Investors in Hurricane Energy Plc (LON:HUR) can expect a flurry of corporate activity in the coming months following its significant successes with the drill-bit.
Hurricane today unveiled the findings of the Halifax exploration well which make the prospect of a ‘multi-billion barrel’ oil haul much more likely.
The company revealed a success with the Halifax exploration well that sets up Hurricane with what appears to be the largest undeveloped oil project in the UK continental shelf.
Significantly, the well confirmed a massive oil column, measuring at least 1,156 metres, and it supports Hurricane’s theory that the Lancaster field and the Halifax discovery are in fact part of the same single hydrocarbon accumulation.
This is a very big statement given that the Halifax well is located some 30 kilometres from the Lancaster field.
Time to prioritise field development and production
Halifax marks the end of an astoundingly successful four well programme, which has exceeded all expectations.
That being said, it also means now’s the time for investors to put aside the exciting conversations about what the project ‘could’ be and instead focus more closely on the process that will see Hurricane build a tangible oil business for the nearer future.
Hurricane chief executive Robert Trice told Proactive Investors that delivering a revenue-generating early production system for the initial Lancaster field is now priority number one.
To put it bluntly, that means Hurricane now needs to secure some US$450mln in the near future.
Hurricane doesn’t give specific details of when the funding deadline is – if it is going to keep to its rapid schedule - though guidance for a final investment decision during the second half of 2017 means there definitely is a deadline, and it is coming up soon.
Imminent CPR and fast-tracking to production
An ‘imminent’ resource assessment, in the form of a ‘competent persons report’ or CPR, will be a crucial precursor to the fund raising process.
The study will not consider the latest breakthrough at the Halifax location or the preceding exploration success on the separate Lincoln discovery.
Instead, the attention is focussed on an area of the Lancaster field that’s thought to contain a number of hundred million barrels of crude.
It is the area where Hurricane has already drilled horizontal wells which will be plugged straight into the EPS development.
The EPS is anticipated to be a 17,000 barrel per day operation, tied into a floating production, storage and offloading (FPSO) facility (which has already been signed up via an arrangement with Bluewater Energy Services).
Given its scale and relatively achievable funding requirements the EPS is deemed to be a logical, manageable and value-adding step.
The EPS is essentially a project within a project, it will generate revenue and allow Hurricane to establish a sustainable foothold for the larger project development.
Much more appraisal and exploration work will be required before the gap can be bridged between the hundreds of millions of barrel resource and the multi-billion barrel figures that could be.
The pace and veracity of what follows the EPS is very much variable based on the corporate deal making to come.
Investors now await farm-out and funding news
Two parallel financing work ‘streams’ are underway, Trice explains.
One process sees Hurricane going it alone. It is working on a fund raising process that will include equity, bonds and regular debt-based project financing.
This scenario will see Hurricane land the US$450mln it needs to deliver the EPS whilst retaining 100% of the project, though it will also result in some dilution for equity holders.
A farm-out deal could, however, be an alternative approach to securing the EPS funding.
A third option could also be possible, whereby Hurricane raises a smaller amount of funds and also brings in a partner.
Plainly, there are many variables at play. Nevertheless, Hurricane is a much stronger position than it was around a year ago when it froze the farm-out process and opted to take private equity funds and advance the successfully drilling campaign.
Not only did all four wells deliver, but, significantly the market has also moved in Hurricane’s favour.
“We see ourselves in a far more buoyant industry,” Trice said.
“Before we started drilling everyone [in the industry] was in a dire situation with low oil prices, budgets had been slashed.”
He added: “There is now more money to be spent [in the industry], larger oil companies have got budgets to get on with projects and they’re looking at farm-in opportunities.”
Trice, specifically, adds that thanks to the positive findings of the new wells that has been a major change, on a technical level, in how third parties now view the company’s assets.
What happens with the farm-out - for example, who the new partner is/are and what it is committed to - may prove to be key factors in how the subsequent phases of appraisal and exploration play out for Hurricane.
Share price will have to play catch-up
Drilling in recent months has answered many questions for Hurricane, but, the corporate phases to come will likely present new ones.
One thing that is clear, however, it that Hurricane is sitting on an awful lot of oil and, according to experts, the group’s share price has yet to catch up.
Stockbroker WH Ireland, for example, has highlighted a “tremendous opportunity” for investors as he says the share price reaction on Monday almost ignores the significance of the Halifax well result.
In Monday’s morning deals, Hurricane was up between 5-10% changing hands just shy of 60p.
WH Ireland, meanwhile, struck a line through its valuation (which saw Halifax alone worth 65p per share) because analyst Brendan Long now saw the need for a “significant upward revision”.
The stockbroker repeated a ‘buy’ recommendation, but, in the meantime put its 92.9p price target under review.
“We can see that trading dynamics are mitigating market recognition of this result, we believe this represents a tremendous opportunity for long-term value investors to acquire stock at a price-level that almost ignores today’s results,” Long said in a note.
A degree of profit taking or ‘investor fatigue’ is perhaps understandable. The Hurricane price is after all up some 400% in the past twelve months and the specifics of the upcoming round of financing remains remain uncertain (somewhat understandably given the presumably pivotal stage of negotiating).
In the meantime, investors will keenly await the ‘imminent’ CPR as it will likely be the next major catalyst from the company.