The big-bang exploration may be in the rear-view, for now at least, nonetheless Hurricane Energy PLC (LON:HUR) remains in a key value-adding phase for shareholders.
In around a year’s time, Hurricane will begin production from one comparatively small portion of the very large Lancaster oil project, located in the West of Shetland region.
For the uninitiated, Hurricane arrived on the London market back in early 2014 as an appraisal and exploration company – at that time it had already discovered oil at Lancaster but had plans to drill again in order to prove its commercial merits.
Substantial drilling success in a 2016 campaign not only confirmed Lancaster but also unearthed new discoveries in the nearby Halifax and Lincoln areas, whilst the still un-drilled Warwick prospect was significantly de-risked.
In all, the campaign was a game changer for Hurricane. Essentially, it put the company’s oil resources into the ‘multi-billion barrel’ club – altogether the portfolio is seen to have around 3.5bn barrels of resources.
Hurricane is sitting on a huge new play, at least that’s the view of its proponents.
Drilling successes sent Hurricane shares sharply higher, creating significant value for shareholders and it also provided a platform for the company to take greater control of its flagship project.
Going it alone with Lancaster
Whilst Hurricane had always retained 100% of Lancaster, the previous strategy was to bring in a development partner, via a farm-out transaction.
But, as Lancaster’s scale grew to 500mln barrels and against a backdrop of lower contractor costs in the wake of crude’s previous price collapse, the company made an opportunistic move.
A US$520mln private equity backed funding deal, in June 2017, gave Hurricane the wherewithal to take Lancaster forward without a partner and without surrendering project equity at the pre-production stage.
Hurricane subsequently launched the ‘early production system’ development which is due to achieve ‘first oil’ during the first half of 2019.
It will see Lancaster yield some 17,000 barrels of oil per day, perhaps more if the group can optimise processing operations.
That will provide Hurricane with valuable revenue and cashflow. More significantly, it will provide a material and longer-term validation of its oil play - which in turn puts the company in a stronger position for an eventual partnership.
The EPS will address a portion of Lancaster that’s estimated to host 37mln barrels of the field's total 500mln barrel resource.
Plainly, if Hurricane is to unlock all the value its unearthed in exploration, there’s a considerable amount of additional work to come over the longer term. That is, however, very much a story for another day.
Right now, investors are all focussing on the EPS and project execution.
It is the kind of work that’s less appealing to the market’s speculators and it is not unusual for companies in this situation to see market valuations drift - as many short-termist speculators who bet on the stock through the drill campaign move on to their next high risk dice game.
The quieter months of project execution do, however, create long lasting value and as such, can present opportunities for the buy-and-hold investor.
Significant value upside identified
With a share price of 48p, Hurricane is valued in the market at around £955mln. However, last month, stockbroker Cantor Fitzgerald highlighted the potential for very substantial value creation as Lancaster advances.
Cantor has a ‘buy’ recommendation and an 80p price target. “The Lancaster development saw FID taken following the $547m in new funds raised during 2017,” Cantor analyst Ashley Kelty said in a note.
“This sees the first phase of the development of the field using the Aoka Mizu FPSO, with first production from two wells at around 17,000bopd in 1H19.”
Kelty highlighted that at least 60mln barrels could be produced from the Lancaster EPS area over a 10 year period – although additional wells could lift daily volumes up towards the floating production vessel’s maximum capacity of 30,000 bopd.
Such a ramp up assumes a way around gas flaring constraints, and would see 90mln barrels unearthed over the 10-year period.
The analyst added that last year’s exploration successes, which saw “world class” discoveries in the Halifax and Lincoln wells - adding more than 1.8bn barrels of crude - and these assets present further value potential. It means the company’s assets could be in the crosshairs for oil majors.
“It is believed that the Lancaster and Halifax field are in communication, making this a giant accumulation – easily the biggest field yet to be developed on the UKCS, and easily the biggest discovery since 2000,” Kelty said.
The analyst added: “Hurricane asset base now equates for 13-25% of the entire remaining recoverable resource on the UKCS. Whilst further appraisal across the portfolio is required, the potential is staggering, and we believe that it will be of great interest to the majors as they seek to acquire new reserves.”
At the same time, the analyst pointed out that the current valuation rating is “far lower than any peers”, but, he reckons the discount will be unwound as project development milestones are reached.
Kelty said: “We believe that Hurricane offers the biggest and most exciting opportunity on the UKCS at the current time, and that the current price offers an exceptionally attractive entry point to investors.”
Lancaster EPS on-track
The development programme is advancing and it is on-track. Hurricane on Thursday confirmed that the newly-fabricated buoy for the early production system has now departed dry dock in Dubai.
The company highlighted that the buoy is a critical element of the turret mooring system for the Aoka Mizu FPSO, which will be deployed at the Lancaster field. The completion concludes a key part of the construction phase of the project, it added.
It is expected that the buoy will arrive by the end of June, at which point it will allow for the installation of the turret mooring system to take place before the end of the third quarter.
"The installation of the turret mooring system is critical to the overall timetable for the Lancaster EPS development,” said Dr Robert Trice, Hurricane chief executive.
“The departure of the buoy from Dubai is on schedule and I'd like to thank Bluewater Energy Services and Drydocks World Dubai for their diligence and teamwork, both of which have been material in achieving this key project milestone."
Start of installation phase
The day before, Hurricane revealed that it has now started the offshore installation phase. It begins with the installation of enhanced horizontal ‘xmas trees’ on Lancaster’s two existing wells. An offshore construction vessel has taken on board both xmas trees and it is now due to mobilise to the field.
It is among a number of work tasks that are taking place ahead of the installation of the turret mooring system for Lancaster’s float production storage and offloading (FPSO) vessel.
"I'm delighted to see the start of the installation phase of the project with activity beginning to take place offshore,” Trice said in Wednesday’s statement.
“All workstreams are proceeding well; we remain on budget and on schedule for first oil in H1 2019."