Hero Technologies Inc (HENC)

[tchauncy]

Read This: So here we are at a point that some of us have been waiting as long as 8 years to finally get some initial resolution to a $20+ million HENC endeavor (no pun-intended).

Over these years we have seen the price of conventional crude as low as in the $20's to as high as the $120's. At the same time we have seen the stock as low as the high single digits to has high as the low $.70. Today we see the stock in the mid $.20's. Also during this time, we have seen HENC's Working Interest expectations vary from a low of below 20% as recently as six months ago to its current high of over 50%. In the early days, there were many pundits to include supposedly "expert" oil professionals that scoffed at any suggestion that PEL 444 would ever be anything more than "Kangaroo Pasture" in that no wells using modern day exploration technology had been successfully drilled and completed within 75km of 444. This causing "conventional wisdom" that the Edge of the Cooper Basin oil strata ended far to the East. I personally experienced such scoffing back in 2008 when I showed HENC to a Senior VP Petroleum Engineer with Shell oil in Houston.

However, within a few years these same pundits are nowhere to be found in that hundreds of commercial wells, including some of the largest wells testing over 5000 barrels a day, ever discovered have been drilled and put on line extending into this supposed Kangaroo pasture. Even in the past year, far west and smaller than 444, Petroleum licenses have been snapped up from Government auctions requiring costs and commitments of over $50 million.

To put things in a proper perspective, for the 15 years or so prior to this decade and the discovery of the Bakken play in the Williston basin, in spite of tens of thousands of exploratory wells drilled in the on shore US, less than half a dozen had come in with 1000 barrel a day potential. And certainly none at drilling depths of under 10,000 ft. and none with Gas to Oil Ratio's (GOR) that entitled sales at premiums to higher priced Brent Crude. Even the Bakken, where the average depth of the bigger producers was in the 12,000 foot plus causing drilling and completion as much and higher than $15 million a well, did not receive such premium pricing. In recent years, due to Fracking technology, much more oil was discovered on shore in old basins at lower finding costs, but let’s face it. Fracking was, and still is considered a "secondary" production solution for older heavily drilled areas that were abandoned due to conventional depletion and too tight porosity and permeability of structure.

How many of us over the years have become excited about a small stock that maybe had a 15-30% interest in a few thousand acre play and watched it soar to $50+ million market cap? Irrespective of whether it was successful or not, was such speculation justified? Maybe, at least at the time. Let me share a personal experience in late 2012.

Back in the early ‘80’s when I was Founder CEO of a full service stock brokerage firm specializing in Oil & Gas, I helped raise a half million dollars for a small Dallas based oil company to acquire around 2500 acres of drilling land in Panola County TX. In exchange, additional to a cash fee, my partner and I each were given a .0053 Royalty on the 2500 acres. Shortly after raising the cash, a few wells were drilled on the property and they came in with a few hundred barrels a day production. The wells produced for a few years while average oil prices were less than they are today, so we each got monthly royalty checks for less than $100 for a few years. By the late 80’s, the checks stopped and I pretty much forgot I even owned the Royalty. About six or seven years ago, I got a pleasant call form Anadarko Production Co. Royalty division asking me if I was the owner of a Royalty in Panola County. I thought for a moment and answered yes. To my stunning surprise, I was told they had been looking for me for a couple of years and was holding some $19,000 in back royalty payments. For the next few years, I was receiving around $1000-1400 a month in checks. In late 2012, my former partner called me and told me he had just sold his .0053 interest to a Royalty Company out of Dallas for $120,000 CASH! So I immediately asked for their number. As it turned out, the price of oil during that year end was dropping fast so by the time I spoke with them, they only offered me $100,000 which I gladly accepted and was paid. Why they were willing to pay so much is that our “drilled out” small property was smack dab in the heart of the Haynesville Shale play resurrected by Fracking.

So think about it. The two of us together hold just over 1% royalty in just 2500 acres and over the years together collected well over $300,000 in cash! I assume today I would have been lucky to get a quarter of what I did receive and the Royalty owner is probably having “buyer’s regrets”. The point of this story should be obvious. While the price of oil can have major fluctuations over the short term, it is a depleting asset and when least expected can and will recover, no matter how dire things look at the moment.

Now let’s look at what we are dealing with re. HENC. HENC, with only a $30 million Market cap currently owns an amazing 2,358 square kilometers (582,674 gross acres, 310,761 net acres) in just PEL 444 alone! That is a 53.3% Working Interest. Because of the low GOR, the crude coming out of the Cooper Western Flank is selling for around a 10-15% premium to Brent, which brings the raw sales price in USD to close to $50 a barrel. According to Beach and other prolific producers in the basin, due to a high 50+% wildcat success rate, and 90+% Development success rate, based on year ago disclosures when the cost of drilling was at least 35% higher, these AU “Majors” were claiming “Finding Costs” of around $25-28 a barrel. Which based on today’s costs would logically bring finding costs down to below $20 a barrel. In the US, average finding costs for just West Texas Intermediate crude (WTI), was running $90 for conventional production and maybe as low as $40-45 on secondary fracking projects.

The reason cost have dropped so low in the Cooper has little to do with whether it is economical to drill right now. It is. The costs have dropped because the AU Majors like Beach, Drillsearch (who have just merged) and Senex, (Drilling Operator of this HENC well) have diverted their annual drilling budget away from Exploration for the moment (the oil in the ground is not going anywhere), and are focused on acquiring production at fire-sale prices from many Junior producers in the Cooper who had been funding their drilling budgets with bank loans back with $120 a barrel oil. Just a year or two ago, banks in the region were actively soliciting successful juniors for loans with floors as high as $80 a barrel. But as typical, Banks “are not eager to sell an umbrella once it starts raining” So many of these Juniors are selling land and production at fire-sale prices just to survive, and the well-funded Majors are only too happy to accommodate with a “low bid”.

In hind-sight, luckily, HENC and TGC hit that dry hole a few years ago. For had it been successful, they too would likely be strapped with a lot of bank debt used to fund further exploration and be in the same boat as most other area juniors.

In HENC’s case in particular, the timing could not be any better to begin its evolution into drilling. Not only do they have the advantage of all of the above, but since they are dealing with US dollars, the conversion into AU Dollars quoted for drilling costs in the basin, has seen the AU dollar which just a few years ago was $1.03AU to $1.00USD to around $.73 to $1.00. And all the while the Price of oil is based on USD. Not so good a deal for TGC in this aspect since the CD is around .75 to AU .73 and they must spend Canadian Dollars.

Now all of this will be somewhat moot, at least for the moment if they are on the wrong side of the field 50% average success ratio, however, with the drilling of this well, ownership of the 582,000 acres is now secure for the next five years, irrespective of whether it is a producer or not.

Expectations.

While my personal opinion is that due to various reasons such as; more than two years of interpreting and re-interpreting, not only the state of the art 3d seismic shot on just 3% of the 582,000 acres in 444, but also taking the 30+ highest prospects and narrowing them down to this first well, the likely hood of success I better than 50%. Even further encouragement should be attained by Senex, one of the “Majors” I mentioned above, taking on the “boots on the ground” operator status in exchange for only Operators fees. Reason likely being is that Senex who owns most of the acreage directly adjacent to 444, sees this as an opportunity to get a “first hand” look at all the information about this well rather than having to wait the two years that detailed info like drilling logs and engineering reports are normally “tight-holed”.

A Very Important consideration should be mentioned here regarding initial “testing” of this well should it be deemed likely successful.

While we have seen numerous PR’s and drilling reports put out by a number of Cooper basin operators, reporting “open hole” tests resulting in 1000 barrel to 7000 barrel a day results, DO NOT expect to see the same reported on this well, pretty much no matter how big it turns out to be. What you need to pay attention to is the number of different “pay” zones and even more importantly, the thickness and depth of the pay zones reported. While the typical Cooper well has one to two pay zones, I have been told that they are going to be looking at as many as four potential zones that showed up on the seismic. While anything over a few meters of “pay” can be commercial, some of the bigger wells in the field have total pay of over 20 meters in total thickness.

Reason being is that this well is being drilled differently than 95% of the wells in the Cooper in that it is being drilled as a “Slim-Hole”. Other than it was mentioned in a prior PR, I have no detail as to how “Slim a hole”, this will be. By oil-field definition, any well drilled with a diameter of less than 6” inches can be defined as a slim hole, all the way down around 4”. Obviously, the smaller the diameter, irrespective of the size and success of the well, the lower the Open Hole test is going to come in since the “slim-hole” acts somewhat like a “choke”. For example, the production potential from a 9 5/8” casing compared to a 4 ½” can be reduced by as much as 80%.

My guess they are using a slim-hole not only because it is around a third cheaper, and can be drilled faster, but also, there is no urgency to start selling as much oil as possible from this first hole. I assume if successful in a big way, offset wells will be drilled more conventionally.

Last two comments, while we have been concentrating on oil, over the past five years or so, there has been considerable interest, particularly by international majors like Shell and Chevron in using modern fracking and directional drilling looking for Shale and Coal seam Oil and Gas and expenditures in developing these alternative hydrocarbons numbers in the Hundreds of Millions of dollars. Due to current lower prices, interest has waned somewhat for these exotic products, but overall, the success has been quite impressive in some area. I have been told that 444 in particular seems to have considerable potential in these alternative products over and above conventional.

And let’s not forget, HENC also owns some 230,000 (48% net) acres in PEL 112 to the South. While a they did drill a dry hole on this License in 2012, there are some, (myself included) who believe that 112, can be every bit as big if not bigger than 444, due to its position right in the Northeast to Southwest “fairway” of the extension of the Cooper Permian nose. Significant wells have been drilled and complete right down the fairway to within just a few kilometers NE of 112. An engineering report put out by Australia’s largest Reservoir Engineering firm showing P90 reserves (90% probably) of over 25 million barrels recoverable form just a 10% seismic sampling of PEL 112.
http://hollomanenergy.com/technical_reports/

Bottom Line: Irrespective of the outcome of this well, It is very likely that over the next 5 to 10 years, tens of billions of dollars of Hydrocarbon will be extracted from these two giant Petroleum licensed, irrespective of who owns the stock at that time.

JMHO