I’ve just been pulling together my simplistic view of figures ahead of the pending CPR and with 14-18 months to run until the window in which the Lancaster EPS might achieve first oil (H1 2019, though Xmas 2018 also possible).
========NOW=======
To my mind the situation now is best set out in this table:
Table 1Code: Select all
| MMboe | Cat | $/bbl | $mln
Lancaster - FFD | 529 | 2C (50%) | $ 1.00 | $ 529
Lancaster - EPS | 62 | 2P (50%) 10yr | $ 5.00 | $ 311
Halifax | 400 | guesstimate | $ 0.01 | $ 4
Lincoln | 250 | 2C | $ 1.00 | $ 250
Warwick | 400 | guesstimate | $ 0.01 | $ 4
Whirlwind | 117 | 2C | $ 0.50 | $ 59
Strathmore | 182 | P50 | $ 0.01 | $ 2
Tempest/Typhoon | 1,307 | P50 | $ 0.01 | $ 13
Subtotal | 3,247 | | | $ 1,171
Re volumetrics : I am using the latest 50/50 numbers wherever I could find them. For the Lancaster field I have split it into the volume attributable to the FFD and the separate volume attributable to the EPS. The Halifax and Warwick 50/50 resource numbers are pure guesstimates but I do assume an equivalent situation to that fairly optimistically hypothesised so far. Trying to be accurate is not really the point of this exercise. (If you have a better opinion than mine please speak up).
Re pricing: The $/bbl numbers I have used are just my opinion.
Re adjustments: In the simplistic view I make no adjustment for balance sheet cash, oil price, or for any other factors such as asset values, cash for options, interest payments, liabilities, etc. Then I take the fully diluted number of shares as best I can find:
Table 2Code: Select all
issued shares (mln) | 1,959
convertible bonds (30 06 17) | 442
future options | 0.9
Fully diluted (mln) | 2,402
Dividing the two numbers gives $0.49 per share and using USD/GBP of 1.30 gives
£0.37 per share. As I write the market is at £0.29 per share so not hugely different.
=======NEXT CPR END 2017========
The coming CPR may or may not make a difference to the volumes and valuations ascribed. We’ll see.
=======EPS etc LATE 2019=========
Following that (and ignoring any farm-in outcomes) the next major step is for the EPS to be operating, and I am assuming that the contracted rig does two other jobs at the same time. Firstly renter Halifax for a DST and OWC determination. Secondly drilling Warwick and a DST. I assume they can be done out of spare change so this is an operationally optimistic case. Assuming success in all three then the (late) 2019 picture might become:
Table 3Code: Select all
| MMboe | Cat | $/bbl | $mln
Lancaster - FFD | 529 | 2C (50%) | $ 5.00 | $ 2,645
Lancaster - EPS | 62 | 2P (50%) 10yr | $ 14.65 | $ 910
Halifax | 400 | guesstimate | $ 0.50 | $ 200
Lincoln | 250 | 2C | $ 1.00 | $ 250
Warwick | 400 | guesstimate | $ 0.50 | $ 200
Whirlwind | 117 | 2C | $ 0.50 | $ 59
Strathmore | 182 | P50 | $ 0.01 | $ 2
Tempest/Typhoon | 1,307 | P50 | $ 0.01 | $ 13
Subtotal | 3,247 | | | $ 4,278
This time the EPS valuation goes up to $14/bbl which is my discounted view of a 10-yr life one year into the future using a 10% rate and $25/bbl margin. Again your view may vary but I am trying not to overcomplicate. I am assuming success at Halifax and Warwick to bring these to $0.50 valuations.
In this case the EPS is paying the bills but to balance out some of my optimism I don’t take into account any cash generation.
With no new shares needing to be issued this leads to $1.78/share and
£1.37/share as a reasonable aim point in late 2019. If the market prices in success early then it could overshoot but that would be before EPS results had become available – the more oil that comes out the better the available dataset becomes for reservoir analysis purposes (i.e. RF%).
========FFD APPRAISAL 2021 ======
It will not have escaped anybody’s attention that in the case where the entire Rona Ridge area of GLA + GWA is oil full then this is a Brent or Forties scale reservoir. That would imply several $bn of capex, maybe 50-100+ wells, and three or four (jacket) facilities.
I’m ignoring gas handling issues as this looks to be in the sweet spot GOR-wise, so no export pipeline (Whirlwind may be gassy, and there is a hint of a possibility of a gas cap on the top of Halifax btw). The tilted OWC hypothesis tends to indicate a good aquifer underlying everything, so that eases reservoir development if it proves out.
Nonetheless the optimal pathway to develop that is non-trivial to figure out but at the very least involves a serious appraisal campaign. Sketching out a possible sequence that aims to as rapidly as possible prove up value for HUR shareholders gives the following with about four more wells.
Table 4Code: Select all
| MMboe | Cat | $/bbl | $mln |
Lancaster - FFD | 529 | 2C (50%) | $ 5.00 | $ 2,645 | needs an FFD design and an EPS to prove up
Lancaster - EPS | 62 | 2P (50%) 10yr | $ 14.65 | $ 910 | needs the EPS to work
Halifax | 400 | Guesstimate | $ 5.00 | $ 2,000 | needs an EWT of the X-well to prove up, plus one or two A-wells
Lincoln | 250 | 2C | $ 5.00 | $ 1,250 | needs a well tieing in to the EPS to prove up
Warwick | 400 | Guesstimate | $ 5.00 | $ 2,000 | needs an X-well and an X-EWT
Whirlwind | 117 | 2C | $ 1.00 | $ 117 | likely gassy; when is latest drill-by-date ?
Strathmore | 182 | P50 | $ 0.01 | $ 2 | useful chip
Tempest/Typhoon | 1,307 | P50 | $ 0.01 | $ 13 | needs to be drilled in 2018 to hold
Subtotal | 3,247 | | | $ 8,936 |
The above can be done by an EPS at the current location I think, but that’s just an opinion. It would require tying back the Lincoln well to the EPS and likely backing out Lancaster to get capacity, but that’s exactly what this EPS-FPSO is for. Maybe even a Warwick well tie back but I am assuming just a EWT on the X-well.
Re Halifax it is too far to get tied back, so I am assuming just an EWT and then one or two appraisal wells down the ridge.
Since in the success case the EPS is generating $310m/yr the above campaign could be funded without external resources. So no need to accept more dilution through share placements or a farm-in.
The biggest constraint in the above is the capacity of the subsurface team to process the data. I am assuming a single rig for this reason and that leads to a late 2021 outcome, i.e. approx. four more wells post 2019, or six more well entries post now.
That in turn leads to a highly optimistic valuation
in late 2021 of $3.72/share or
£2.86/share.
========= FARM-IN========
I have lots of opinions on farm-ins and the dynamics in play, but the above gives an indication of why the HUR management team are well-placed to play hard-ball over valuations. Basically it shows that HUR can take this through to the gates of a FFD on their own, and maybe even with no further dilution. If the majors won’t want to pay-to-play then there are ways of doing this without a major being involved. It would not be ideal, but it can be done.
There is for example the option of some time in (say) 2020 seeking a 100,000 bbl/d full-size FPSO on the market (at about $1bln) and placing her where the EPS-FPSO is destined, By then that location would have four wells available to produce (maybe more) and some more wells added. The EPS-FPSO could be shifted north to fully appraise Halifax. Whilst that was chugging away the FFD could be properly optimised and funded with a decent dataset, using the normal oilpatch contractors. It would likely take a non-conventional contracting approach but people are up for that these days. There are other ways. The point I am making is that there is a reasonable risk pathway that can be pursued that prevents the majors forcing a low-ball valuation onto HUR. Having enough, but not too much, gas greatly helps HUR’s hand as there is less exposure to an export gas line to force capex upfront.
All this assumes the success case and 50/50 volumetrics. Clearly that is not the only possible outcome. More and less are both possible pathways. As the data comes in over the next few years we will be able to revise the analysis.
========CURRENT SHARE PRICE ========
The 29p/share today is not irrational. A higher one at this point can be defended, or post-CPR, but are not necessarily correct. The same assumptions that can make a 29p rational now can make far higher ones rational looking forwards. It's a fun game to play isn't it !
Please excuse formatting, but must catch a plane so no time to tidy up further. It is a long flight .........
regards, dspp
[edited 28/10/17 to insert table numbers]