The oil explorer took a step closer to production earlier this week when it confirmed it had finished the majority of offshore works at its Lancaster early production system just west of the Shetland Islands.
That’s ahead of first oil from the well, which is expected in the first half of 2019 once a production, storage and offloading (FPSO) vessel arrives from Dubai where it is currently in dry-dock.
Including Hurricane’s other nearby targets – Halifax, Warwick and Lincoln, all of which were named after British bombers – there is an estimated 9.3bn barrels of oil (bbls) in place in the area.
At the moment, the company estimates contingent resources – the oil which it is confident it can retrieve – of around 2.3bn barrels, reflecting the uncertainty of ‘fractured basement’ reservoirs, a new type of play in the UK and one that is geologically complex.
That uncertainty means investors aren’t pricing in the true potential of Hurricane’s assets, argues the investment bank.
“The high risk and uncertainty over recovery of reserves has led the market to price information in the line of vision,” read the note to clients.
Bull case NAV of 381p
It adds that the market is pricing in just 32.7mln bbls of reserves at the moment. If the Lancaster EPS is extended from six to ten years, as Morgan Stanley expects, and the separate Greater Warwick Area EPS program lasts for eight years, that figure rises to 74mln bbls.
“Assuming oil prices in line with our house view, this leads to a net asset value of 68p.”
That’s still a drop in the ocean compared to the 2.3bn bbls of contingent resources for the whole field, which includes 785mln bbls associated with Lancaster and GWA.
Assuming the Lancaster EPS provides the expected sustained production, the analysts believe the “market is likely to assign value to these reserves very quickly.”
“If we assume US$10/bbl value for Lancaster and GWA 2C resources, we arrive at a base case NAV of 292p. Should long-term oil prices increase further to US$80/bbl (real), we see potential for a bull-case NAV of 381p, ~7.0xhigher than current levels.”
Hurricane shares rose 3.7% to 54.1p in early afternoon trading.