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Hurricane Energy’s big farm-out deal will wait - analyst

Published: 20:43 06 Jul 2017 AEST

Offshore oil operations, North Sea
Macquarie's price target suggests 114% upside to the Hurricane price.

Macquarie reckons there could be a much longer wait for Hurricane Energy Plc’s (LON:HUR) farm-out deal than the oil firm’s more ambitious guidance.

Analyst Kate Sloan, in a note, highlighted: “Hurricane management believes that a farm out could be forthcoming soon, even before first oil from the EPS.

“However, we would expect interested parties to now wait until the EPS proves the concept before making a tangible move, especially given persistent low oil prices and associated reduced budgets and risk appetite.

“We don’t believe a farm-out will happen until at least 2020 on that basis.”

The analyst write-up follows Hurricane’s major fundraise which last week brought in US$520mln to fund the Lancaster field development through to production in the first half of 2019, via an early production system (EPS).

Sloan, however, also claimed that additional funding would likely be needed before the much larger full field development – her estimate is that Hurricane would need around US$1.5bn by the first half of 2023.

Whilst the summer 2017 funding means Hurricane has the financial wherewithal to deliver the EPS by itself, Sloan says the company is unlikely to go it alone with the full development.

A farm-out before the bigger Lancaster field development is the most likely solution, the analyst said.

Macquarie is positive in its outlook for the company, with an ‘outperform’ rating and a 73p price target that suggests some 114% upside to the current price. That being said, however, Sloan sees the possibility for Hurricane shares to lag somewhat now that its busy drilling and funding phase is complete.

“We are buyers of Hurricane as we believe that the market is undervaluing its Lancaster asset, and believe that the upside associated with its other basement discoveries is attractive,” the analyst added.

“However, there is a risk that the shares become dead money in the near term, as no additional drilling is expected (management have clearly stated that this was not an over-raise) and first oil from the project is not expected until mid-2019.

“Without a farm out, therefore, we may not see the gap between fair value and the share price close significantly over the next 12 months.”

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