Hurricane Energy looks strong as it delivers first production and revenues
This year has seen oil and gas player Hurricane Energy rise from 40.5p to 55.7p on the back of strong newsflow across its portfolio of licences in the UK’s Continental Shelf. With the firm – which claims to control more discovered but undeveloped UK oil resources than any of its peers – recently delivering first production and revenue, we review its recent performance and future potential.
Hurricane focuses on the discovery, appraisal, and development of hydrocarbon resources from naturally fractured basement reservoirs. These form when fractures occur in a collection of igneous or metamorphic rocks as a result of weakening through a thermal contraction, cooling of volcanic melt, and tectonic activity.
As the reservoirs are naturally fractured and oil is stored within the fracture network rather than pore space within the rock, as in most other reservoirs, they do not require additional fracking. Fractured basement reservoirs have been a rich source of conventional oil production around the world for some time now, with recoveries coming in at more than one billion barrels.
Hurricane’s strategy is to produce from fractured basement reservoirs for the first time in the UK’s Continental Shelf, west of Shetland, where it has a portfolio of contiguous licences. The area is a proven petroleum basin with numerous large producing oil fields including Clair, Foinaven, and Schiehallion.
In particular, Hurricane’s licences focus on a north-east to-south-west trending basement feature called Rona Ridge that sits at a water depth of c.150m. They are split into two parts called the Greater Lancaster Area (GLA) and the Greater Warwick Area (GWA).
GLA comprises two 100pc-owned fields called Lancaster and Halifax. Lancaster is Hurricane’s most advanced asset and contains 2P reserves of 37.3MMtsb over six years and 63.1MMtsb over an extended 10-year period. It also holds a 2C contingent resource of 523 million stock tank barrels of oil. Meanwhile, Halifax contains a 2C contingent resource of 1,235 million stock tank barrels of oil.
Elsewhere, GWA consists of two 50pc-owned fields called Lincoln and Warwick. Lincoln contains a gross 2C contingent resource of 604 million stock tank barrels of oil while Warwick boasts a best-case, gross attributable resource of 935MMboe with a 77pc chance of success. Hurricane’s final licence Hurricane, which sits outside GLA and GWA holds a 2C contingent resource of between 179-205 million stock tank barrels of oil.
Following a long period of preparation, this year has seen Hurricane take huge steps forward in its delivery of the Lancaster Early Production Scheme (EPS) for the GLA. The scheme involves a two well tie-back to the Aoka Mizu floating production storage and offloading (FPSO) unit and targets 17,000bopd production. At an operating cost of $22/bbl, this is expected to generate more than $200m of operating cash flow p.a. based on $60/bbl brent.
Critically, it is also designed to provide long-term production data to enhance Hurricane’s understanding of reservoir characteristics, informing ways to plan for full field development on the GLA licences. Indeed, the firm believes that there is a chance that Lancaster and Halifax may contain a single ‘supergiant’ field and has said that the GLA has the potential to boast 2P reserves of more than 100MMboe in H1 2020.
In a milestone development, Hurricane announced last month that hydrocarbons had been introduced into the Aoka Mizu FPSO’s process system. Introduction of hydrocarbons marked the final stage of the FPSO’s commissioning and marked the commencement of the Lancaster EPS start-up phase.
Earlier this month, the business went on to announce that Lancaster had become the UK’s first producing fractured basement field after the FPSO’s start-up phase completed with a 72-hour production test. The combined flow from both wells during this test period reached and maintained the planned production rate of 20,000bopd.
Finally, earlier this week, Hurricane announced that it had generated its first revenues after selling its first cargo from Lancaster to BP Oil International. Since May, the raft of newsflow has seen Hurricane’s share rise from 45.7p to their current 55.7p, at one point reaching a high of 60.8p.
This year has also seen Hurricane take steps forward across its GWA asset. Last year, Spirit Energy farmed-in to 50pc of the Lincoln and Warwick assets that make up the GWA, committing to a five-phase work programme targeting sanction of full field development in 2021.
In its recent full-year results Hurricane said the farm-in has ‘significantly accelerated’ work in the area, with the two companies planning three-wells across Lincoln and Warwick this year. The first of these, Warwick Deep, spudded in April.
What’s more, Hurricane added that the farm-in more than 90pc of its committed capital programme is carried. As well as de-risking its exposure to the licences, the organisation said this would allow it to build its capital reserves after two years of substantial expenditure. It plans to use this capital undertake appraisal and development activities concurrently on the GLA, GWA, and Whirlwind over coming years.
The winds of change
Hurricane’s share price has enjoyed a solid start to the year, and it’s market cap currently sits at more than £1bn. Looking forward, the delivery of the Lancaster EPC is essential for several reasons. Not only does it mean the company is now generating revenues, it means it can improve its understanding of both the GLA and GWA areas and potentially ramp up production to large multiples of current levels.
Likewise, the unexpected backing of Spirit could enable the business to squeeze value out of GWA much more quickly than expected. With Hurricane also boasting cash in the banks and operating in a safe jurisdiction, the future could look very bright