Drilling Deeper - Vialogy (VIY)
6/1/2010
(119264)
Drilling Deeper
In the end, it all depends on the drill bit. Either Vialogy’s QuantumRD technology helps locate new hydrocarbon reserves or not. But, by golly, Vialogy appears to be moving fast to convince the oil and gas industry that QuantumRD is worth trying.
News of another major contract to use QuantumRD takes the client base to nine, with a contingent order book of more than 50 wells, plus a fat pipeline of prospective clients. Chief executive Bob Dean says there is now a full workload.
That sets a most encouraging scene as the company approaches an especially tricky phase. As suggested in my December 31 report (Crunch Time), a crucial well is coming up. The collaboration with a large Texas company and the University of Texas means we are into drilling on an especially challenging 11,000 foot well in an area where many have failed.
Success would mark a great leap forward, and win a major endorsement for the technology with the backing of Bob Hardage, an enormously influential Texan professor. The form is not quite clear, and might involve locations at two depths. It will test all of the skills of Vialogy’s guru, Dr Sandeep Gulati.
The results should be known inside the next month, though as shareholders have become aware, timing is tricky in this game.
They might be accompanied fairly closely by news on the long-awaited Escondido well for partner Atascosa. This has been delayed several times by a variety of factors unconnected with the site and the technology. Vialogy has confirmed that the two successful Atascosa wells will undergo further work in the first quarter of this year to speed their production, potentially raising the revenues in which Vialogy has a share.
Drilling action is likely to take centre stage over the next few weeks, but it should not prompt investors to overlook the importance of the newest client (number eight on the press release, but actually number nine if Atascosa is counted).
The new customer is one of the largest privately held independent exploration and production companies in America. Based in Oklahoma, it operates internationally onshore and offshore, and controls over 4,000 wells. The initial collaboration is focused on the Pennsylvanian Morrow Sandstone at the Mescalero Springs prospect in Chaves County, New Mexico.
That takes Vialogy outside Texas, analysing potential deep targets at between 11,000 and 12,000 feet down, further validating QuantumRD’s ability to resolve stratigraphic prospects below conventional seismic processing. Vialogy is to deliver recommendations in four weeks, but it is important to stress that these will merely be Vialogy’s site choices. There is no commitment by the client to pursue them, and no idea of whether or when they might get a place in any drilling schedule.
The client has insisted on anonymity, and there are no financial details. Vialogy refuses to comment on bulletin board speculation which has come up with a number of guesses as to the identity of the new client.
Searches suggest that the most likely is Samson Investment Company (www.samson.com) whose internet profile fits nicely with the outline in the press release. A link between Vialogy and Samson would be enormously impressive, though any deal would barely trouble the petty cash box at Samson (if, indeed, this new customer is paying in advance of results). Samson has spent $4bn on drilling and oil and gas acquisitions over the past three years, and spends $1bn a year on new wells. It takes pride in employing the best technology, and mentions using high-resolution 3D seismic.
Obviously the lack of names means investors must be careful not to become too enthusiastic, but this substantial new US client and early exchanges of data with two giant international names (only early exchanges, no hint of contracts so far) do suggest Vialogy is starting to be taken seriously by the oil and gas exploration industry.
That takes us back to where we started – relying on the drill bit. Though Vialogy is winning real credibility, there can be no guarantee that any well location will prove successful. A failure now would damage, but not damn completely, the company’s chances of reaching viability.
And a win or two would only underline that there are insufficient resources to exploit QuantumRD properly, and point up the need for yet another funding exercise – hopefully on the back of a higher share price.
Vialogy, then, remains a relatively high-risk, high-reward play at 5.25p. Fingers crossed.
I have a holding in Vialogy.
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