Cuadrilla has become the first operator to have flowed gas from a horizontal shale gas exploration well in the U.K. Initial results are encouraging, with recovered gas containing very high methane content (96%), no H2S and minimal CO2. Core samples suggest the Bowland shale is quartz-rich, with low clay content and excellent properties for fracturing. Gas flowed to the surface from PNR1-z at a peak rate of 0.2mmscfd, but with just two of 41 installed stages along the horizontal section fully fractured as designed. Less than 14% of sand planned for injection was put in place as Cuadrilla attempted to operate within the regulatory micro-seismic traffic light system. Cuadrilla estimates that a 2.5km horizontal well, with all stages fractured as planned, would have a potential initial production (IP) rate of 3–8mmscfd (no IP time period stated). Data were not provided on type curve or potential estimated ultimate gas recovery (EUR) given the limited duration of the test. EUR would be a key additional input when determining commerciality. In our initiation note published on 9 April 2018, we estimated a minimum commercial 30-day IP rate of 5mmscfd for a 2.5km lateral.
U.K. Shale Valuation
Our last published P50 valuation of AJ Lucas Group Ltd (AX:AJL) stands at A$0.93/share. Given current uncertainty around Bowland shale type curves, well costs, rig availability and gas prices, we use a probabilistic approach to valuation, which does not include political or regulatory risk. Our base case assumed a probabilistic-type curve based on data from consultancy Anderson Thompson (we interpreted mid-case 30-day IP rate of 15mmscfd and 6.5bcf EUR for 2.5km lateral).
Business Description
AJ Lucas has investments in the exploration and commercialization of shale gas in the U.K. through license equity interests and a stake in Cuadrilla. It also has two Australia-based operating business units: Drilling Services (LDS) and Engineering & Construction (LEC).