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Hurricane Energy is nearing first production, buy for the rise

By Gary Newman | Friday 6 April 2018

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.

When it comes to anything on the operational front amongst smaller companies in the oil sector you tend to pretty much expect some delays and the directors are often over optimistic when it comes to timelines for delivering certain milestones.

But an old favourite of mine, Hurricane Energy (HUR), which I have been a fan of here since before it first found oil at its 100% owned Lancaster licence, offshore UK in the West of Shetland area, looks like it could actually start producing oil around the time that it forecast.

It is still early days and installation of the early production system (EPS) is yet to get underway, but all the preparations seem to be going well and it is on track for subsea installation to get underway in Q2 or Q3 of this year.

Recent updates show that the necessary seabed boulder relocation has been carried out ahead of schedule, the necessary equipment is being delivered on time, and testing of the floating production storage and offloading vessel (Aoku Mizu) is going to plan.

I know that some are wary of investing in AIM companies in this sector if they already have a high market cap – around £687 million in this case –and Hurricane currently doesn’t produce any oil.

But the share price has been showing signs of life and is currently trading at around 35p, and providing there is no big drop in the oil price, it is hard to see how it won’t continue to show strength as we approach targeted first production of around 17,000bopd during H1 2019.

This would be a real game-changer for the company, as even based upon its modelling at a $50/barrel Brent price, that would yield operating cash flow of around $150 million, and given that Brent is currently sat close to $70/barrel, that should be significantly higher, given a breakeven price per barrel for the project (including capex and opex) of around $37/barrel.

Currently reserves don’t like particularly large on paper, with 2P for Lancaster coming in at 37.3 million barrels, based on a six year EPS (the ten year EPS model gives 2P of 62.1mmbbls), but there is an awful lot of further upside as and when it moves to full production further down line, as there are a further 486 million barrels of 2C contingent resources.

Funding for the project is already in place after the company raised a total of $520 million last year from a mixture of an equity issue and convertible bonds.

Whilst all of the focus is justifiably on Lancaster at the moment, the company does still have plenty of potential upside from its other licences as well.

Halifax, where there has already been a significant discovery of 1,156m of hydrocarbons, has even larger 2C contingent resources at over 1.2 billion barrels. Although it is yet to flow (the DST only recovered small amounts of oil but it is thought that drilling mud and granite blocked the fractures and caused this result) and oil/water contact hasn’t been established either, due to damage to the formation, but it does share similar fracturing characteristics to Lancaster.

There has also been drilling success at Lincoln, which has 2C contingent resources of 504 million barrels attributed to it, and it is thought that this may be connected to its other Warwick licence, which although undrilled has lots of potential from its P50 prospective resources of 935 million barrels.

Although any plans to get these two fields into production, assuming they even turn out to be viable, are some way off, it does illustrate the potential amount of oil that Hurricane is sitting on, and just how big the company could become.

Last time I covered this company it was as a long term hold from a share price of 30.25p, so it has performed fairly well since then, and I would reiterate that stance as well as pointing out that time is likely to be running out to buy shares down around current levels, not far above the 32p that capital was raised at.

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