Tom Winnifrith focused on Hurricane Energy (HUR) in his Saturday bearcast, following a twitter exchange with a ShareProphets subscriber, with whom I have spent many a happy hour exchanging views on the investment case on the LSE asylum. Tom has invited him to write and publish his bullish views on the site – I fully support that; free speech and opposing views are the life blood of all investment case assessments. But there appears to be some confusion. Hurricane is NOT in my Vomit list of crap stocks, but it does sit in the reserve list for now. I think both Tom and the subscriber did not fully understand why I considered Hurricane worthy of a mention in my Vomit list review, and that says to me others may be equally confused. That merits clarification, and I am pleased to do so...
Let me first be very clear on Hurricane's positives. It has cash. It is generating cash. It is a real oil producing business. Having listed on AIM as effectively an explorer in 2014 that marks the company out as one of the very few oilers to have made the journey from potential to reality while being listed. That is to be celebrated – it gives hope to so many other investment cases! However, I have highlighted before the NPV10 of the Lancaster field Early Production System has been stated by the company at $525 million (at $60 base case oil price). This compares to an equity value of £650 million as I type (let's call that $850 million) plus convertible debt of $230 million. I would suggest that difference between $525 million and $1.08 billion is the opportunity value of the very substantial 3rd party certified oil resources the company has. To realise this value the company has to demonstrate the EPS can deliver as planned, and then either commercialise the remaining resource or sell to someone who can. The fundamental issue I have on realising that investment case starts from a rather technical but absolutely fundamental point. I do find it difficult to address technical aspects when I write a review. I know some readers understand exactly what I mean and if I posted 10 acronyms followed by = crap or good, that would convey the story! But equally other readers have to think back to “O” level science days, which can be rather painful. In my day job, when I write as an Engineer to my Clients (who are often either Engineers, or used to reading engineers reports), I have a relatively homogeneous reader base. I try to hit a balance when writing here. It’s a challenge sometimes to get my point across – and hope I do, at least most of the time.
The issue I see with Hurricane is the water cut. I reviewed this in December. The point is the Lancaster field is being produced from two wells. One well is producing water as well as oil – the other is fine. The company always expected to produce some water from trapped accumulations, but the % water in the one well is above expectation. There are broadly two explanations – the watery well has intersected a significant accumulation of trapped water within fissures (cracks) in the granite rock or it's drawing water directly from the underlying aquifer. A basement structure is different to a traditional sandstone structure – the oil sits in fissures in the rock, not within the rock itself. These fissures can be horizontal / vertical / inclined and filled with oil or water. These fluids flow into the well bore to be replaced with oil sitting lower in the structure, which in turn is replaced with water from the underlying aquifer. However, if the well bore (and bear in mind these are very long horizontal well bores) intersects a fissure that is directly connected to the aquifer, that refilling process can be short circuited – water flows via that fissure system to the aquifer in preference to oil more local to the well bore. That is a key risk of basement structures. Hurricane has always been clear that it has 3D seismic derived models of the basement structures. But models are just that – they are not reality. The Greater Warwick drills on the adjacent structures in 2019, funded by Spirit Energy cannot be viewed as great successes. That puts a question mark on the company modelling capabilities of the structures.
We have been told further and better information will be provided at the CMD on 25th March on this issue. I can see a number of outcomes on that day:
a. Evidence is provided that trapped water was the issue with the watery well. For example that the well has been put back on production and the water cut has reduced.
b. Acknowledgement that well is likely producing aquifer water and will be abandoned.
c. Something between the A and B above.
If the company cannot demonstrate the EPS NPV can be delivered to plan (which has always been based on the current well stock), then it puts a question mark over the EPS value, but more importantly over the opportunity value of the contingent resources. The fact the company has made reference to a potential further Lancaster well drilled this year makes me cautious. I called this a red or black stock in my Vomit List review. It could all come good, but if it does not, then I can see a massive share price fall to reflect the reality of the asset value, warranting the Vomit list back-up place. Hurricane could be heaved to Vomit status if the CMD update on 25th March it not very positive and clear. I wish all holders well, but I will not be joining them on the register at the current time.
Filed under: Hurricane Energy, Woodford, Wellesley Finance, Aston Martin, Asimilar, Carr's, AAOG
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