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Hurricane Energy PLC: THE INVESTMENT CASE

Hurricane Energy says estimates of the Lancaster field are too conservative, so just how big is the West of Shetland discovery?

300mln barrels is "too conservative" an estimate for the West of Shetland discovery, experts reckon there could be more than 1bn barrels, but investors will just have to wait and see just how much crude is in the Lancaster field.
Hurricane Energy CEO, DR Robert Trice onboard offshore drilling rig
INVESTMENT OVERVIEW: HUR The Big Picture
Dr Robert Trice - cautiously confident

There are many very interesting and technical facets to the Hurricane Energy Plc (LON:HUR) story, but, most investors can’t help reverting to one rather crude and simplistic question - just how big is it?

Dr Robert Trice, Hurricane’s chief executive, has a good idea but he’s pretty much keeping schtum.

“We’ve always believed that there is a massive amount of producible oil on all of our basement assets. There’s no need for us to go out with our highest estimates.

“We’ve always been cautious and have taken this pragmatic approach to releasing information when we’re confident and it is sensible. It means the volumes go up, rather than go down.”

The Hurricane boss added: “We’re keeping our powder dry on our resources because we understand that with the basement [play] there’s uncertainty about what can be recovered, hence our plans for an early production system.

“Given the uncertainty we are following our path of undertaking a competent persons report and getting their professional opinion. That is a prudent way forward, and it doesn’t either intentionally or unintentionally mislead the general public.”

The official line from Hurricane, updated on February 7, is that the previously upgraded in-house estimate that the Lancaster field held 300mln barrels of crude is now too conservative.

This new guidance comes as the detailed analysis of last year’s well data confirmed that Lancaster’s already very large oil column was bigger and extended deeper the company previously thought.

Data also points to last year’s Lincoln oil discovery also being larger than before – but we’ll get to that later.

Analysts suggest the prize in the West of Shetland region may soon exceed 1bn barrels and, according to Trice, those experts aren’t ‘getting carried away’ with such lofty predictions.

“They’re not getting carried away … you can see numbers [for Lancaster] going north of 400mln barrels without too much imagination, so I don’t think people are being overly excited.”

Investors shouldn’t have to wait too long for more official answers.

Upcoming CPR can be illuminating

An independent assessment, a competent persons report, is due in the coming weeks (Hurricane says during Q1 2017) and that will go some way to quantifying the opportunity.

The CPR is looking only at Lancaster - specifically the area defined by the original Lancaster licence area - and it will set the stage for Hurricane’s initial development of the field.

Hurricane intends to advance its planning for an early production system to a final investment decision later this year, ahead of a proposed start-up in 2019.

This project will essentially be a pilot or test production operation - a field within a field - albeit one that produces crude at a level most AIM quoted peers would be more than happy with.

The idea is that the EPS will unearth valuable production data, give insight into the kind of recoverability possible and will yield some 17,000 barrels per day of crude production.

By way of context, AIM quoted Ithaca Energy’s is due to produce around 25,000 boepd when its Stella field comes online and it was just valued at US$1.24bn by Delek Group’s takeover offer earlier this week.

For Hurricane at Lancaster, however, the EPS merely represents the start.

Brendan Long, analyst at WH Ireland, points out that the EPS area has some 62mln barrels of oil resources and he estimates nearly 377mln barrels of additional oil resources across the rest of the Lancaster area – adding up to 439mln barrels altogether.

Investors will have to wait and see what number consultant RPS Group provides for the CPR.

Halifax is a potential game changer

Drilling began on the Halifax exploration well, some 30 kilometres north of Lancaster, in early January and Hurricane guided that the results would be due before the end of the quarter.

The well aims to find oil in the same setting as seen at Lancaster. If it does, and if all the data aligns, it could confirm a truly huge discovery.

Put simply, a success at Halifax could potentially reveal that both Lancaster and Halifax as one single entity – a giant oil accumulation spanning the substantial portion of an area referred to as the Rona Ridge.

As an outsider it is difficult to guess what exactly that means in terms of the project’s eventual scale, but, Trice points to BP’s Clair field as a possible analogy as it would cover a similar sized area - Clair is an 8bn barrel West of Shetland discovery that is expected to have peak production of around 100,000 bopd.

Alternatively, it is also possible that the Halifax well may draw a blank (breaking Hurricane’s winning streak with the drill bit), or another possible outcome is that it finds oil but in a distinctly separate reservoir.

It is no wonder then that investors eagerly await the well results.

Two big, separate fields

Hurricane has a similar sort of situation to the south, where a 2016 well confirmed the Lincoln discovery.

The latest well data, released February 7, indicates that at Lincoln the oil reservoir extends deeper than at Lancaster - at Lincoln the ‘oil down to’ (ODT) marker is measured at 2,258 metres and the oil-water contact point is not identified, whereas at Lancaster the oil-water contact point is at a depth of 1,678 metres.

Hurricane also confirmed that the Brynhild Fault cuts between the two discoveries.

Consequently, the company determines that Lancaster and Lincoln are distinct and separate fields.

Where Lancaster has Halifax as an ‘upside case’, it is now believed that to the south the Lincoln field may be connected to Warwick - a currently untested exploration prospect.

Proper estimates have yet to be determined for Lincoln (including or excluding Warwick), but, in broad terms they’ve both been described as being similar to Lancaster.

A full picture will come later this year

Hurricane prioritised the evaluation and CPR for Lancaster, as the pivotal document will help form the basis of field development planning for the fast-track EPS project.

Trice anticipates a subsequently independent assessment of the whole area will follow.

That exercise will come once the Halifax findings are known, and after several months of technical work and analysis covering what has been a very fruitful campaign of drilling.

All being well, later this year investors should know just how big the Hurricane Energy success story really is.

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