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Hurricane Energy has reached a very significant milestone at Lancaster field, but exploration results key

Hurricane celebrating very significant, albeit widely expected 'first oil' from the Lancaster early production system, with exploration drilling underway at Greater Warwick Area
Hurricane Energy oil operations
Hurricane in mid-April announced the spudding of the Warwick Deep exploration well, the first to be drilled in its partnership with Centrica backed Spirit Energy.

Hurricane Energy PLC's (LON:HUR) share price decline on Wednesday underplayed a very significant milestone for the group as it delivered ‘first oil’ from the early production system (EPS) at the Lancaster field in the West of Shetland region in the North Sea.

The hotly anticipated achievement comes on schedule, bringing imminent revenue and cash flows. Trading at 58.95p, Hurricane shares were subdued, however.

Starting the EPS at Lancaster marks a crucial de-risking step towards unlocking Rona Ridge, a possible multi-billion barrel development project in the future.

The EPS addresses only a small fraction of Lancaster’s overall discovered resource. It is hoped that longer term production data will yield important validation and confidence ahead of much more substantial investment decisions.

Exploration is always a key driver

Part of the reason for the muted response in the stock exchange is that this particular achievement was well communicated, well understood by the market and came in pretty much on schedule (once a few minor teething issues were resolved).

It is worth noting that the EPS start-up has long been priced into the Hurricane share price, which presently values the group at around £1.25bn in London.

The start-up delivers on promises made by Hurricane following the company’s last successful phase of drilling.

New drilling is, meanwhile, underway right now. And, as is typical with most growth stocks, the more speculative segment of investors and traders are more keenly interested in the exploration operation than the less binary but essential business of engineering and project delivery.

It is, at present, more likely that Hurricane’s share price will be moved by the outcome of new wells not the tangible steps that have brought it to the cusp of revenue-generating production.

Production ramp up at Lancaster

Hurricane on Wednesday revealed that the EPS opening started with a 72-hour test in which two wells flowed at a combined production rate of 20,000 barrels of oil per day (bopd).

In the initial phase of the EPS, the company intends to gradually ramp up facilities over a six month period.

Hurricane anticipates that it will run at around 45% capacity in the first three months before increasing to 65%. The production rate is expected to average between 9,000 to 13,000 bopd during this period.

By the end of the six month period, Hurricane expects the EPS to be running at 85% of capacity.

Hurricane has consistently guided that the EPS would produce at a rate of 17,000 bopd, though it may be notable that the peak rate in the pre-production test measured 20,000 bopd.

Chief executive Dr Robert Trice said, in a statement: "I am delighted to announce that first oil has been achieved and that the Lancaster field is now on production, beginning the phased development of Hurricane's considerable resources on the Rona Ridge.”

City impressed with the expected success

Russ Mould, investment director at AJ Bell, described it as a “massive breakthrough” for Hurricane and the UK oil and gas sector in general.

“The company has achieved first oil from its Lancaster field and this is also the first time crude has been produced from so-called fractured basement reservoirs in the UK,” Mould said in a note.

He added: “The Lancaster field was discovered as far back as 2014 so it has taken some time to reach this point, testament to the challenges in producing oil from such a remote location to the west of the Shetland Islands. The company has employed a floating production vessel to get the job done.

“Hurricane deserves credit for doing so on time and on budget and the market will be eager to hear more about its future plans at a capital markets day in July.”

Elsewhere, oil companies expert Malcolm Graham Wood said the day "some people thought might never happen has arrived”.

He expanded: “Whilst this is clearly a red letter day for Hurricane, it’s whole team led by Dr Trice deserve praise for delivering the first phase on time and within budget I know that no one at the company will be resting on their laurels.

“As has been said consistently throughout this whole process up to 12 months of stable production will be required in order to provide a clear view of the reservoir and ‘enable us to plan for associated full field development scenarios ‘.

“Having said this the fact that at today’s AGM Dr Trice will be able to formally deliver the good news will be a moment of considerable triumph And pride and whilst it is too early to see off the industry nay sayers it is no doubt an opportunity to break out the cigars.”

Exploration well results imminent

Hurricane in mid-April announced the spudding of the Warwick Deep exploration well, the first to be drilled in its partnership with Centrica Plc (LON:CNA) backed Spirit Energy.

It is the first of three planned wells in the programme, which will assess the Greater Warwick Area (GWA), comprising the Lincoln discovery and the previously untested Warwick prospect.

The GWA is believed to be a continuation of the large oil reservoirs seen at the Lancaster field, though the two areas are separated by a fault.

Hurricane retains a 50% stake in the GWA following its farm-out deal to Spirit, which committed to fund and execute the drilling campaign. In all, Spirit is to cover Hurricane’s costs in the GWA, up to US$387mln across five potential phases of work.

The proven Lincoln discovery was estimated to host some 604mln barrels of contingent resources, while Warwick’s prospective resource was pitched at 935mln barrels.

Clearly, a success in the Warwick Deep well could represent a significant upgrade to the GWA project whilst the overall three-well programme aims to bring it towards an initial development scenario.

A further three appraisal/development wells are slated for a follow-up programme in 2020 – which could, subject to results, see ‘first oil’ from the GWA either late next year or early 2021.

Beyond Lancaster’s production growth and future development, these drilling projects represent key value creation drivers for Hurricane.

Whilst the market may not have had much of a reaction to ‘first oil’ from the Lancaster EPS plainly there remains plenty of potential left for investors to shoot for.

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