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By Gary Newman | Tuesday 19 April 2016
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
Prior to the oil price crash, Hurricane Energy (HUR) was a favourite of mine and is one that I still watch closely despite not having held a position there for a long time.
West of Shetlands focussed Hurricane has actually done very little wrong and its assets look impressive, but spending by the majors in this area has been curtailed and it has probably meant that any farm in deal has dragged on for longer than it would have done had the oil price remained higher.
At a time when many AIM listed oil explorers are struggling to raise funds and often having to do so at a large discount, I expect that those still invested in Hurricane will have been pleased with the news this morning that the company had raised gross proceeds of £52.1 million at a share price of 15p, a premium of over 46% on the level it closed at on Friday.
Kerogen Capital took more than 293 million of these shares and paid £44.1 million for them, with the remaining £8 million raised being split between Crystal Amber Fund (which already had a 16% interest in the company) and Marlborough Fund – all of this is conditional on shareholder approval for the deal given the number of shares being issued. Crystal Amber was also given the option to subscribe for just over 23.3 million warrants at 20p as well.
The company also reiterated that it is at an advanced stage of discussions with several farm in partners, and that these funds will allow it to push on ahead with drilling which could help to spark a deal.
The money raised is going to be used to drill two more wells at its Lancaster fractured basement discovery, which has already managed a flow rate of 9,800boepd (constrained by the testing equipment) and pressure readings suggested that 20,000boepd from a single well would be likely, with this well having also been suspended as a future producer.
The plan going forward is to drill a pilot well and a horizontal sidetrack well on Lancaster, with the first expected to get underway in Q3 2016, and that this will provide a much better indication as to the size of contingent resources present.
Currently those contingent resources have a massive range with estimates from 62mmboe up to as high as 456mmboe, and this second horizontal well will provide another future producing well once suspended. The pilot well is more about identifying oil/water contact depth, plus assessing a possible aquifer and how well that could support production.
This will all ultimately help the company – and possibly its partner if a farm in deal has been reached by then – to make a final investment decision on Lancaster in early 2017.
I still view this as a good speculative long term investment with a lot of potential, but it isn’t one to be watching every day - unless you’re looking to trade spikes like we’ve seen on today’s news – and you will need to be prepared to hold for several years if you’re looking to still be in when the company starts producing, assuming of course Lancaster is deemed commercially viable.
Hurricane also published its preliminary annual results up tot the end of 2015 on the same day, and there were no real surprises within those.
Operating expenses had reduced by 37% to £5.4 million, and the company made a post tax loss of £5.5 million for the year, with cash in the bank of £9.9 million. In the future the company could also benefit from its accumulated tax losses and the amount of capital it has spent so far on its projects, at around £183 million in total.
I like the team behind Hurricane, and especially CEO Dr Robert Trice as he is the man behind trying to utilise these fractured basement plays, and the techniques used could well be relevant to others operating fields with similar characteristics. I also like the fact that the West of Shetland area already has a number of oil majors operating there, plus good access to infrastructure – although it is also worth considering that it isn’t going to be cheap to get Lancaster to first oil, although in mitigation it does also have the potential to be a very large field if reserves come in at anywhere close to the upper end of the contingent resources estimates.
As I’ve already mentioned, I wouldn’t be rushing to put money in at the moment if you are expecting a quick return – although it is likely that action here will hot up closer to drilling getting underway later in the year. But if you are patient and looking for an oil company with future potential which you are willing to hold for several years, then I still view Hurricane as one of the better ones around, and once interest in it dies down again you may even get in cheaper than the current share price of around 12.5p to buy.
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