8 September 2023

88 Energy Limited

Half-Year Financial Report

88 Energy Limited (ASX:88E, AIM:88E, OTC:EEENF) (88 Energy or the Company) is pleased to advise of the release of its financial results for the half-year ending 30 June 2023.

A copy of the Company's Half-Year Financial Report, extracts from which are set out below, has been lodged on the ASX and is also available on the Company's website at www.88energy.com .

Media and Investor Relations:

OPERATING AND FINANCIAL REVIEW

During the period, the Group continued its principal exploration activities in Alaska, complemented by a 75% owned, non-operated working interest in onshore Texas Permian Basin production assets.

Project Phoenix

Project Phoenix is focused on oil-bearing conventional reservoirs identified during the drilling and logging of Icewine-1 and adjacent offset drilling and testing. Encompassing 82,846 gross acres, Project Phoenix is strategically located on the Dalton Highway with the Trans-Alaskan Pipeline System running through the acreage.

Project Phoenix holds an estimated unrisked conventional total of 647MMbbl of prospective oil resources (mean unrisked, net to 88E), independently assessed by Lee Keeling and Associates (LKA) in Q3 2022 (refer 88E ASX release dated 23 August 2022).

Hickory -1 Exploration Well

The Hickory-1 well spudded on 9 March 2023 and drilled to Total Depth of 10,650 feet with successful wireline and coring program completed. All pre-drill primary (SMD-A, B, C) and secondary (SFS, BFF) reservoir targets were intersected with a new Upper SFS reservoir also identified which had not previously been intersected by nearby wells.

Hickory-1 was cased and suspended in April 2023 ahead of the upcoming flow test program in the 2023/2024 Alaska winter season. Multiple zones are scheduled to be tested, all expected to flow based on reservoir characteristics. The flow test and well stimulation program is being developed in consultation with flow test design experts, who are utilising available regional information in combination with a detailed evaluation of the drilling and wireline logging data from Hickory-1.  The Company is working with technical consultants to determine the optimal fluids to be used to stimulate the reservoir in conjunction with the overall flow test program to ensure the best possible outcomes.

Program planning is on schedule and will include rigorous technical and economic optimisation prior to finalisation. Rig selection and contract negotiation is expected to conclude imminently, and the key, long lead items are being ordered. Post well analysis is ongoing with results from the testing programs anticipated to be fully completed and received in early Q3 2023.

Hickory-1 Drilling and Wireline Program Results

Hickory-1 intersected multiple hydrocarbon-bearing zones across all primary and secondary pre-drill targets and identified the new Upper SFS reservoir. The 2023 Hickory-1 drilling, and wireline program delivered the following key outcomes:

·  Confirmed presence of multiple hydrocarbon-bearing pay zones across all pre-drill targets, in addition to the newly identified Upper SFS reservoir;

·   Approximately 450 feet of estimated net pay calculated from wireline data over all pay zones, with gross pay estimated to be over 2,000 feet;

·   Average total porosity of 9-12% across all zones, with key target zones in the Upper and Lower SFS exhibiting between 11-16% total porosity; and

·   Reservoir quality and thickness met or exceeded pre-drill expectations, with higher-than-expected porosity in the SFS and BFF, as well as increased total gross reservoir, total net reservoir, and total net pay.

Overview of the planned program of post well results analysis and pre-planning for flow testing:

·   Geological Analysis: Including refining the depositional model and thin sections analysis 

·   Geophysical Analysis: Refining current interpretations, updating AVO analysis +/- seismic inversion to integrate Hickory-1 shear data 

·   Routine and Special Core Analysis: Including porosity and permeability testing to calibrate petrophysical models 

·   Geochemical Analysis: Including High Resolution Gas Chromatography and mud gas carbon isotope analysis 

·   Geomechanical Analysis: Azimuthal rock property analysis including strength testing for stimulation modelling  

·   Flow Testing Planning: Stimulation modelling and design  

Toolik River Unit

The Department of Natural Resources (DNR) Oil and Gas Division approved the formation of the Toolik River Unit covering leases in the western and central areas of Project Phoenix (refer to ASX announcement dated 28 February 2023). The Unit approval has extended those leases beyond their primary term, with the Unit Plan of Exploration through to February 2028. Unitisation provides an efficient, integrated approach to exploration, delineation, and development of the numerous identified and potential reservoirs.

Project Icewine West

Charlie-1 discovery well drilled in 2020 recovered hydrocarbons during wireline operations with an API gravity between high-40 to low-50 (Torok formation) and the Company is targeting a follow-up appraisal well in future years post any successful flow test in Project Phoenix. The Lima Complex Prospect, Seabee Formation, is the same play type (but slightly older) and expected oil type as the Basin Floor Fan in Project Phoenix.

Project Leonis

Awarded in April 2023, Project Leonis is located adjacent to TAPS and the Dalton Highway, enhancing future potential commercialisation pathways. The acreage is covered by an existing data suite including Storms 3D seismic data and Hemi Springs Unit #3 (HS-3) exploration well drilled by ARCO in 1985 which did not target the shallower Upper Schrader Bluff (USB) reservoir. However the HS-3 well did log 200 feet of interpreted bypassed net pay in the USB reservoir with good porosity and oil shows including oil over shakers at multiple depths which underpinned the Company's investment rationale.

Activity at Project Leonis will target the producing USB reservoir that has been successfully developed at nearby Orion, Polaris, West Sak. Independent studies to identify pay in laminated or shaley sand systems have confirmed that the USB reservoir in HS-3 possesses similar characteristics to the producing fields to the north. These studies also confirmed a good seismic tie between HS-3 and the Storms 3D using sonic velocities.

An initial internal review and interpretation of the Storms 3D seismic data revealed a strong seismic-well tie and a clear seismic amplitude at the USB prospect. To further assess the reservoir potential and improve imaging of local and regional faulting, an independent expert reprocessed the Storms 3D data successfully improving the quality and seismic resolution.

An initial interpretation of the reprocessed data has enabled the Company to assess the USB prospect boundary to enclose up to 60km2 and to confirm the potential for a significant resource within Project Leonis.

The Company has engaged an independent expert utilising specialist fault and horizon interpretation software to better understand the petroleum system at Project Leonis. This includes identifying and capturing finer stratigraphic and structural features. Once completed in Q3, 88 Energy intends to commission an independent maiden prospective resource estimate over the acreage.

Project Longhorn

Production from the Longhorn wells averaged ~400 BOE per day gross (~71% oil) during the first half of 2023, peaking at 620 BOE per day gross.

Project Longhorn received two quarterly cash distributions (March and June) totalling A$1.4 million, which was net of CAPEX payments for the two workovers completed in Q4 2022.

In June 2023, Project Longhorn commenced two planned workovers scheduled to be completed in Q3. Four workovers and at least five new drill targets remain on the existing acreage, with the forward work program and timing for future capital investments to be determined by the Joint Venture.

Project Longhorn Peregrine

In March 2023, the Company completed a strategic review of the Project Peregrine acreage and relinquished six blocks that were considered to have limited prospectivity, providing an annual saving of approximately A$0.3 million.

The focus at Project Peregrine will be on the untested Harrier prospect (N14 and N15 targets) and the N14 south reservoir target. The N14 corresponds with ConocoPhillips' Harpoon prospect fifteen miles to the north of the Project Peregrine leases. The northernly Peregrine leases are modelled to have better porosity and permeability and are closer to infrastructure.

Yukon

The Company completed a strategic review of the prospectivity and commerciality of the Yukon leases as well as near-acreage synergies and relinquished all acreage to the State of Alaska. 88E deemed Yukon to be a non-core acreage position due to the lower resource potential, barriers to commercialisation and high exploration and development costs. The Company relinquished the acreage ahead of the annual rentals (~A$0.2 million) providing immediate cost savings.

Corporate

On 6 February 2023, the Company advised that it had successfully completed an oversubscribed bookbuild to domestic and international institutional investors to raise A$17.5 million before costs (the Placement). This was achieved through the issue of 1,842,105,263 fully paid ordinary shares in the Company at an issue price of A$0.0095 (equivalent to £0.0055) per new ordinary share. The funds raised under the Placement, together with existing cash reserves were directed towards the Hickory-1 well at Project Phoenix, payment for the new Project Leonis acreage, pursuing new portfolio expansion opportunities and additional working capital.

Euroz Hartleys Limited acted as Sole Lead Manager and Bookrunner to the Placement. Cenkos Securities Plc acted as 88 Energy's Nominated Adviser and Sole Broker to the Placement in the UK. Inyati Capital Pty Ltd acted as Co-Manager to the Placement. Commission for the Placement was 6% (plus GST) of total funds raised across Euroz Harleys Limited, Inyati Capital Pty Ltd and Cenkos Securities Plc. In addition, the Company issued 75,000,000 Unlisted Options (exercisable at $0.02 on or before the date which is 3 years from the date of issue) to the managers of the Placement.

In June 2023, the Company through its subsidiary Accumulate Energy Alaska, Inc (Accumulate) entered into a standstill and option agreement with its Project Phoenix JV partner, Burgundy Xploration, LLC (Burgundy). The agreement provides Burgundy additional time to raise funds to pay its outstanding 2023 cash calls by 31 October 2023 (Standstill Period). As part of the agreement, Burgundy grants an exclusive option to Accumulate to acquire up to 10% additional working interest in the Toolik River Unit where Hickory-1 is located (which may only be exercised if Burgundy fails to pay its outstanding cash calls by the end of the Standstill Period) (Option). The exercise price for the Option will be US$500,000 per 1% working interest acquired. The Option is exercisable at any time within 3 months following expiry of the Standstill Period (or any further default of unpaid cash calls), so long as the cash calls remain outstanding. The Exercise Price to Burgundy is payable by Cash Consideration or issuing 88E Shares to the value of the Exercise Price and the Election method (cash or 88E Shares) resides with Accumulate. If Cash consideration is elected, then the receivable would be reduced by the cash required to execute the option. The agreement also requires Burgundy's support of the 2024 work program and budget that includes the flow testing of up to four zones at Hickory-1.

Financial

For the period ended 30 June 2023 the Company recorded a loss of $11.6 million (30 June 2022: $67.3 million loss). The loss was largely attributable to the impairment of the Yukon Project and leases (Regenerate Energy Alaska) of $8.8m. 

No dividends were paid or declared by the Company during the period.

As at 30 June 2023, the Group had cash on hand of $7.3 million (31 December 2022: $14.1 million) and no debt. Net assets totalled A$139.6 million (31 December 2022: $131.6 million). The increase in net assets is largely due to the additions in capitalised exploration and evaluation expenditure for the Hickory 1 project. The decrease in cash on hand has been used primarily to fund the Hickory 1 project.

EVENTS AFTER THE PERIOD

Other than as disclosed below, there were no significant events occurring after balance date requiring disclosure.

Corporate

On the 31st July 2023, the Company launched a Non-renounceable Rights Issue towards funding its operations and working capital. The Company announced on 29 August 2023 the results of the Rights Offering to existing shareholders which totalled A$3.3 million (issuing 553,070,348 new shares to eligible shareholders) [Rights Issue], and subsequently announced the completion of the Shortfall Offer Placement on 31 August 2023. The Company received firm commitments to place in full all of the New Shares not taken up under the Rights Issue via the Shortfall Offer representing 1,457,716,470 New Shares to be issued [Shortfall Offer Placement]. The proceeds of the Rights Issue and Shortfall Offer Placement of A$8.0 million (before costs), which together with the Company's existing cash reserves (A$7.3 million  as at 30 June 2023), strengthened the Company's balance sheet and provided the Company with further capital to fund 88 Energy's share of the Hickory-1 well flow test at Project Phoenix and permitting and planning for a potential new well at Project Leonis. The Company also agreed to part fund its share of the first two new wells at the recently acquired Bighorn Phase 2 acreage, anticipated to cost US$3.0 million (net) in development capital, through the issuance of A$4 million worth of 88 Energy Shares as part of the Shortfall Offer Placement (approximately 667 million shares at a deemed issue price equal to the offer price of A$0.006 per share under the Rights Issue and Shortfall Offer Placement) to Lonestar I, LLC (Capital Development Shares). The Capital Development Share issue is expected to save the Company at least an equivalent amount in cash costs on development wells for Project Longhorn production growth, so that the value of the benefit to the Company from the Rights Issue and Shortfall Offer Placement totals A$12.0 million (before costs).

Project Phoenix

In early September, 88 Energy executed a rig contract with All American Oilfield for the use of Rig-111 to flow test the Hickory-1 well. Rig-111 is a highly mobile and versatile carrier mounted workover and shallow drilling rig, capable of depths up to 18,000 feet. With its recently updated mast, the rig's capabilities and mobility are well suited for the workover requirements of flow testing Hickory-1. Rig-111 was previously contracted by 88 Energy to successfully drill Merlin-1 in 2021. Planning and permitting for the Hickory-1 well flow test is on schedule with contract negotiations and ordering of long lead items proceeding as planned, with operations set to commence as early as possible in the upcoming Alaskan winter operational season.

Umiat Unit

The Bureau of Land Management (BLM) Alaska State Office approved a 30-month extension of the initial development obligation from September 2024 to February 2027, allowing the Company additional time to plan and drill an exploration well by the 2025/2026 Alaska winter season.

Project Peregrine

In March 2023, the Company completed a strategic review of the Project Peregrine acreage and made the decision to relinquish six blocks that were considered to have limited prospectivity, providing an annual saving of approximately A$0.3 million.

The Project Peregrine Prospective Resource Assessment has been updated by independent oil and gas reservoir evaluation consultancy, ERCE Australia Pty Ltd (ERCE). ERCE incorporated the Merlin-2 Appraisal Well results and assessed 2 new prospects that have been identified by the company following an assessment of the remaining prospectivity of the Project Peregrine acreage. Additionally, the Harrier and Harrier Deep prospects were re-assessed as part of the updated assessment. Refer to ASX announcement released on 31 July 2023.

Project Longhorn

On 3 July 2023, the Company announced the execution of binding agreements for the acquisition of a new non-operated working interest (~45% net to 88 Energy and 435 net acres) in leases and wells with conventional onshore production and development assets within the Texas Permian Basin. The new assets will form an expansion of the existing Project Longhorn acreage and are located ~4 miles to the south. The newly acquired acreage is estimated to contain independently certified net 2P reserves of 1.1 MMBOE1,2.

The purchase price for the acquisition was US$1.5 million (net to 88E US$1.1 million) to be to be paid in cash by 88 Energy and the JV partner, Lonestar I, LLC, who also acquired a working interest in the new assets and will operate the new field through an affiliate, with the remaining interests retained by existing joint venture partners.

The acquisition provides 88 Energy with potential production upside through two new wells planned in 2H 2023 (on leases which Project Longhorn will have ~75% working interest), each anticipated to deliver IP30 of approximately 80-100 BOE per day gross (~75% oil), with each well anticipated to cost US$1.5 million net to 88E (to be funded primarily through forecasted cash flow from existing Project Longhorn production assets).

The acquisition expands 88 Energy's move into producing oil and gas assets and is in line with the Company's strategy to build a successful exploration and production company. This further step has again been undertaken in a measured fashion via the purchase of a non-operated working interest whilst retaining a single basin focus.

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE HALF YEAR ENDED 30 JUNE 2023

The consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 2023

The consolidated statement of financial position should be read in conjunction with the accompanying notes.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE HALF YEAR ENDED 30 JUNE 2023

The consolidated statement of changes in equity should be read in conjunction with the accompanying notes.

CONSOLIDATED STATEMENT OF CASH FLOW

FOR THE HALF YEAR ENDED 30 JUNE 2023

The consolidated statement of cash flows should be read in conjunction with the accompanying notes.