The notion that Hurricane Energy PLC’s (LON:HUR) success represents a ‘paradigm shift’ for the North Sea may be a little misdirected. Nonetheless, it is certainly fair to say the company is doing things its own way and it has been rewarded handsomely for doing so.
Hurricane is seemingly on the cusp of promotion from the junior market up to a premium listing (likely to be the main board of the London Stock Exchange) and in June the company landed a US$530mln funding deal.
Plainly, Hurricane is advancing very quickly.
Vast crude resources West of Shetland
First, it is probably right to clarify that Hurricane seemingly vast oil resources are not in fact locating in the North Sea - rather, they’re found in the West of Shetland region of the UK continental shelf.
It is a pedantic point, but, it speaks to significant subtext. The North Sea is seen by some as something of a dead horse whereas Hurricane is flogging an oil play that fresh and new.
In this regard Hurricane is a pioneer, not a game changer.
For the uninitiated, Hurricane is a pathfinder in so much as it has proved that a particular type of oil play (what’s known as a fractured basement play), which works in Asia and South America, is also viable offshore Scotland.
Whilst skirting around the more nuanced technical points, the takeaway for investors is quite simple – Hurricane geologist chief executive, Dr Robert Trice, long believed oil bearing basement plays were present and they could be exploited.
Exploration success and proof of concept
Backed by private equity investors (and more recently those in London’s AIM market) the company drilled a series of successful wells to deliver results that have answered some of the early scepticism.
There’re some 2.6bn barrels of crude resources in the company’s asset inventory thanks to a new assessment earlier this month, and the company is advancing a plan to start production from its most advanced project in around eighteen months from now.
This early production system (EPS) at the Lancaster oil field will be the major value catalyst for Hurricane, but it won’t be the only one.
On a path to early production
The EPS is due online in the first-half of 2019 with this start-up phase forecast to deliver up to 17,000 barrels of oil per day (bopd).
Recently analysts embarked on a site visit to Dubai where the Aoka Mizu floating production, storage and offloading (FPSO) vessel (which is contracted to the project) is dry-docked for upgrade works. It is expected to arrive onsite in September.
New assessment detailed huge upside for future
A new competent persons report, released December 11, assessed Hurricane’s assets except for its most advanced, the Lancaster field, and it confirmed what many in the market had hoped for - that Hurricane’s successful drill campaign unearthed an awful lot of oil.
New discoveries Halifax and Lincoln have been estimated to host 1.23bn and 604mln barrels of crude respectively, whereas the untested (but substantially de-risked) Warwick prospect is thought to contain a potential 935mln barrels.
Including Lancaster, which was in May was estimated to have 523mln barrels of recoverable resources, the new assessment sees the group’s total inventory rising 231% to 2.6bn barrels oil equivalent.
Broker sees very significant upside
In the wake of the resource report, Royal Bank of Canada upgraded its target price for Hurricane.
The broker’s new target of 70p suggests some 125% upside to Hurricane’s current price of around 31p.
“Although production history (through 2019) will be needed to full convince a farm-in partner, the stock remains one of the cheapest,” RBC analyst Nathan Piper said in a note.
Piper sees the shares going much higher, as the group’s assets continue to advance and de-risk.
“The company has passed every test so far, successfully determined how to drilling into basement, conducted successful short term production tests (over 15,000b/d) and crucially securing funding to progress development of Lancaster,” the analyst said in a note.
New chairman incoming, but who?
Following the departure of Dr Robert Arnott in November, the company is in the market for a new chairman.
It has hired executive search recruiter Spencer Stuart to find the company’s new chairman.
The UK offshore oil company said in a statement that once this person is in place it will look to appoint additional independent non-executive directors to the board in order to make it fully compliant with corporate governance guidelines.
Additionally, on the recommendation of the company’s Listing and Governance Committee, Hurricane has now brought in specialist shareholder engagement and corporate governance consultant, Boudicca Proxy, which will assist the evaluation and transition of the firm’s policies into line with ‘premium listed’ stock exchange companies.
Maturing and doing its own thing
There’s no question that Hurricane is doing things its own way.
A stock market promotion may be coming and it may be worth around £570mln, but it is still essentially junior company that (for the time being at least) is advancing a major multi-billion barrel oil project all by itself.
It stands apart from the rest of the exploration and production sector and with many share price catalysts in the pipeline Hurricane will continue to be through 2018 as it advances Lancaster towards start-up.