*Please read the disclaimers at the base of this report. The author has a short position in Pantheon. Does not constitute a recommendation to buy or sell the securities mentioned herein. Do your own due diligence.
Over the past 12 months we have maintained a short position in Pantheon Resources. Whilst having taken profits following the recent collapse of the share price and subsequent equity fundraise, we continue to be bearish on the company’s prospects.
To summarise:
Pantheon’s North Alaska acreage has tight reservoirs with extremely low permeabilities, impeding the possibility of recovering material resources through conventional or even unconventional means and making Pantheon’s purported 10-20% recovery factor on oil in place appear suspect.
Pantheon’s acreage appears to be gas prone, and we are sceptical of claims of a gas cap at Alkaid 2.
The cost and expense of drilling and completing wells has been consistently underplayed by Pantheon, despite repeated and significant cost overruns and technical difficulties
Lack of gas takeaway infrastructure and NGL handling capacity limits the possibility for 3-stream recovery
The exit of Halliburton from the acreage for nothing, of Otto Energy for a modest amount of Pantheon shares (which it subsequently sold the bulk of), the sell down by former Great Bear shareholders, and the earlier failure to farm out the acreage in 2019-2020 do not augur well for commercial participation in Pantheon’s projects.
The history of management has been chequered, with key executive Bob Rosenthal completing a round trip of executive roles from Pantheon, to a number of other apparently failed E&P businesses and then to Great Bear, which was then acquired by his former colleagues at Pantheon, who brought him back into Pantheon in an executive role. Management was quick to sell stock in advance of the recent Alkaid 2 completion, raising eyebrows.
The company has never succeeded in making any money in its 17 years of being listed, jumping from offshore to onshore, from conventional to unconventional in Texas, and then again from conventional to unconventional targets in Alaska.
We question how the company can continue to secure funding to drill wells in the face of mounting costs and balance sheet pressures (notably the quarterly dilution from its convertible bond repayments, which are paid in shares with greater dilutive effect the lower the share price - the “death spiral” effect).
The recently announced capital raise by share placement is indicative of the fact that management recognise they do not have sufficient data (or indeed belief) that any farm-in would be possible even though they have been touting this way forward for several months.
It has been a rollercoaster year for AIM listed Pantheon Resources (PANR.L), with the share price riding all the way up from 20p to 140p and all the way back down again. At one point the market capitalisation was over GBP 1bn. All this for a company that does not, and indeed has not ever produced meaningful quantities of oil for its entire history since listing way back in 2006. In spite of this, its ability to tap the market for new shares whilst constantly reinventing itself has remained impressive. From gulf coast prospector, to Texas conventional plays, to Texas unconventional oil wells, and finally to the ice-covered tundra of the North Slope of Alaska, the promise of ever more material oil discoveries and proven resource appraisal has always appeared to be just around the corner. And once again, just recently, at Alkaid 2, when the long awaited “big producer” is drilled, the result is yet again, a disappointment, a few hundred barrels of oil a day for a few days, and then…. nothing.
Pantheon’s recent “big promise” has been the prospect of 20 billion barrels of resources in the Alaskan North Slope, south of Prudhoe Bay. Conveniently the Alaskan acreage was acquired through the purchase of Great Bear Petroleum, whose owners and founders included the original founder and management team at Pantheon back in 2006 (Bob Rosenthal), along with a former consultant to Pantheon, Dr Ed Duncan who had brought Pantheon into the unsuccessful Tyler County acreage in Texas. After touting the potential for 100,000s of barrels a day of shale oil to Alaska state senators, spending $200m+ with little to show for it, and then shifting to conventional exploration, Great Bear had run out of road, having spent all of its cash, and needed an angel investor. Unsurprisingly given the entwined history of the management of both companies, Pantheon (and its long-suffering retail shareholders) rode to the rescue.
In spite of the constant fanfare over Great Bear’s Alaska acreage and its huge resource potential, every time this “resource” has been tested, it has been found wanting. Previous tests at Alkaid, Talitha and Theta West produced oil, but at best only a few 10s of barrels a day and for short (24 hour) flow testing periods. In the most promising horizon, the SMD, the well test failed completely (albeit blamed on “technical issues”.)
With the winter drilling season cut short by blizzards the company set its hopes on drilling a horizontal at its Alkaid prospect, touting multiple frack stages/completions and an optimistic flow test. Little did investors know that the drilling, completion and testing of the well would take well over six months. Finally, when the well was ultimately tested, production fell well short of expectations, and was far gassier than had been expected. So much so that the company suggested in its press releases that the well may have encountered a gas cap. While the well was gassy, we are unconvinced that the well had penetrated a gas cap.
Pantheon Management’s gas cap dance
During the drilling of Alkaid-2 management kept changing their narrative over gas. A brief run through of management statements is detailed below:
Dec 30th 2022: [high gas rates] not coming from a gas cap but coming out of solution near the well bore. (Operational Update)
3rd Jan 2023: (Investor Q&A): “We believe the gas is in solution and the reservoir does not contain a gas cap”
24th Jan 2023: (pre-Webinar release) “the frack has possibly intercepted a gas cap at the extreme up dip portion of the Alkaid anomaly” (Pantheon analysis with SLB and other consultants)
6th March: “It is believed that the Alkaid 2 well fracked into a gas cap resulting in a much higher GOR…”
7th March: Proactive Investors Video: Bob Rosenthal - [gas coming from a] “combination of gas from a gas cap and from solution gas at the wellbore”
30th March: Interim results - Jay Cheatham comments: “We know the flow test result was impacted because our fracks intercepted a gas cap”
Was the switch of the narrative there to provide cover to suspend production from a well that was due to test over a prolonged period (ie 9 months)? Which would have seen oil production die as gas was produced preferentially? In other words, does the gas-cap “excuse” help avoid conducting a disappointing long term test that condemned the whole acreage position? Hard to say, but the narrative shift here does seem a little suspect.
Alternative interpretation of Alkaid 2 and its broader implications
The reservoir in the Alkaid unit is tight. It may have reasonable porosities but permeabilities are very low, generally in the order of .1 or even .01mD (we can see this from the log data they have provided in previous webinars). The reason for this is not clear as Pantheon has apparently not got whole-core information nor has it suggested any potential reasons. By analogy with similar Alaskan reservoirs, it is likely to be a result of the presence of argillaceous volcanoclastic fragments with swelling clays (smectite, illite, montmorillonite), possibly volcanic cements (analcite for instance) and general compaction, associated with pressure solution along grain boundaries especially silicious grains. Given that most Cretaceous reservoirs in Alaska are volcanoclastic dominated it is unlikely that the SMD or fan systems will have better reservoir characteristics. In the case of the fan systems, they will probably have greater heterolithic interbeds negatively impacting permeability and in addition they will have been compacted more due to their deeper burial than the Alkaid unit. Interestingly Pantheon do allude to the heterogenous nature of the reservoirs. In the case of Alkaid-1 it is apparently on the edge of the main reservoir unit in wet sands with oil, cemented sands and sub-seismic sands with/without oil. Alkaid-2 is centred on oil and gas sands.
Alkaid-1 (the earlier well that Great Bear drilled) produced 100bod and 110mcfd from a six-foot vertical test, giving a GOR of 1100 scf/bbl (Rs 1.1mcf/bbl). The flow rates from the recent Alkaid-2 horizontal are poor and dominated by gas. Their calculated IP30 was ca. 180bopd, 325 barrels of condensate and ngl plus 2.3 mmscfgd. Even including the ngl within the liquid portion the GOR is minimum 4600 scf/bbl; excluding the ngl which is normal practice the GOR will be higher. These different results are attributed by Pantheon to the fact that the trajectory of the Alkaid 2 well path miraculously entered the oil-bearing part of the reservoir at the GOC (ca. 8320’) then goes horizontal at ca. 8390’. They have no independent evidence that a gas cap exists in Alkaid-2 and one was not recorded in the vertical Alkaid-1 well (perhaps evidence for a separate isolated accumulation). This assumption allows them to argue that the 200’ stimulated rock volume which is fracked has connected at its fringes into the gas zone some 70 or 80’ higher. The implication is that on production the gas is drawn down into the well bore preferentially bypassing the oil. An alternative and much simpler explanation is that the oil has a high GOR and when put on production drawdown liberates the gas. In fact, a known GOR of 4600+ places Alkaid-2 firmly in the realm of a gas condensate discovery. This is backed up by the API which is reported as 38 to 41. Alkaid-1 is then the anomaly but this could be explained as a separate and distinct marginal oil pool, although it could be an anomalous test given the operating circumstances at the time.
Regarding the deeper reservoirs Pantheon tested 36 to 39 API and in Talitha 42.3 API. It would be remarkable if the hydrocarbons in these lower units were not also high GOR oil/condensate possibly with a greater GOR than in the Alkaid unit. Finally, the recent 88Energy release reports very high gas concentrations, 15 times background, in their Hickory-1 well in the reservoirs which extend into the Pantheon acreage. In addition, they published fluorescence pictures of the shows in the well which all appear as light blue a colour normally associated with condensates. Hickory-1 is adjacent to the Pantheon acreage and is downdip of the Pantheon reservoirs so in theory more likely in an oil leg. Curiously Pantheon never flagged gas on their gas logs when they drilled in any unit.
In summary the hydrocarbon resource in Alkaid is potentially very gas rich. The deeper reservoirs are also likely to be gas prone. That indicates all resource volume calculations are questionable as are recoverable rates and well rates per 1000’ lateral. Well IP rates and EUR also remain unknown and thus commercial assumptions used by Pantheon are suspect.
Resource inflation
From 2019 to the present time Pantheon’s claimed OIP (oil in place) resource in Alaska has increased from 7 to 8 billion to currently 23.5 billion. This is a staggering increase especially given only 4 wells and 4 tests, the latter all below 100 bopd. There is nowhere near enough new information on which to base such radical upgrades. In addition, the current gassy Alkaid-2 test has not been accounted for in these figures. There are two main impacts: firstly, on overall recovery rates and viable resource potential (currently Pantheon assume 10 to 20% recovery) and then on individual well commerciality. However much oil is in the ground, a combination of very tight heterolithic rock, gas in solution, and potentially high water cuts, along with well tests so far, does not offer much hope for commercial recoveries.
Pantheon’s claimed 23bn barrels of oil in place is dominated by the lower basin floor fan (17.8bn barrels) where the rock is tightest, and the big increase in this fan is the result of expanding the gross rock volume given the Theta West test. However, a couple of wells miles apart hardly confirms consistent reservoir rock, and of course in the case of the SMD, (2.6bn barrels of claimed oil in place) we don’t even have proof of movable oil.
Beyond this, the language from Pantheon management has historically been all about framing the resource as one of the largest conventional resource bases available on land, and yet admitting on the other hand that thousands of wells would be required to capture it, in complete contradiction to the conventional analogues they use (eg Tarn, Willow, and Pikka/Horsehoe). Pantheon then talk of 10% recovery factors with the potential over time for higher recoveries (eg 20-30%), yet the reality is that they have not been able to prove even modest drainage of resource from any single well they have drilled. The reality is that this is going to be a long and costly science project, with an extremely high risk of a negative outcome in terms of extracting material recovered resources. So far, the company have not been able to demonstrate a resource play to match anything in Texas where costs are a fraction of those in Alaska and where gas and NGL offtake is comparatively far easier. We are sceptical they ever will.
Permeability problems
Pantheon does share its well logs in some presentations, but they are very difficult to read as they fail to provide visual clarity or indeed highlight key data in them (we will follow this with a further specific note on the potentially misleading information published). As a taster just look at the well log for the SMD section at Talitha below (from Pantheon’s technical webinar in 2021), with measured permeabilities in the oil bearing zone all well below 0.01 md (or the brown coding in the fifth column below): in other words extremely tight in comparison to some of the analogues they have cited in their webinars (eg the Tarn field)
We note the apparently misleading inferences cast by the company in past webinars about estimated porosity and permeability with much reliance placed on the Tarn field as a “good depositional process analog” and a suggestion that the Theta West play for example has 10x the opportunity of the Tarn fan (Webinar, April 2022). Depositional analogues are one thing but that does not mean detailed reservoir characteristics will follow the same lines. Note Tarn vertical wells achieved 1000s bopd not a miserly few hundred from a long horizontal.
The problem with all this is that Tarn is a conventional play and Pantheon have consistently noted the need for horizontal fracking on their acreage. Age could be extremely important as hinterland derivation of sediments do change with time. Theta West is Campanian age rock (younger) as opposed to the older Cenomanian reservoir at the Tarn field: direct comparison could be misleading and in addition heterolithic rocks which are interleaved on a micro scale at Theta West have not been observed at Tarn reservoir.
Evidentially then, what we appear to have on Pantheon’s acreage is a gassy, extremely tight reservoir across heterolithic rock strata, elevated clay content, composed essentially of volcanoclastic material, making fracking challenging, but with recovery using conventional techniques impossible given the lack of permeability. We have been, and remain sceptical of any prospect for commercial development of Pantheon’s Alaskan acreage.
Above the ground
Pantheon has been listed since 2006, having raised hundreds of millions of dollars, and with precious little to show for it, except an extraordinary series of resource claims on powerpoint presentations and associated webinars (never challenged by live Q&A). The main characters throughout that time have been, Bob Rosenthal, Jay Cheatham, Ed Duncan, and Mario Traviati (in the background).
Previous Pantheon “Rodeos”
Alaska is not Pantheon’s first rodeo. Pantheon has raised approx. $200m from its shareholders since its listed inception in 2006 (and a further $22m in the last few days). Up to another $200m has been spent by Great Bear prior to its acquisition by Pantheon. Less than $12m remains of that cash, while the company still owes money to its convertible holders (approx $39m at last quarter end). Hopes have been raised and dashed innumerable times over the last 17 years. First it was the Padre Island play, which the company bought into, and which culminated in disappointing production. Then came South Louisiana in late 2007. Also, a failure. Bob Rosenthal (the co-founder) left about that time. But the hyperbole kept on coming. In late 2009 veteran oilman Jay Cheatham (still CEO today!) was stating “This is the year when I believe Pantheon broke through to add material asset value for shareholders, which should become evident in first half 2010”. At this point he was trumpeting the Tyler County Texas play, targeting the Austin Chalk and Woodbine. By 2015 Cheatham was touting a “commercial discovery” at Tyler County, and a P50 recoverable resource of 150mmboe. However, several years later, and with numerous well failures the blame game at the Texas play was afoot, and the Great Bear acquisition (Alaska) was underway. The Texas plays and its well failures were quickly demoted to the back of the presentation materials before being quietly dropped altogether in favour of “Multibillion barrel” potential in Alaska. Since then, there have been a series of unconvincing well tests (in the 10s of barrels a day of production over short time periods) as well as an unsuccessful exploration well at Winx. The narrative has shifted from unconventional resources (eg the Hue shale) to conventional resources and then back to unconventional (or at least only accessible by horizontal fracturing), and potentially disingenuous comparisons have been made with conventional fields (Tarn and Willow) and more recently and somewhat bizarrely with the Delaware Permian. None of these are remotely convincing, given Tarn and Willow’s much higher permeability and natural flow rates, and the Delaware Permian’s predominately carbonate and non-volcanic reservoir composition, and superior permeability post stimulation.
Pantheon’s “Revolving Door” Management
Rosenthal was the main founder of Pantheon back in 2006, as well as holding the position of Technical Director. Before admission to the AIM market he owned 32% of the company, which post the capital raise went down to 11%. As well as a founder and key shareholder he also retained, somewhat conflictingly, a 0.68% overriding royalty interest in the Padre Island project, the company’s first venture. Rosenthal left the company in 2008, selling all his stock, before shortly afterwards co-founding Great Bear Petroleum with Ed Duncan and Australian banker Mario Traviati, helping to raise $18m (the initial capital), along with a follow up round that led to the leasing of 500k acres on the Alaskan North Slope. Rosenthal also set up (among other companies) North American Oil and Gas Corp, with co-investment (again) of Mario Traviati. NOMOAG had its securities revoked by the SEC in 2017 following failure to answer enquiries or post timely updates, with the company ultimately defaulting:
After a hiatus at Great Bear it appears Rosenthal came back with Ed Duncan and reasserted control via a bankruptcy process (Great Bear had borrowed in advance against tax credits which were then not paid out by Alaska state) while then engineering the takeover of the company by none other than Pantheon Resources.
A great Farm-Out opportunity? Myth vs realised price?
The main equity holders in Pantheon’s Great Bear Alaska acreage have been Otto Energy and Halliburton. While Otto retains a very modest shareholding in Pantheon (at least in Otto’s last interim report), Halliburton exited completely in 2019, effectively giving away its entire 25% stake in the Alkaid/Phecda acreage to Pantheon, in exchange for giving up on its lease obligations, leading to the presumed conclusion that Halliburton believed any future incurred costs on the acreage would in all likelihood exceed any revenues from it.
In October 2015, Otto Petroleum, a listed Australian E&P company paid $7m to acquire acreage from Great Bear in two distinct areas for an 8% and 10.8% working interest respectively. Despite Pantheon’s claims to be proving up billions of barrels of oil resource in 2021 Otto was quite happy to sell its position for a very modest amount of Pantheon stock, approx 14 million shares or approx 2% of the company, 11 million of which it promptly liquidated in late 2021 for $10.5m, a far cry from possessing 10% of a “multi-billion barrel project”:
Presumably such a stake in the field (via Borealis Alaska) would have attracted the kind of interest that Pantheon now claims for its assets in any future farm in, but it seems the only possible acquiror was Pantheon. The sale of the stake to Pantheon for Pantheon shares came on 20 January 2021, shortly before Talitha results were announced, and the sale of Pantheon shares came just a few months after the lock up expired at the end of June 2021.
Similarly Great Bear’s owners/creditors who received stock from Pantheon (several hundred million shares in return for Pantheon’s acquisition), were quite content to sell down the material Pantheon stake they acquired when time and market conditions allowed: not exactly a sign of belief in a massive resource play that was about to be unlocked. We do know from the company’s TR-1 disclosures that among the beneficiaries of these material share sales were Great Bear shareholders including Rosenthal, Traviati and Dr Ed Duncan; what we don’t know is what debt repayment commitments (to previous Great Bear creditors) were part of these sales, and to what extent the sales value exceeded the debt repayment commitments, given the higher prices that Pantheon traded at the time the shares were sold.
Conclusion
Pantheon shareholders have always been led to feel that great things lay around the next corner. That once a few technical issues were overcome, the promised land of abundant resources awaited them. However, in reality, the only people that Pantheon has served has been its management team, who have been able to extract rent and emoluments over many years from a company that has never turned a profit (or achieved much in the way of revenue for that matter). The biggest claims have been left until last: a multi-billion-barrel resource potential in Alaska. Yet the reality is that the oil is trapped in unfavourable rock, with very low permeability, that appears to be both water and gas prone. With only a few wells drilled and with little in the way of flow to show for it, and whatever the hype, there appears little prospect of the company, or its shareholders, being able to recover the investment to date. The constant change of script from management, and dance between conventional and unconventional analogues (neither of which convince) hardly suggest they have conviction in the play either.
DISCLAIMERS
The information contained above is not intended to constitute and should not be construed as investment advice and should not be construed as an offering or a solicitation of an offer to invest in any product or share. It is for personal use and information use only. It should not be relied on in the context of the investment objectives and financial situation of particular needs of any particular person or class of persons, and relevant advice should be obtained before taking any investment decision. The information above has been obtained from sources that we believe to be reliable and accurate at the time of publication, however, we give no warranty of accuracy as to the information or opinions offered above. Opinions given above are given at the time of posting and are subject to change without notice. The value of investments may fluctuate and you may not receive back the amount originally invested. Past performance is not a guarantee of future performance. At any time we may have a position long or short in a given company under discussion.