By Justin Reynolds
Time for the Hurricane to finally take off ?
“Hurricane is now arguably a takeover prospect for companies prepared to fund the rebuilding process. Founder Robert Trice said in an interview with the Financial Times back in 2017 that selling stakes to larger partners was always an option, and that global majors had expressed interest”
Hurricane Energy (HUR), the AIM-listed exploration and production company that once seemed set to take the North Sea oil and gas industry by storm with its innovative ‘fractured basement’ drilling techniques, now may be close to blowing itself out.
The company is continuing to be shaken by reverberations from the severe downgrade to its production and resource forecasts announced earlier this month, with speculation rising that the most credible way forward may be through a takeover bid.
A billion barrels…
Founded in 2004, for some years Hurricane generated increasing investor and press excitement on the basis of what seemed a credible promise that it might become the first company to produce oil commercially from fractured basement rock formations in UK waters. The formations are natural fissures in the granite below the softer sandstone where North Sea oil and gas is usually found.
A 2017 Competent Person’s Report (CPR) forecast that the company’s cluster of assets west of the Shetland Isles may harbour contingent resources of well over one billion barrels, sending its share price soaring above 60p, up from levels of around 10p a year before. Hurricane seemed set to inject new life into a North Sea hydrocarbons industry in moving slowly into the sunset.
But a note of scepticism has always sounded through the noise. Fractured reservoirs have been productive in very few locations around the world, and even then mostly just in waters off Vietnam. Their complexity and volatility has left the industry uncertain about their capacity to deliver stable production.
And indeed Hurricane’s velocity has gradually diminished. There was disquiet even in the halcyon days of 2017, when former chairman Robert Arnott resigned citing a ‘substantial gap’ between the company’s ‘standards of governance and leadership culture and those expected of a publicly listed company’.
Last June Hurricane’s founder and first chief executive Robert Trice stepped down after forecasted production rates of 20,000 barrels per day at its flagship Lancaster field could not be sustained. A further blow was administered when the Oil and Gas Authority’s rejected the company’s application to tie back an additional production well to its Early Production System (EPS) vessel. The regulator also set conditions for the extension of the company’s licences requesting that two sub-vertical commitment wells should be drilled over the next two years.
Hurricane, under interim management, set up a technical committee to re-examine possible geological and reservoir models for the Lancaster field, which reported this September. It represents something of an unwelcome year zero for Hurricane, attempting to reset operational and investor expectations by frankly acknowledging that the previous management and the 2017 CPR were seriously over egged.
Recovering oil from the rock formations in the company’s Lancaster and Lincoln fields is going to be much more complex than previously thought because of the presence of oil-bearing sandstone overlapping the basin. And the recoverable resource is far lower than original models suggested: the contact point between oil and water, a fundamental determinant of the available crude, is shallower than expected. Put simply, there seems much less oil and much more water than previously thought.
The September update accordingly reduced the estimate for 2C contingent resources in the Lancaster field to 58 MMbbls, from 486 MMbbls in the 2017 CPR, and to 45 MMbbls for the Lincoln field, down from the 565 MMbbls quoted in the CPR. The total contingent resource estimate for both two fields amounts to 103 million barrels of oil, down from the CPR estimate of 1.05 billion. Phase one of the Lancaster development is now forecast to produce only 16 million barrels of oil, down from initial forecasts of 37.3 million.
Hurricane also faces financial challenges. The company reported a loss after tax of $307.7 million in the first half of the year, weighed down by a painful $238.9 million impairment charge on the Lancaster field. The company must also settle a $230 million convertible bond that matures in July 2022. Hurricane had net free cash of £83m at the end of June. The market knocked 50pc off the value of the company’s shares on receiving the news, which have now fallen by 90pc in 2020. The current price is hovering around 3p, against 46.5p a year ago.
Brutal as the update and its reception was, it has at least wiped the slate clean for new CEO Antony Maris, appointed earlier this summer. Mr Maris, a fractured basement reservoir fields veteran, was previously Chief Operating Officer at Pharos Energy (PHAR.L)
The regulator has given the company some breathing space, extending the deadline for plugging and abandoning a well it drilled on the Lincoln field with joint venture partner Spirit Energy to June 2021, and putting back the deadline for the drilling of a commitment well on the Lincoln field to June 2022. Hurricane is developing cautious plans for future operations, currently assessing the possibility of drilling a Lancaster water injection well to increase reservoir pressure and boost production. The company plans to review the firm’s financing arrangements with key stakeholders, and has ruled out an equity raise at this time.
But there are serious questions as to whether Hurricane has the resources to fund its future development. The company needs to drill new appraisal and production wells to boost reserves that no longer look compelling. It must meet its regulatory commitments, and of course there is still that $230 million bond…
For now institutional investors are holding firm. Indeed one, Crystal Amber Fund Limited, has increased its holding in the firm to 10.89pc from 6.25pc, saying its annual results published on 21 September, that ‘the conclusions of the technical committee persuasive but not conclusive’, adding that fractured reservoirs ‘commonly exhibit rapid initial pressure decline and we note at Lancaster that the rate of pressure decline has in fact slowed. Moreover, the zone now believed to contain residual oil below the oil water contact is very thick, whereas we would have expected an abrupt change in oil saturation at the free water level’. The Fund therefore ‘believes that significant volumes of oil may be present below the revised oil water contact at 1,330 metres.’ Richard Bernstein believes the “Doom scenario” is over done and recoverable reserves are worth far more than the current market cap.
Hurricane is now arguably a takeover prospect for companies prepared to fund the rebuilding process. Founder Robert Trice said in an interview with the Financial Times back in 2017 that selling stakes to larger partners was always an option, and that global majors had expressed interest.
All these speculations must be considered against the background of ongoing uncertainty for the wider oil industry. Prices are still pegged around $40 a barrel, down by a third since the beginning of the year, Opec and Russian production cuts notwithstanding. BP has announced well publicised plans to cut its production of oil and gas by 40 per cent over the next decade. And there are reports that refineries are blending diesel with premium jet fuel, such is the current level of overcapacity. Some analysts predict a supply shortage could emerge in the next few years, boosting prices and investment. Others believe hydrocarbons consumption may never recover to previous levels. It’s too early to say.
For Hurricane the winds are even harsher for most oil and gas operators. But with the company’s shares now at basement levels, it may be worth looking at should talk of a takeover come to something…
Below, Oxbow advisors give their view on the Oil market for 2020…
The author was paid for this article but does not hold shares in the above company.