Hurricane Energy PLC (LON:HUR) shares rose on Friday after the explorer revealed it has taken an US$8.5mln hit as Centrica PLC (LON:CNA) backed partner Spirit Energy has stalled on the next phase of its partnership deal for the Greater Warwick oil project, in the West of Shetland region, a move City broker SPAngel thought could be positive for both.
Spirit paid the majority of costs for the 2019 three-well drill campaign, which suffered disappointing results.
The current inertia comes as Centrica seeks an exit from its investment in Spirit, with a sales process that kicked off in late 2019 The original farm-out transaction envisaged two phases – with last year’s spending and activity covered in the first.
As yet, Spririt has not triggered Phase 2 which was previously envisaged to follow on from a decision to connect the GWA to production facilities at the neighbouring Lancaster field (also including the installation of tie-in to the West of Shetland Gas Pipeline System – known as ‘WOSPS’).
This decision was recently deferred. It means that costs at GWA over and above the Phase 1 ‘carry’ of US$180.6mln must be jointly funded, 50:50, between Hurricane and Spirit.
As of 29 February, some US$8.5mln of such costs had accrued. Hurricane will additionally expect further GWA costs as work progresses.
It expects an additional net cost of US$20mln related to the build-out of equipment and materials related to the tie-back a single well from the GWA to the Aoka Mizu FPSO. This equipment will be held in storage until the partners sanction the tie-back to Lancaster.
Hurricane noted that it can also choose to build-out long-lead items for the tie-in, on a sole basis, at a cost of US$28mln. Moreover, the group would then have to bear 100% of costs to proceed with the installation and that’s presently estimated at around US$62mln.
It would also then need to reimburse Spirit for US$18mln of costs related to gas export facilities, if installation occurs before Phase 2 is activated.
Similarly, the company noted that the original farm-out terms would apply retrospectively if Phase 2 is triggered.
Hurricane chief executive Dr Robert Trice, in a statement, said: “These amendments to our arrangements with Spirit give us greater optionality relating to gas export, whilst preserving the carry value of the Spirit farm-in in the event that the GWA joint venture partners proceed with a GWA tie-back in the future.
"In addition, the Lancaster EPS is currently producing at 20,000 barrels of oil per day and I look forward to providing an update at the Capital Markets Day on 25 March 2020."
Centrica, in last month’s financial results statement, told its shareholders that it expects to receive initial bids for its 69% stake in Spirit by “around the end of the first quarter”.
Spirit produced around 45.8mln barrels of oil equivalent in 2019, down 2%. Aside from the Hurricane partnership, the company owns stakes in fields in both the UK and Norwegian North Sea.
"Good deal for both sides," says broker
In a note to clients, analysts at SPAngel commented: "Following a disappointing year with the drill-bit at the GWA in 2019, today’s update provides additional clarity on the forward plan for these assets.
"It is no secret that Centrica has put its 69% stake in Spirit up for sale as it pursues a greener portfolio, and a reduction in committed capital clearly makes this deal more attractive to potential buyers. For Hurricane, this firmly places the destiny of the GWA development in their hands, whilst retaining the optionality of the original farm-out agreement if fully developed past phase 2."
They added: "With the Lancaster EPS throwing off material cash flows stemming from an admirable 20kbopd production rate, Hurricane can comfortably meet the additional upfront costs, if required, without any dilution to shareholders (either asset or equity), and so we see this as a good deal for both sides."
In afternoon trading, shares in Hurricane Energy were 1.3% higher at 15.10p.
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