Is now the time to take a look at Hurricane Energy?
Monday saw Hurricane Energy deliver a broadly positive operational update for its Lancaster and Greater Warwick Area assets. Although data gathering delays could create some short-term volatility for the company, we believe that the market’s lack of reaction could present a buying opportunity for longer-term shareholders.
To recap, Hurricane focuses on the discovery, appraisal, and development of hydrocarbon resources from naturally fractured basement reservoirs. The business’s strategy is to produce from fractured basement reservoirs for the first time in the UK’s Continental Shelf in the North Sea, 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.
This year has seen Hurricane take huge steps forward in its delivery of the Lancaster Early Production Scheme (EPS) for its Greater Lancaster Area (GLA), comprising the Lancaster and Halifax fields. 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.
FPSO design plan for production
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 earlier this year that hydrocarbons had been introduced into the Aoka Mizu FPSO’s process system. In May, 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. Following this, in June, Hurricane announced that it had generated its first revenues after selling its first cargo from Lancaster to BP Oil International.
This year has also seen Hurricane take steps forward across its Greater Warwick Area (GWA) asset, which comprises two 100pc-owned fields called Lancaster and Halifax. 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.
The two companies are currently completing a three-well drilling programme across Lincoln and Warwick, which is due to complete this year. The first of these, Warwick Deep, spudded in April but did not flow at commercial rates, instead producing a mixture of drilling brine, water, oil, and gas. The news led Hurricane’s share to decline by a fifth to 42.7p, a figure from which it is yet to recover. The second well in the programme, called Lincoln Crestal, spudded in July.
On Monday, Hurricane released an operational update spanning both its Lancaster EPS and the GWA. Although the update failed to generate significant traction in the market – indeed, Hurricane’s share dipped 3pc on the news – it contained many positive points for long-term shareholders.
Firstly, although data gathering at Lancaster has been held back by the use of only one of two subsea flowlines, the company said the system’s availability, production, and cash flow since first oil have been above guidance. What’s more, Hurricane said operations have now recommenced with two flowlines, meaning the firm will now be able to resume its work fully to gain a greater understanding of the Lancaster area. That being said, the organisation added that production and availability are likely to be constrained throughout the remainder of the year due to data gathering delays and ‘certain planned works’. Reflecting this, Hurricane said that system available would revert towards prior guidance – 45pc in Q3 and 65pc in Q4.
Elsewhere, the company said that Lincoln Crestal has now reached a total depth of 1,780m, including a 720m horizontal section of fractured basement reservoir. Preparations for drill stem testing have now begun – something that some Twitter users have highlighted as a positive indicator for the well moving forward.
As we have previously written, Hurricane’s revenues and substantial assets set it apart from many of its peers in the junior oil and gas market. 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 this in mind, the positive developments delivered by Hurricane in its recent update are encouraging for long-term shareholders (the delays at Lancaster represent something of a short-term hiccough). The market’s lack of reaction could provide a buying opportunity for those who are willing to sit with Hurricane and see its journey through.
Before summer Dr. Robert Trice, CEO, caught up with Malcy to discuss future drilling programme
The author was remunerated but does not hold shares