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Lancaster EPS funding in place

Hurricane Energy 4 July 2017 Update
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Hurricane Energy

Lancaster EPS funding in place

Fundraising

Oil & gas

4 July 2017

Price

32.50p

Market cap

£399m

Net cash (£m) at 31 December 2017e

235m

Shares in issues post fundraise

1,959m

Free float

53%

Code

HUR

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(28.2)

(42.7)

91.5

Rel (local)

(26.1)

(42.9)

68.2

52-week high/low

67.0p

16.0p

Business description

Hurricane Energy is an E&P focused on UKCS fractured basement exploration and development. It owns 100% of the 523mmbbl (RPS 2P reserves plus 2C resources) Lancaster oil discovery, West of Shetland.

Next events

CPR

H217

Project sanction/FDP

Q317

Analysts

Sanjeev Bahl

+44 (0)20 3077 5742

Elaine Reynolds

+44 (0)20 3077 5713

Hurricane Energy is a research client of Edison Investment Research Limited

Hurricane has provisionally raised up to $535m through a $300m equity placing (plus $5m follow-on offer) and a concurrent $220m (with $10m over-allotment) convertible bond offer. Equity is being placed at a price of 32p/share while the convertible offers investors a 7.5% coupon and conversion price of 40p/share – a 25% premium. We had assumed EPS funding in our valuation with an approximate 60/40 equity/debt split (see our May Outlook note); confirmation of funding should provide increased confidence in Hurricane’s ability to keep to a H119 first oil target. The fall in Hurricane’s share price over the last two months has led to greater dilution than we had previously anticipated with Edison’s Lancaster NAV falling from 102p/share to 81p/share (c 21%) assuming convertible dilution.

Year end

Revenue
(£m)

PBT*
(£m)

Capex
(£m)

Net cash**
(£m)

Debt
(£m)

12/15

0

(5.5)

(3.4)

9.9

0.0

12/16

0

(4.7)

(46.8)

82.2

0.0

12/17e

0

(5.7)

(72.1)

235.2

(175.8)

12/18e

0

(18.1)

(140.2)

77.0

(175.8)

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Dilutive impact of equity and bond placing

Our updated NAV includes the dilutive impact of Hurricane’s equity and bond placing announced on 30 June 2017. We assume that a $10m bond over-allotment option is exercised and an additional $5m follow-on offer is completed successfully. The net result (alongside some modest changes to our FFD farm-out assumptions accounting for +4p/share) is a reduction in Lancaster NAV from 102p/share to 81p/share. Greater Lancaster Area (GLA) RENAV, including Halifax and Lincoln moves to 104p/share from 134p/share.

Activity expected in 2017/18

While Hurricane has concluded its 2016/17 exploration and appraisal campaign, we expect activity to centre on the Lancaster EPS final investment decision (FID), and the publication of a CPR encompassing Halifax and Lincoln, which is now expected towards the end of 2017. Farm-out discussions are likely to continue ahead of Lancaster EPS first-oil, a requirement to drive forward the Greater Lancaster Area appraisal and full-field development (FFD). We estimate that Hurricane will need to release a 51% equity interest in Lancaster in order to provide a farminee a 20% return at $70/bbl long-term Brent while providing Hurricane with a full cost carry.

Valuation: oil prices weigh on sector

Recent oil price and share price volatility has not helped limit funding dilution, and one could expect full field development farm-out terms to be more onerous than we describe above if oil prices remain in-line with the current forward curve. Assuming static farm-out terms, our Lancaster NAV is 69.9p/share at 60$/bbl and 58.4p/share at $50/bbl Brent.

Valuation update

Hurricane Energy RENAV and oil price sensitivity

Our Hurricane RENAV is provided below, split into a core valuation, which includes the Lancaster EPS development (based on a 10-year field life), contingent upside for Lancaster full field development and prospective upside for Halifax and Lincoln. The net cash included in our valuation is post the fund raise and excludes Hurricane’s convertible bond which we include in our diluted share count (ie assumes conversion at 40p/share). We assume full field development is funded via farm-down. We have modified our farm-out model from our last published note, reducing the required farminee unrisked IRR from 25% to 20% at $70/bbl Brent adding 4p/share to our Lancaster NAV. Post the delivery of a successful EPS development phase, we believe potential farminees will have greater confidence in FFD P50 returns and will be prepared to accept farm-in economic terms more in-line with that implied by recent sector transactions at 20% IRR.

Exhibit 1: Implied farminee/buyer IRRs from recent sector transactions

Source: Edison Investment research

Our relatively conservative assumptions with regard to capex cost and project timing remain unchanged from our last published note – here we assume an additional 10% cost contingency (which we expect to ‘release’ closer to first oil) and a first oil of early 2020.

Due to the effects of dilution and modest changes to our farm-out model, our Lancaster NAV falls by c 21% from 102p/share to 81p/share and our RENAV including Lincoln and Halifax upside falls by c 23% from 134p/share to 103p/share.

Exhibit 2: Hurricane Energy valuation summary (NPV12.5)

Recoverable reserves/resources

Net risked

Value per share

Asset

Country

Diluted WI

CCoS

Gross

Net

NPV/boe

value

risked

Number of shares: 2,398m*

%

%

mmboe

mmboe

$/boe*

$m

p/share

Net (debt)/cash end FY17 ex convert (assumed conversion)

100%

100%

586

19

SG&A (2 years)

100%

100%

(15)

(1)

Lancaster EPS - 10y

UK

100%

90%

62

62

11.4

635

20

Core NAV

 

 

 

 

 

 

1,205

39

Contingent

Lancaster FFD (post-EPS)

UK

49%

73%

462

226

7.9

1,310

42

Contingent RENAV

 

 

 

462

226

 

1,310

42

Lincoln

 

49%

48.8%

250

123

6.1

365

12

Halifax

 

49%

45.0%

250

123

6.1

337

11

Total inc exploration RENAV

 

 

 

962

471

 

3,218

103

Source: Edison Investment Research. Note: NPV/boe assumes a farm-out will be full capex carry for Hurricane. FX $1.3/£. *Assuming convertible as equity.

At this stage, we do not include value from other discoveries and prospects, as there is no clarity on when appraisal/exploration wells will be drilled and/or funded. Assuming the market is not including value for assets beyond Lancaster, we believe the share price embeds an oil price below c $40/bbl long-term Brent; however, we believe a Lancaster FFD development farm-out would be more challenging and onerous for Hurricane shareholders than we forecast if conducted based on project economics below $50/bbl.

See further detail on EPS development project economics in our note Big fields get bigger -523mmbbls and counting published on 16 May 2017.

Exhibit 3: Edison RENAV sensitivity to oil price*

Source: Edison Investment Research. Note: *Assumes farm-out economics at $70/bbl long term for all cases.

Risks and sensitivities

Hurricane is subject to several sector-specific and company-specific risks. We highlight the key risks below.

Sector risks

Generic sector risks include:

commodity price volatility,

geological risk and uncertainty and reservoir performance uncertainty;

recent studies on project execution in the upstream oil and gas sector suggest that up to 60% of projects incur delays and capex overruns versus FID expectations;

small/mid-cap availability of funding: while we include the potential dilutive impact of equity funding and farm-outs in our valuation, if the cost of capital implied by equity financing or farm-outs is higher than our estimates, this would lead to additional equity NAV/share dilution; and

volatility in service sector availability and pricing.

Company-specific risks

Asset concentration: the bulk of Hurricane’s value is based on one large asset. If this asset were to be impaired for any reason, it would have a material impact on Hurricane’s share price.

Geographical concentration: Hurricane is 100% exposed to the UKCS and petroleum fiscal terms, which have been volatile over the last decade. While tax terms and capital allowances are currently favourable versus other mature basins, there is no certainty that these will not change if oil prices were to rise significantly from current levels, potentially reducing equity holder leverage to a rising oil price.

Funding risks: Hurricane is reliant on being able to attract additional capital to progress the Lancaster EPS and FFD and as such valuation will be sensitive to the financing availability and terms.

Financials

Financial forecasts for Hurricane incorporate Lancaster EPS first oil in 2020.

Earnings and cash flow

Earnings are limited prior to Lancaster EPS first oil; however, we expect to see a material step-up in both earnings and operating cash flow beyond this date. Free cash flow will depend on Hurricane’s funding structure for FFD – we currently assume Hurricane farms down its 100% equity in Lancaster to a partner (assuming farminee 20% IRR) and is cost carried through to FFD first oil.

Balance sheet

The forecast evolution of Hurricane’s balance sheet includes equity and debt funding for the EPS phase of Lancaster development as announced on 30 June 2017. Capex beyond Lancaster EPS is minimal as we assume Hurricane is fully carried post farm-down for full-field development (in exchange for reduced working interest). We expect Hurricane to select a capital structure that management believes will maximise shareholder returns.

Exhibit 4: Financial summary

 

 

£000s

2015

2016

2017e

2018e

2019e

Year end December

 

 

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

0

0

0

0

0

Operating Expenses

(5,366)

(6,500)

(7,230)

(7,230)

(7,230)

EBITDA

 

 

(5,366)

(6,500)

(7,230)

(7,230)

(7,230)

Operating Profit (before amort. and except.)

 

(5,448)

(6,540)

(7,325)

(7,325)

(7,325)

Exploration expenses

0

0

0

0

0

Exceptionals

0

0

0

0

0

Other

0

0

0

0

0

Operating Profit

(5,448)

(6,540)

(7,325)

(7,325)

(7,325)

Net Interest

(75)

1,839

1,598

(10,808)

(11,238)

Profit Before Tax (norm)

 

 

(5,523)

(4,701)

(5,727)

(18,133)

(18,563)

Profit Before Tax (FRS 3)

 

 

(5,523)

(4,701)

(5,727)

(18,133)

(18,563)

Tax

0

5,365

0

0

0

Profit After Tax (norm)

(5,523)

664

(5,727)

(18,133)

(18,563)

Profit After Tax (FRS 3)

(5,523)

664

(5,727)

(18,133)

(18,563)

Average Number of Shares Outstanding (m)

632.2

889.5

1,568.5

1,959.2

1,959.2

EPS - normalised (p)

 

 

(0.9)

0.1

(0.4)

(0.9)

(1.0)

EPS - normalised and fully diluted (p)

 

(0.9)

0.1

(0.4)

(0.9)

(1.0)

EPS - (IFRS) (p)

 

 

(0.9)

0.1

(0.4)

(0.9)

(1.0)

BALANCE SHEET

Fixed Assets

 

 

176,231

247,621

319,661

459,731

646,890

Intangible Assets

176,012

245,146

245,146

245,146

245,146

Tangible Assets

89

15

72,055

212,125

399,284

Investments

130

2,460

2,460

2,460

2,460

Current Assets

 

 

10,771

86,152

414,977

256,774

51,052

Stocks

410

359

359

359

359

Debtors

420

5,893

5,893

5,893

5,893

Cash

9,941

79,900

408,725

250,522

44,800

Other

0

0

0

0

0

Current Liabilities

 

 

(271)

(21,341)

(21,341)

(21,341)

(21,341)

Creditors

(271)

(21,341)

(21,341)

(21,341)

(21,341)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

 

(3,221)

(4,829)

(180,648)

(180,648)

(180,648)

Long term borrowings

0

0

(175,819)

(175,819)

(175,819)

Other long term liabilities

(3,221)

(4,829)

(4,829)

(4,829)

(4,829)

Net Assets

 

 

183,510

307,603

532,649

514,516

495,953

CASH FLOW

Operating Cash Flow

 

 

(2,558)

(4,115)

(5,632)

(18,038)

(18,468)

Net Interest

0

0

0

0

0

Tax

0

0

0

0

0

Capex

(3,407)

(46,773)

(72,135)

(140,165)

(187,254)

Acquisitions/disposals

0

0

0

0

0

Financing

22

121,338

230,772

0

0

Dividends

0

0

0

0

0

Net Cash Flow

(5,943)

70,450

153,006

(158,203)

(205,722)

Opening net debt/(cash)

 

 

(15,856)

(9,941)

(82,230)

(235,236)

(77,033)

HP finance leases initiated

0

0

0

0

0

Other

28

1,839

0

0

0

Closing net debt/(cash)

 

 

(9,941)

(82,230)

(235,236)

(77,033)

128,689

Source: Company accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Hurricane Energy and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Hurricane Energy and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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