Regular readers of ShareProphets will know that I am usually very wary of any natural resources company that isn’t actually producing anything, especially if they are valued in the hundreds of millions. So, it may surprise you to hear that I am still a big fan of Hurricane Energy (HUR) – a company that I have been bullish on since before the first drill at its Lancaster licence in the West of Shetland area, off the UK coast. Currently the shares are trading at around 50p and that gives it a valuation of circa £976 million, yet at the moment it isn’t actually producing any revenue. Now before you think that I have gone mad, I believe this company to be very different to the vast majority out there and think that the valuation is justified if we consider the future potential here.
This is a very different proposition to some of the other explorers that have found large amounts of oil, but often in parts of the world where there is little if any existing infrastructure, and currently have no way of financing the route to production. Hurricane is well beyond that stage, as it has already raised $520 million via equity and convertible bond issues, and that is enough to take it through to first oil, which is expected in the first half of 2019, and initially it is expecting to produce 17,000bopd. It is also well worth remembering that it is operating in an area where a number of majors already have producing fields, and has also achieved its reserves and flows from a part of the geological structure that has often been largely over-looked, and it is the vision of founder and CEO Dr Robert Trice that has got it to this stage. I’ve been very impressed with just how quickly they have gone from the initial discovery and flow tests to installing an early production system.
Once it does begin to produce it is expected that operating cash flow will be well in excess of $200 million per annum – those estimates have been based on a Brent price of just $60/barrel, so are very conservative ($70/barrel comes in around $272 million, from revenue of $407 million). And that is just from the first phase of development, with ultimately far higher daily production expected in the future once the data from the early production system has been assessed. There is still some risk involved at this stage, as the early production system does need to show that production can be expanded significantly – exporting the gas produced has the potential to take this to 30,000bopd - and also that the life of the field extends well beyond the six years under the current model. The latter is where the big shift from contingent resources to reserves will come into play, with 2C of 486 million barrels and 2P of just 37.3 million barrels currently – any extension to field life starts to add significant amounts to actual reserves. It isn’t all just about Lancaster either, as drilling at its Halifax licence also found significant amounts of oil and the latest estimate is for 2C of 1.235 billion barrels, along with 2C of over 600 million barrels at Lincoln, which it has also successfully drilled. That means that in total the company is sat on around 2.6 billion barrels of 2C and 2P reserves and resources.
Some though clearly think that the shares are overvalued, and there are shorts of around 2% that are above the notifiable threshold, but I suspect there are also others that fall below the 0.5% level. Personally I find it hard to see where the value is in shorting this, barring some sort of disaster or delay to production, and I also see a very good chance of one of the majors, such as BP, at the very least partnering on the future development – Hurricane would be in a very strong negotiating position – or even attempting to buy the asset outright.
I also think that Robert Trice would be very happy to realise a fair amount for the asset and then moving on to further proving up the other licences which are still at an earlier stage, given what has already been discovered there. I last covered this company back in early April when the share price was around 35p and, despite the big rise since then, I would still maintain a conviction buy here. The only thing that would make me change that opinion, barring any unexpected bad news specific to the company, is a collapse in the oil price, which I don’t see coming any time soon.
Filed under: Hurricane Energy, Bearcast, Marc Cohodes, Volution, disclosure, Pathfinder Minerals, Brexit
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