The Aoku Mizu FPSO is now on station and hooked up at Lancaster; we believe this keeps the EPS on schedule for first oil in H119. Hurricane will now focus on topside commissioning prior to start-up, which will be followed by a ramp-up period to a gross targeted plateau production rate of 20kbd (17kbod net of operating efficiency). In addition to progressing Lancaster, the company has a full programme of activity in its neighbouring Greater Warwick Area (GWA), with the three-well E&A programme in the GWA expected to kick off in early Q219 at Warwick Deep. Our risked valuation stands at 102.8p/share (see our last note).
Hurricane Energy recently farmed out 50% of its Lincoln and Warwick licences covering the Greater Warwick Area (GWA) to Spirit Energy. This transaction is intended to accelerate the de-risking and monetisation of GWA, adding a new leg to the Hurricane business model running in parallel with the development of the Greater Lancaster Area (GLA). Under the terms of the farm-in, Hurricane will retain a 50% working interest in GWA licences in return for a net carry of $137.2m through a two-phase initial work programme and $150–250m contingent carry on net GWA full field development (FFD) expense. We update our valuation to reflect the terms of the Spirit Energy farm-in, driving our RENAV from 81.0p/share to 102.8p/share (+26.9%). We believe the transaction materially accelerates the de-risking of Hurricane’s Rona Ridge asset base, both in terms of GWA resource and the ability to focus Lancaster EPS cash flows on fast-track appraisal of the GLA resource base. Key valuation uncertainties include resource recovery from the GLA and GWA FFDs – we expect reserve and resource estimates to tighten on the back of further appraisal and EPS performance.
Robert Trice, CEO of Hurricane Energy, discusses how the company has amassed over two billion barrels of oil equivalent in 2P reserves and 2C resources and is on track to deliver first oil from the Lancaster early production system (EPS) in H119. Robert describes Hurricane’s recent deal with Spirit Energy, which accelerates the de-risking of the company’s Rona Ridge asset base, both in terms of the Greater Warwick Area (GWA) resource and the ability to focus Lancaster EPS cash flows on fast-track appraisal of the Greater Lancaster Area (GLA) resource base. Lastly, he discusses the outlook for 2019 including upcoming exploration and appraisal activity.
Spirit Energy has farmed-in to 50% of Hurricane’s Lincoln and Warwick licences covering the Greater Warwick Area (GWA). The farm-in is intended to accelerate the de-risking and monetisation of GWA, adding a new leg to the Hurricane business model that will run in parallel with the development of the Greater Lancaster Area (GLA). Under the transaction, Hurricane will retain a 50% working interest in GWA licences in return for a net carry of $137.2m through a two-phase initial work programme and $150–250m contingent carry on net GWA full field development (FFD) expense. Based on company-estimated GWA gross 2P reserves of 500mmbbls expected to be unlocked by the FFD, the combined carry value is $1.2/boe to $1.6/boe. The transaction structure differs materially from our assumed 60% working interest dilution through farm-out for Lincoln (250mmbbl development case) and a post-carry NPV/bbl of $5.0/boe ($2.5/boe risked) in our last published valuation of 81p/share. We expect to revise our risked Lincoln valuation ($241m) to reflect the details of the transaction, which include accelerated production via tie-back to Lancaster, not currently reflected in our valuation. We believe today’s deal materially accelerates the de-risking of Hurricane’s Rona Ridge asset base both in terms of GWA resource but also the ability to focus Lancaster EPS cash-flows on fast-track appraisal of the GLA resource base.
The development of Hurricane’s Lancaster early production system (EPS) remains on track for H119 first oil. We estimate a 1 January 2018 point-forward IRR of 63% for the EPS phase based on current commodity price forecasts. We use the EIA’s short-term oil forecast with Brent at $66/bbl for 2019 and long-term $70/bbl (from 2022). We believe the market is fully valuing a 10-year Lancaster EPS phase (34.7p/share net of debt), a project that has the potential to significantly de-risk our RENAV of 81.0p/share (increased from 78.4p/share). Our RENAV includes a risked value for Lancaster full field development and two mid-sized field developments (250mmbo) at Lincoln and Halifax.
Management’s concept selection and contracting strategy appears to deliver the desired result, with Hurricane reiterating that the Lancaster EPS remains on time and on budget and first-oil scheduled for H119. Market focus is likely to remain on installation items during the 2018 weather window and then to technical data established once production has stabilised. These data are likely to significantly increase our understanding of Greater Lancaster Area (GLA) resource recovery potential and value. Our last published valuation stands at RENAV 78.4p/share, including a Lancaster EPS-only valuation of 32.7p/share based on a long-term (2022) oil price assumption of $70/bbl Brent. We expect little change to our valuation, but will revise our financial forecasts shortly to reflect capex phasing and a change in reporting currency from GBP to US$.
On 12 December 2017, we visited the Aoka Mizu FPSO at Drydocks World Dubai, and had the opportunity to meet a number of Hurricane Energy and Bluewater employees. We returned with greater confidence in Hurricane’s ability to mobilise the Aoka Mizu to location in Q218 and to deliver first oil in H119. While some risk remains relating to weather-critical items, we feel that the risk of schedule slippage is lower than we had previously assumed. We bring first oil forward by six months in our updated valuation; this is offset by a slightly more conservative view of production ramp-up and uptime assumption in the first six months of production.
Hurricane has published this week an updated competent person’s report (CPR) on its West of Shetland fields not previously included in the 2017 Lancaster CPR. The report by auditor RPS Energy covering the Halifax, Lincoln, Warwick, Whirlwind and Strathmore fields confirms over two billion barrels of oil equivalent contingent resources (Hurricane 100% interest) across these fields, with a further 935mmboe of unrisked prospective resources recognised for the (as yet undrilled) Warwick prospect.
Investor focus is understandably on the execution of Hurricane’s Lancaster EPS development. First oil from Lancaster will complete the transition from explorer to producer and unlock a stream of cash flow that management can direct towards appraisal, full field development or shareholder returns. In this note, we look at progress made to date and the potential for farm-down of the Greater Lancaster Area (GLA) and Greater Warwick Area (GWA) to fund further appraisal ahead of full field development. Our updated RENAV stands at 79p/share, down from 103p/share, reflecting a recent reduction in our long-term (2022) oil price assumption from $80/bbl to $70/bbl.
Hurricane has provisionally raised up to $535m through a $300m equity placing (plus $5m follow-on offer) and a concurrent $220m (with $10m over-allotment) convertible bond offer. Equity is being placed at a price of 32p/share while the convertible offers investors a 7.5% coupon and conversion price of 40p/share o a 25% premium. We had assumed EPS funding in our valuation with an approximate 60/40 equity/debt split (see our May Outlook note); confirmation of funding should provide increased confidence in Hurricane's ability to keep to a H119 first oil target. The fall in Hurricane's share price over the last two months has led to greater dilution than we had previously anticipated with Edison's Lancaster NAV falling from 102p/share to 81p/share (c 21%) assuming convertible dilution.
Hurricane Energy's 2016/17 drilling programme has significantly increased understanding of the Greater Lancaster Area (GLA) and Greater Warwick Area (GWA) hydrocarbon accumulations. Initial data analysis suggests that the GLA is one large accumulation including the Halifax and Lancaster basement oil discoveries contained between the Westray Fault Zone and Brynhild Fault Zone. RPS resource estimates for Lancaster alone range from 157-1,166mmbbls recoverable (P50 523mmbbls), making it a giant oil field and one of the largest discoveries on the UKCS over the last decade. Incorporating wider GLA and GWA resource is likely to take this figure to upwards of 1bnbbls, 100% owned by Hurricane. Management expects first oil from a Lancaster early production system (EPS) in 2019, with the company looking at equity and debt funding options. We assume a 60/40 equity to debt split in our latest Lancaster NAV of 102p/share, rising to 134p/share including risked Halifax/Lincoln upside.