “real” blue-sky opportunities and those that are merely “marketing spin” to distract from the reality.
Helios has assembled a world-class management and investment team that has a strong record of discovery in region. Neville Henry (significant shareholder) is a geologist based in Houston with 43 years experience and is responsible for discoveries across 6 basins with total discovered reserves of more than 4 billion barrels of oil, including the discovery of Aurora Energy’s Eagle Ford Shale Project. Aurora Oil & Gas Limited was listed on the ASX with an initial market cap of $28m and the assets were ultimately purchased for A$1.84 billion by Baytex Energy in 2014 (Aurora was then delisted after the cash takeover by Baytax). The Aurora assets generated Net Profit After Tax for 2013 of US$116 million, production in excess of 21,000 net boe/d and proven net reserves (1P) of approximately 122 million boe. Neville also spent 12 years with Anadarko Petroleum where he was responsible for increasing oil production from 25,000 to 400,000 bopd. Managing Director Richard He is known for the development of the Halliday Oil Field in East Texas which after 14 successfully fracked wells, the field was sold for US$520 million.
So I am confident that management has the expertise, history and capacity to do it again and am willing to back the team. When looking at the opportunity independently it is easy to get excited at the potential, particularly on a risk reward basis.
The Presidio Oil Project is located near the Mexican border within the Marfa Basin and as mentioned is the least explored region in Texas. Helios is testing three wells of which two have already been drilled (Quinn Creek 141 and Quinn Mesa 133) and are now awaiting perforation and testing which will occur later this month. If Helios can achieve some commercial flow rates (i.e. boe/d) which we should know in the coming weeks, then this will be deemed as a new oil discovery in a new basis and the stock will be significantly re-rated. The third well will be drilled in March. In the meantime, Helios has continued to secure more acreage in the area in advance of a successful discovery where acreage prices will surely skyrocket.
The geology of the region is highly prospective for oil given its similarities to the hydrocarbon-bearing characteristics of the more prominent basins. The advantage of this geology is that the drilling is shallow at 3500 feet and low cost – actually very cheap – at US$500,000 per well compared to the cost of drilling a single well for US$3.5 million at their South East Texas Trinity Project.
There have been a good number of oil and gas shows reported in the Marfa sub-basin (approximately a third of the wells drilled have shown the presence of oil and gas) and this to me indicates that at some point a solid discovery will be made in the region (shown below).
Considering the land bank being built by Helios in the region (ongoing and I expect updates on acreage size from the Company) together with the expertise behind the company (particularly at the geological level) I believe this is a unique opportunity for a genuine new oil discovery in West Texas. Such a discovery would trigger a new outlook on the region and a grab to secure acreage in the area for further drilling activity and development. Acreage prices will skyrocket in those areas with oil and gas potential. As an example within the Permian Basin acreage prices have increased from around US$2000 per acre to near US$30,000 per acre this year with spikes of up to $60,000 an acre. Considering Helios has been securing acreage at sub $50 per acre, the increase in their acreage value would be substantial and an add-on to any oil discovery.
As the news flow continues and the potential for a new oil discovery increases I expect the share price to continue its upward trajectory since listing in August. I have been encouraged to see the share price well supported on dips and an ability to hold its 30 day exponential moving average indicating that momentum is still strong. Indicators are not in overbought territory so I don’t have any concerns the stock is stretched or ‘hyped’ at all.
Helios has set itself up to be in the driving seat in the region, piloted by genuine experts not just in the industry but specifically within the Texas oil and gas industry. Like counting cards in blackjack, the true benefit is not in knowing when the deck is “hot” but rather increasing your bet size when it is, and reducing it when it cools. Helios is certainly one that has the potential to be hot and to maximize the potential, it is also one of my bigger bets.
