Touchstone Exploration Inc. (TXP.L) Earnings Call Transcript & Summary

Yes, there are, but I must admit, it's kind of like we own an island in the Caribbean right now with what we've got set up with the land base. As I say, we were aggressive on the last bid round, and we basically picked up all the land in the fairway from the west to the east part of the island on the fairway. So to be honest with you, there might be a little -- few little things to pick up, but there's nothing big left. I mean, I had referred -- if you go back a year ago, I had referred to the Shell property as kind of the holy grail of Trinidad. And for a couple of reasons. Number one is it's a beautiful facility located right in the heart of the fairway. But on the takeaway from that plant, the key thing is it goes to the petrochemical business, which they call the domestic business, which is what we sell to now. But the most important thing and what really changes with the Shell deal is it allows us now to go to the LNG market. And we'll get LNG pricing for that gas. And that sort of phases in over the next 1.5 years. But to give you a magnitude, like we're getting $2.50 right now and LNG is selling for $12 or $14, right? So there's a little processing to get it there and all of those kind of things. But the magnitude of change here, I'm not sure has really been grabbed by the market yet. And maybe after we get the deal closed, everybody will start to see some of those opportunities. But that's the fundamental change that's going to happen for us in 2025.

Okay. That's really interesting. And in terms of the technical aspects, the drilling depth, reservoir characteristics, is it really simple drilling? Or do you have technical challenges there to overcome?

No, it's not. And as a matter of fact, when you look back, we've had a lot of wells we've had to sort of scrap halfway down into a sidetrack and go around. And part of it is the rock is very young coming off of South America. So you get these swelling plays that kind of choke up the wellbore when you're drilling it. It's mainly above the zones. Once you get into the zone, it's okay. It's kind of getting there. So there's been some technical challenges on that. And the other challenge, and quite frankly, it's part of one of the reasons we're in a bit of a penalty box right now is these wells have huge initial flush production and then they kind of turn a corner and level out. And so you get these sort of spikes in the production base. And it's -- I think it's difficult, I think, if you're not in the business to understand sort of how these declines work. It looks -- it's pretty standard when you look around. But once you turn into that parabolic section of the curve, you're going to be producing for 15 or 20 years. It's just that initial drop off initially is really challenging.

And how -- I mean, can you get into a bit more technical detail on that in terms of like obviously, these initial flow rates look great and then they sort of drop off to what? And how does that kind of flow line expansion managed?

Yes. So what we see is we see 2 different flow metrics in the rock itself. So what you see is you see the wells acting like it's been fracked and really it has been fracked because when the Tektronix came along, they pushed all these rocks up, and that's why they're great as they are, but it's busted them up, if you can imagine that. So when you open them up, you get these really high flow rates you basically get rid of all the gas that's in those fractures and then the rock itself starts to feed in. And that's where you turn that corner. And it's what we call matrix porosity. Once you get into that matrix porosity, you get this nice long linear flow out of it. But to give you an idea, like the first year declines could be 70%, but you're bringing the well on at 40 million cubic feet a day and you get all your money back in the first 5 or 6 months and then everything after that becomes the profit. So that's the new model that it's been a bit of a challenge to kind of get our heads around it. There hasn't been any new gas wells on the island in 20 years. So it's not like we had a bunch of modeling to do here. We were flying a little bit blind on what we did. But what we're now seeing is the 2 first wells we brought on 14 months ago, they've made that corner. They're right on the curve. The new wells as we bring them on are going to be exactly the same way. So...

Right. And what do you expect the average EUR to be then for each well?

So that's going to -- I think what we're going to look at right now is we're kind of modeling them off of the -- what we'll call our P90 case, so the most likely. So we're looking for something that comes on about 14 million to 17 million cubic feet a day. And then when it finally turns that corner, it's going to be between 8 million and 10 million a day. So that's -- those are the kind of numbers that we're looking at right now.

Right. And obviously, you're kind of feeling your way through -- I think the Cascadura 4 well was postponed last year until this year. Are you glad you made that decision? Is that going to get a bit more certainty about what you're going to be able to do that?

Yes. I wish that was sort of a decision that we made all on our own, but mother nature helped. There's a bridge we had to build, and it was a bridge too far. It took months and months and months with the rain. And we just couldn't move the rig until the rain got done, and it's in there now. And it's -- it's actually shut down right now just because they had a problem with one of the pumps. But when that gets fixed, it will be back drilling probably in the next couple of weeks.

Right. Okay. And with these kind of Cretaceous place, they're described as, I guess, high potential, again, with the historic data that you've got seismic legacy wells, et cetera, what's your expectation in terms of managing those fields?

So yes, you're talking about the Cretaceous, which actually lies below everything we've drilled so far. So we've been drilling up the Herrera. That's been our main focus. We now know with the science that we've done is the hydrocarbon that's in the Herrera has been sourced from the Cretaceous. It's actually -- the kitchen is the Cretaceous, if you want to think about that. Now having said that, Talisman came here and Exxon both come to Trinidad looking for the Cretaceous because it is the big play. It's bigger than anything that we've looked at. It's what Guyana and Suriname are chasing right now.

There's offshore, right?

It's all offshore. But that basin is offshore, but that whole basin comes right through Trinidad. And there have been a number of Cretaceous wells drilled. I think there's been almost 30 drilled in Trinidad, none of them being successful. But they were all drilled on the same old model that the original dry holes were drilled at in Guyana, which is structural model. When Exxon came into Guyana, they started to do stratigraphic models in the Cretaceous, and that's worked. I think there are 14 out of 19 or something on their discoveries. So what we've done is taken that technology, brought it to Trinidad, and that's now where we're looking at taking the dry holes that Exxon and Talisman has been drilled with the 3D seismic and I were talking about earlier, processing that for the Cretaceous. And we think there's probably 3 or 4 really interesting Cretaceous shots on our land. Nice thing is the Herrera sits above it. So if we get a good Herrera well, we can take a bit of a shot down to look at the Cretaceous.

Right. And I guess the good news is that you're onshore. I was talking about onshore here. That said, I mean, how do you manage the timing of this? Because do you want to be self-financing and get gas flowing shallower and then kind of get into sort of CapEx requirements for the sort of deeper plays? Or do you go and raise some money for it and get after it quickly?

Yes. The short answer is yes to be self-funding it. And really, what we want to do is we've got these 3 gas plants. They're all underutilized. We've got the land. We've got the rig. We just want to drill development wells into those. And then what we can do is we can then do going forward and what we're likely want to do in 2026 is take about 80% of the capital, make that development and 20% exploration. And then that would be the break going forward and have that self-funding. So we talked about the debt load being a little high at the beginning, and that's really where Scott is going to just manage the capital and the debt load. And then when we go to '26, this thing starts to churn out enough capital to be fully self-funding.

Right. And what do the markets look like? You talk about, obviously, you're selling all in country when it comes to the gas and you've also referenced maybe some premium LNG pricing, et cetera. How do you kind of get that balance between where you're selling to and what pricing you're going to be able to achieve?

Yes. So right now, demand on the island, if all of the petrochemical business is running and all the LNG trains are running is about 4 billion cubic feet a day. And right now, they're at about 2.3 billion cubic feet a day of supply. So there's this huge gap. So we sell every molecule every day. There's never a problem with that on the natural gas front. The change that happened in October 1 of last year was the LNG plant became a common carrier, a little more complicated than that. Basically, what it does is it allows third-party gas to now go to the LNG facility before it was just Shell or BP. So that's opened up that market for us that never existed. And that's quite a game changer when you look at the LNG price versus the petrochemical price. So -- but we can sell to either market. You still have to sell to the aggregator, which is the national gas company, and you negotiate a price with them. But that negotiation has now changed because you can either sell LNG or domestic and they supply both. So we're going to look at the pricing on that. And oil, we get Brent less about 15%, 16% and that's just bought by the Crown Corp, and they send it out to one of the other Caribbean islands to be refined. So it's -- from a marketing point of view, we get paid in U.S. dollars. We get paid on the 25th of the following month. It's a dream from that point of view. The only challenge is on the gas side, there's always a couple of middlemen that take a little bit mainly the Crown corporations. So you don't always get that sort of Henry Hub price you'd like to get or the full LNG price. There's always a discount to that.

Right. And in terms of the, I guess, allocation of capital, we talked a little bit about what your hopes are this year. You've got legacy oil fields such as Balata East, et cetera, which continue to produce. And do you -- how do you assess them for optimization? Because you could be talking about recompletions or artificial lifts or enhanced recovery, et cetera, with those or we can get after the new stuff. I mean what's the best use of capital for you when it comes to getting money through the door?

And that's our -- that's what we do every day around here is look at that cost of capital, right? And we stack those programs up comparing those oil prospects to the gas prospects, risk them do all of that. The one thing about those legacy oil prospects, though, is there are some commitments on them, like there's a couple of wells a year that you have to drill to keep the land. So those are obviously just built into the program. You have to do those as a minimum. But if you look back at the last 10 years, like that production has been unbelievably stable when you look at it. So it's kind of a nice, I'll call it, a base production. And the other part is because we've got the fixed price gas contract, it's basically a hedge for 70% of our production, right, because it's a fixed price contract. So by having the oil at world price, it moves around and still gives investors an opportunity to take advantage of a higher or lower oil price as we go along. So it's kind of a combination.

Okay. Okay. And what about in terms of -- and you talked about the extent of the land package that you've got. Do you have any sort of noncore assets? And would there be buyers even if you did?

Yes. So there are some non-core assets, like we've actually disposed of 4 small properties in the last couple of years. And you really -- it talks what we were just talking about a minute ago, which is that capital, right? Like we're going to drill a well for 50 barrels a day when we can drill a Cascadura well for 3,000 barrels BOEs a day, right? Like those -- it doesn't make sense. So what we are -- what we did do is dispose of 4 of the small blocks and we'll probably have a couple more small blocks to go to kind of clean that up and tidy that up a little bit more. But that's the plan is to just focus on the best rate of returns. As far as buyers, to be transparent, they're local buyers. So one of them was actually a drilling company, and we took half cash and we took half drilling credits, which is fine because we can use the drilling credits to drill, right? So it's sort of a win-win. And from a social license point of view, again, it's kind of nice to keep it on the island, right?

Okay. And again, coming back to -- look, you've been done it before. How do you view exploration drilling versus development drilling in terms of that capital allocation?

Yes. And I'm a bit of an explorationist. It's -- I think that's probably where you still see the greatest value creation for shareholders if you get a big exploration opportunity, those are the ones that are nice. The balance perfectly would be a 20% exploration, 80% development. So what does that give you? That probably gives you 2 or 3 wells, exploration wells a year to drill. And when we look at -- I mean, the #1 on our list right now is the Cipero prospect, which just sits north of our existing properties. It looks like a lookalike to Cascadura. It's right in the window. It could easily be tied in the central block. It's non-contracted gas. And quite frankly, it's kind of where the Cretaceous is coming up structure under the central block. So we could actually take a shot at the Cretaceous there at about, call it, 10,000 feet, which we've already drilled to before, whereas as you move south, we're getting down to 14,000, 15,000 feet. So that is a well that I really want to drill, but we just got the land. It takes about 9 months to a year to get the CEC, which is the environmental approval and then move in there. That's why I say I'd love to be on that in January of 2026.

Okay. Exciting times. So what are the -- some of the risk management side of this thing for you for 2025, what have you instructed your team to focus in on?

So we've really got 2 projects we're focusing in on. One will be development drilling at Cascadura. So the initial budget has 4 wells in there to drill into the Cascadura facility. And that's really just to optimize that facility and get it up to a volume that we like. And then the second part is, as soon as we get the Shell property, it's had nothing done on it in 20 years. We're going to put in place a 3-phase plan for Shell. One is look at the existing wellbores. We think there might be some recompletion, some optimization of that. Number two will be to drill a couple of development wells there. And then the third part will be to bring any third-party gas that's sitting on the edge of the property into the plant so we can optimize it. So that's the simple answer of what we're doing this year is development drilling at CAS and ramping up the central block as soon as we've got it.

Okay. So focus on the kind of lower risk drilling with the potentially higher yields sooner to reinvest back into getting after the deeper stuff. Okay. Fantastic. Well, Paul, really nice introduction to the company. I mean, out of all the places you could have chosen to work, why Trinidad? I mean why point yourself there?

Yes. I get a little looking around. And I think there's a couple of reasons. But it really started with the rocks, and that's when you look at that updip end of the Venezuelan basin. I mean the Venezuelan basin is the most hydrocarbon-rich basin in the world. And when I looked onshore, it kind of fit the model of what I had done with the other 2 companies I've been involved. You can go in and get a small toehold, you can do some acquisitions, you can do some land deals and you can build this package. And what I really liked about it is there's no competition on the island, like there was no other public companies that were there. And part of that was the fiscal regime is a little tougher than it is in other parts of the world. And part of it is I think a lot of people get frustrated there because of the process. And we've just kind of put our heads down and pushed our way through that. Now that we're through all of that, I mean, there's a barrier to entry for everybody, right? Like it's a great place to be and that there's not a lot of competition for us to be there. So -- and quite frankly, the previous places I've been where 2 companies had -- our fields were in Northern Canada, and it's a lot nicer to go to Trinidad in the middle of winter than it is in Northern Canada. So that may have had something to do with it, too. But -- we'll keep that between us.

Okay. Well, I appreciate your time today. Thank you very much.

Thank you.