Extending Lancaster along the Rona Ridge

Hurricane has committed to drilling two further exploration wells with the Transocean Spitsbergen, taking advantage of what could potentially be bottom-of-the-cycle rig costs. The two-well programme is targeting delineation of the Greater Lancaster Area (GLA) through drilling of the Lincoln and Halifax prospects. Lincoln (205/26b-A) was spud on 9 November and is to be immediately followed by Halifax, with each well taking approximately 40-45 days to reach target depth.

The Lincoln exploration well (205/26b-A) is targeting a Lancaster analogue 9km to the south-west and separated from Lancaster by a sealing fault. Hurricane’s seismic interpretation of Lincoln indicates a well-connected fault network partially de-risking reservoir. In addition, the 205/26-1 well drilled by Arco in 1975 on the down-dip flank of Lincoln discovered traces of oil in sandstone just above basement, de-risking source. Key outstanding prospect risks include trap and seal effectiveness above and below mapped closure. For the basement section, Hurricane proposes the overlying mapped Rona Sand spill point at 2,135m TVDSS, which is supported by oil bleeding from cores of the 205/26-1 well at 2078m TVDSS.

Oil quality at Lincoln is expected to be marginally heavier than at Lancaster as charge is modelled from multiple source kitchens. RPS believes that Lincoln may have received equal charge from the Faroe-Shetland and Back Basin source rocks, giving a co-mingled Lincoln oil density of 30-40°API; this compares to 36-38° API for Lancaster.

Hurricane’s 2013 CPR estimated Lincoln P50 prospective resource at 150mmbbls; however, Hurricane believes that if a continuous oil column can be proven at Lincoln, following the success at Lancaster, and oil down to (ODT) can be located below 2,135m TVDSS, as per Hurricane’s internal prospect model, P50 prospective resource for Lincoln could be up to 250mmbbls.

In our analysis, we assume a 250mmbbl oil prospect with geological probability of success (GPoS) of 25% and commercial chance of success (CCoS) of 15%.

Hurricane was awarded the P2308 licence by the Oil and Gas Authority (OGA) in an out-of-round application in November 2016. Halifax has been de-risked by the Lancaster pilot well (205/21a-7), which encountered a minimum oil down to (ODT) of 1,620m TVDSS, indicating that the oil accumulation is likely to extend beyond the Lancaster block boundary. In addition, source is de-risked at Halifax by the 205/23-2 well, which encountered oil and gas shows in sandstones immediately above basement, as well as oil in basement cuttings. Seismic interpretation indicates a well-defined fault network in the fractured basement, analogous to Lancaster. Key remaining risks include effectiveness of trap and seal below structural closure.

Hurricane has not provided a specific P50 prospective oil volume for Halifax, although management has indicated pre-drill volumes across the two prospects, Lincoln and Halifax total over 500mmbbls P50. We assume Halifax that holds a pre-drill unrisked prospective volume of 250mmbbls gross. We assume the prospect is marginally lower risk than Lincoln based on the Lancaster spill point and lack of sealing fault interpreted between the two structures. We assume a GPoS of 30% and CCoS of 18%. Clearly, there is significant upside to our resource estimates if well results prove a continuous oil column extending from Lancaster through to the Halifax well location along the Rona Ridge.

As mentioned in our last note, Confirming oil below structural closure, published on 19 September 2016, we currently assume P50 recoverable gross oil volumes at Lancaster of 300mmbbls. This is Edison’s estimate and we expect to have further certainty on mid-case recoverable volumes on publication of Hurricane’s updated Lancaster CPR in H117.

We make several changes to our valuation of Hurricane to reflect the company’s fund-raise, announced on 20 October 2016. Use of proceeds includes drilling two additional exploration wells: Lincoln and Halifax, which we include as risked prospective resource.

On 20 October 2016, Hurricane Energy announced that it had conditionally raised £70m through the issue of 205.9m new shares at 34p/share, with support from existing shareholders including Kerogen and Crystal Amber. In addition to the placing, an open offer to qualifying shareholders is expected to raise a further £4.4m.

While the placing price of 34p/share is at a material discount to our last published RENAV of 73p/share, it provides Hurricane with the capital to pursue two material exploration prospects using the Transocean Spitsbergen, which is currently on location.

Proceeds are to be used to drill the Lincoln and Halifax exploration wells and provide capital to purchase long lead items for the Lancaster EPS. Capex to first oil for the Lancaster EPS is estimated at $400m, with final investment decision expected in H117 and first oil targeted for H119 and timing contingent on funding and FPSO contract.

Hurricane’s cash pile, post fund-raise, should enable it to complete both the Lincoln and Halifax exploration wells and provide for long lead items towards the EPS phase of development. However, further funds will be required for EPS development, with capex to first oil estimated at $400m gross. We understand that Hurricane is looking at a number of funding options including farm-out, construction bonds, oil pre-payment facilities, equity and possibly a combination of these sources of capital. In our analysis, we assume Hurricane farms out for a cost carry in the EPS phase and is able to access $250m of net RBL debt for full field development. Total Lancaster gross capex before first oil is estimated at $3.1bn or $10.3/bbl.

We understand that Hurricane continues to negotiate heads of terms for an FPSO for the EPS phase of development and expect news on progress shortly. We expect lease terms to be favourable in the current market environment.

We have updated our risked NAV to reflect the dilutive impact of Hurricane’s recent fund-raise (relative to our RENAV), as well as including the offsetting impact of value for risked prospective resource at Lincoln and Halifax. Our valuation for Lancaster remains on the basis of 300mmbbls of gross recoverable oil and we assume a farm-down of EPS and full field development, with a farminee generating a 25% point-forward, post-carry IRR. Working interest and per-barrel values shown below include the impact of farm-out and cost carry for Lancaster.

Our financial forecasts incorporate Hurricane’s fund-raise and capex associated with drilling Lincoln and Halifax, as well as the acquisition of long lead items for Lancaster EPS development. Our FY16 estimates include capex of £86.1m, which we expect to be funded from existing cash resources. Funding will be required to progress the EPS phase of Lancaster in 2017.