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Hurricane Energy’s Lancaster field a North Sea silver lining

Last updated: 14:53 08 Jun 2016 BST, First published: 15:45 18 Apr 2016 BST

Hurricane Energy's drilling team on a rig at the Lancaster field, back in 2014.
A £52mln funding sees drilling later this year, so production is possible in 2017.

Beneath the scary headlines, there are a few emerging projects that look set to be silver-linings in the otherwise dark and gloomy North Sea.

Hurricane Energy Plc (LON:HUR) and the Lancaster field are definitely among the North Sea’s few brighter sparks.

In stark contrast to the financial troubles seen elsewhere in the region a new £52mln private-equity backed funding, priced at a premium, not only feels like a big deal but also serves as a reminder for those that may have forgotten about the group’s ‘game changing’ potential.

Importantly, the cash injection puts into motion a two well drilling programme at a time when there’s a dearth of opportunities for oil investors.

Here we take a closer look at Hurricane, and what comes next for the Lancaster oil field development.

Premium priced share placing

Hurricane placed 347.2mln new shares at a premium price of 15p per share, versus the then closing price of 10.25p.

Private equity group Kerogen Capital invested £44.1mln of the £52.1mln, and, as a result, took a 29.9% stake.

Institutional investors Crystal Amber and Marlborough Fund Nominees provided the other £8mln.

The funding deal saw Kerogen Capital’s managing director Roy Kelly take a director position on the Hurricane board.

Prior to the funding Hurricane had £9.9mln of cash.

Lancaster is an appraisal-plus oil project

The Lancaster field is located in the West of Shetland area of the UK North Sea and aside from it being among the few active projects in the maturing basin it is particularly significant because it represents a ‘play opening’ opportunity.

It is what’s known as a ‘basement play’ – in other words the oil is found deep in fractured basement rocks.

Such reservoirs have proved to be large and prolific in other territories, but, Lancaster is the first to be proven here in the UK.

200mln barrel basement play

Significantly for Hurricane, is it the most advanced of a number of prospects in the company’s portfolio.

Back in 2010, Lancaster was estimated to contain over 200mln barrels of oil resources and a successful appraisal well and flow test in 2014 showed production rates of around 20,000 barrels per day, per well are possible.

The 2014 well has been preserved and awaits re-activation as a production well in the not too distant future.

By securing new funding, Hurricane has cemented the Lancaster drilling schedule through the second half of 2016, and as such remains on course for first oil production next year – assuming the next phase of operations go to plan.

What is the plan for the new Lancaster wells?

Cash raised will pay for two wells on the Lancaster field development. The wells - referred to as the ‘Lancaster 7 wells’ - will aim to narrow the range of the field’s contingent resource (currently estimated between 62mln and 456mln barrels of oil equivalent).

It is forecast that the Lancaster 7 wells will cost around £43.9mln, and it is expected that the first well will spud early in the third quarter 2016.

The wells will also aim to confirm possible production rates from a future commercial operation at Lancaster and it is envisaged one will be saved for future production operations.

Hurricane has also now contracted Transocean’s Spitsbergen rig for the drilling programme.

The first objective of the first of the two wells (the pilot well) is to ‘acquire unambiguous data’ to confirm the distribution of hydrocarbons and the depth of the oil water contact.

The well’s secondary objective is to evaluate the properties of a potential aquifer that could be below the oil water contact and requires investigation to establish how supportive it is of production.

Successful completion of these two objectives can allow for a refinement of the Lancaster contingent resource range and will allow the company to optimally plan the field’s development.

Appraisal before farm-out

This June, Hurricane said it intended to complete its planned appraisal drilling programme before closing any further farm-out deal.

By doing this it will be able to focus solely on the upcoming drill campaign and have new information to plan optimally the field development project.

Horizontal well plans

The horizontal well will have installed electrical submersible pumps (ESP), flow tested and it will be suspended for future production.

Flow testing will enable to update forecasts for the field’s ultimate recoverable volumes, and assist in the development.

It is envisaged that the initial production from Lancaster will comprise of two horizontal wells tied into a floating production, storage and offloading (FPSO).  Production could begin in the first half of 2017.

Funding gives “far more flexibility”

In an interview with Proactive Investors Robert Trice, Hurricane’s chief executive, said the funding and decision to drill the wells now gives the firm “far more flexibility” adding that it shows “we’ve got backing to continue with our operations, and we believe it will strengthen our ability to negotiate [with potential farm-in partners].”

What the broker says

Cantor said suspending the farm-out process was a sensible move and highlighted management’s confidence in going alone in the upcoming wells, choosing not to dilute equity and risk, and therefore seeking a higher valuation for the asset post the well programme.

It added that the Lancaster development is one of the largest and most interesting projects on the UKCS [UK continental shelf] at present.

“Its 2C contingent resource dwarfs the average discovery on the UKCS of c.20-30MMboe, and we are encouraged that the company has refined its development plan to give early production for reduced capex. 

“Hurricane has proved that the technical barriers to exploiting fractured basement in the UKCS are not too high.”

The broker values Lancaster at 26p based on an adjusted discounted appraisal (10%) of non-field related admin expenditure for the next five years. 

 

--updates for decision to complete appraisal wells and broker comment --

 

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