All of the focus has been on Hurricane Energy’s (HUR) Lancaster licence, and although its other assets looked very good I wasn’t expecting further progress quite so quickly. A few weeks back I gave an update on this UK-focussed oil company, which I have been a fan of for several years, as it is now getting close to going into production at Lancaster and 17,000bopd is anticipated to start flowing at some point during the first half of 2019. In the piece I mentioned the potential of its other assets, such as Lincoln and Warwick, which are still at an earlier stage, and I wasn’t really expecting a farm-in to come out of the blue quite so soon.
Earlier this week Spirit Energy completed a farm in to 50% of Lincoln and Warwick, and committed to a free carry of up to $387 million. This would see the development of these fields, which are classed as the Greater Warwick Area, happen far more quickly than had been expected had they remained under the sole ownership of Hurricane. The deal gives Hurricane a free carry for a three well programme next year to further explore and appraise the prospects – Lincoln already has booked contingent resources in excess of 600 million barrels and Warwick is considered to be an extension of this field and, although at an earlier stage, it has best case prospective resources of 935 million barrels, and a very high Chance of Success for an exploration drill, coming in at 77%. This work is expected to cost around $180 million and won’t cost Hurricane a penny.
If all goes to plan then the deal also sees Hurricane covered for around $94 million to tie back a well to its Aoka Mizu FPSO (floating production, storage and offloading) vessel which is being used at Lancaster, and in turn would connect it to the West of Shetland pipeline. First oil would be expected sometime in late 2020, with around 10,000bopd being produced from a single well initially, and at that point reserves are expected to be in the region of 500 million barrels, having been converted from contingent resources. Spirit Energy will also be contributing at least $150 million to the eventual full field development, should that stage be reached.
Some might argue that 50% of the licences are being given away relatively cheaply considering how many barrels of oil are potentially there, but I think the deal looks good and an accelerated programme will be of far more benefit to the company than potentially waiting years before doing anything itself with these licences, in terms of going into production, as it has already had to raise large amounts of capital for Lancaster. This deal will also now allow Hurricane to use the profit from its Lancaster operation to fund further work there, and potentially see further development at that field accelerated as well. As for Spirit Energy, the deal will give this company the extra reserves/resources that it needs to replace what is currently being produced, as this year it is expected to produce around 50mmboe from its 28 fields.
The share price here now isn’t much higher than when I recently covered the company - currently around 53p - and the market cap is a little over £1 billion, which may seem expensive for a company that currently has zero production. But what you are buying here is a company which is going to be producing very significant amounts of oil in the near future, and probably even more so now than originally expected - and that has further strengthened my buy rating on this stock at these levels.
Filed under: Hurricane Energy, Reabold, WPCT, Neil Woodford, Breedon, Velocity Composites, Obtala
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