That a US$387mln farm-out deal with Centrica-backed Spirit Energy wasn’t described with overly superlative tags or a ‘game changer’ or ‘transformational’ is testament to Hurricane Energy PLC’s (LON:HUR) growing stature.
For context, the deal puts the pre-production oiler’s value (in simple market capitalisation terms at least) above the likes of Premier Oil PLC (LON:PMO), which produces more than 85,000 barrels of oil equivalent per day and last year generated US$276.6mln of cashflow.
The promise of 17,000 bopd from 2019 aside, Hurricane’s value is primarily in the ground.
Successful drilling through 2016-17 unearthed the possibility for a ‘multi-billion barrel’ oil venture. Specifically, 500mln barrels at Lancaster plus an estimated 1.2bn barrels at Halifax and as much as 1.5bn across the Greater Warwick Area.
Indeed, for all its successes, Hurricane's valuation remains largely based on the potential of what might be.
It is for this reason that the Spirit deal is arguably very significant, as it allows Hurricane prove up more value, more quickly - without distracting capital away from the Lancaster field development.
Money in the ground
Hurricane’s management team has had its priorities firmly fixed on the Lancaster field, the most advanced portion of what has increasingly been viewed as a larger, regional oil project – spanning the area now known as the Rona Ridge.
Lancaster was the project upon which Hurricane’s 2014 IPO was based, it was the primary target of subsequent well programmes and it will be the source of Hurricane’s first revenues and cashflows starting next year when the ‘early production system’ comes online.
It is presently the most valuable asset in Hurricane’s portfolio, and, as the company retains 100% of the project, it remains a core and strategic asset.
Nonetheless, a very substantial portion of Hurricane’s resources now also exist beyond Lancaster’s boundaries, and, frankly, that potential probably deserves to do more than simply wait on the back burner.
Strategically, it is also a good idea for Hurricane to prove, de-risk and accelerate its entire resource inventory.
The long-term scope and potential at Lancaster and the broader portfolio have supposedly attracted industry interest. Moreover, the capital requirements of a full-field development (which will cost a number of billions to execute) likely necessitates some degree of involvement with a ‘major’ oil company.
Arguably, the clock is ticking for Hurricane to de-risk and add as much tangible value as possible in case a future, higher level corporate transaction comes along and leaves a substantial portion of ‘potential value’ off the deal table.
Farm-out to fund value generation at GWA
Teaming up with Spirit for a 2019 drill programme will go some way to bring the Lincoln project up the value curve, meanwhile, it’ll obviously aim to prove the Warwick discovery (or rename the project the GLA!).
Drilling is due to kick off in early, and, if Hurricane’s past operations are anything to go by, investors can look forward to a busy and exciting programme.
Whilst a huge amount of value is presently being unlocked by the development activities for the Lancaster EPS, the GWA drill programme will inject the more immediate speculative interest back into Hurricane share trading.
For an investor’s point of view, the two concurrent programmes should foil attractively together – with GWA drilling beginning in the first quarter ahead of ‘first oil’ from the Lancaster EPS before the end of the second.
Spirit deal details
The deal with Spirit Energy sees Hurricane trading away 50% of the Greater Warwick Area in return for a US$387mln promise of funding for a well drilling programme and an initial field development programme that aims to deliver production by 2020.
Hurricane highlighted that the deal unlocks the GWA programme and significantly means that cashflows from the Lancaster EPS can be reinvested back in the larger Lancaster field development (rather than fund exploration and appraisal activity).
"This transaction allows us to accelerate monetisation of our GWA resource base through a work programme designed to target significant reserve growth,” said Dr Robert Trice, Hurricane chief executive.
Trice added: "As we approach first oil on Lancaster, which remains on track for 1H 2019, we have increased financial flexibility and two parallel work programmes to drive our Rona Ridge Resources towards monetisation."
Spirit’s Phase 1 programme will see three new wells drilled. It aims to accelerate the appraisal of Lincoln and confirm the Warwick discovery. Hurricane will be ‘carried’ in the US$180.6mln initial drilling programme. A rig contract has already been signed, with Transocean, for drilling to start in early 2019.
In Phase 2, assuming prior wells are successful, Spirit will lead field development work aimed at connecting the GWA fields to infrastructure due to be in place at the Lancaster field which, at that point, would be online.
Spirit is expected to spend some US$187mln on this phase of work, which will include upgrades to the Aoka Mizu floating production, storage and offloading (FPSO) vessel, pipelines, and other engineering.
Presently, the initial GWA development is suggested as a single well tie-back to Lancaster’s Aoka Mizu for some 10,000 barrels of oil per day.
Also, Spirit will be expected to contribute some US$150-250mln to cover Hurricane’s share of additional, contingent costs of a larger field development at the GWA.
Lancaster field development on track for 2019
In early August, Hurricane told investors that Lancaster had reached what is described as a ‘critical milestone’ in the development of the Lancaster EPS.
The milestone was the completion of the installation for the turret mooring system. It included the connection to the newly-constructed buoy for the Aoka Mizu floating production, storage and offloading (FPSO) vessel.
The completion of the work means that the project can move on to the installation of subsea equipment and infrastructure (referred to by Hurricane as the SURF programme), which will be the last phase of the current offshore installation work.
"We are delighted to have completed this weather sensitive turret mooring system installation,” Dr Trice said in August.
“The SURF installation campaign is due to commence shortly, with the mobilisation of subsea equipment expected to begin in the coming weeks. We look forward to providing further updates in the run-up to first oil, which remains on track for 1H 2019."
With Lancaster advancing, it was always going to be an important period for the company and its shareholders, now, with the Spirit deal adding drill catalysts into the mix, the next 18 months are going to shine an even brighter spotlight on Hurricane.
87p per share is Cantor's target
Cantor Fitzgerald says the Greater Warwick deal was a significant achievement but the emphasis in 2018 is was always centred on the Lancaster EPS development.
Buy with a target price of 87p is Cantor’s view.