Hurricane Energy (HUR)

[dspp]

Are the BB crowd large enough to lift the price ? Wouldn't CA selling be enough to depress the price ? Has something changed ?

[PeterGray]

I'm as keen to see the CPR as anyone - and it will certainly help to raise the profile of the assets a bit. Bit I'll be very surprised if the figures differ very much from the company's own recent guidance - which I think is going to be a disappointment to some, for example over on ADVFN, who seem to be expecting something covering the whole GLA, and offering massive upgrades.

Peter

[Rhomboid1]

I'm not sure what occurred yesterday but my guess is something material shifted & somebody acted on it, then a load of exciteable folk jumped aboard & compounded the rise, all noise the CPR should arrive next week, but in guessing mode I reckon it'll have a material change in RF that might surprise ..we will soon see!

[dspp]

I agree that whatever it was would have been amplified for all the obvious reasons. But what was material that moved ? How did they know about it ? Was it real or was it a shadow ?

regards, dspp

[Rhomboid1]

All guessing but there are a lot of people privy to market sensitive data, it only takes one of them to be indiscreet after a beer or 3 , my sense is that biggest upside surprises rarely come completely unforeshadowed...I'm obviously in the realm of positive cognitive bias so you're best ignoring me

[dspp]

CPR here now https://otp.tools.investis.com/clients/ ... sid=869800

· Best estimate recoverable volumes of 523 million barrels of oil, an increase of 162% compared to the 2013 CPR 2C contingent oil resource figure
· 2P reserves of 37.3 million barrels of oil attributed to the initial six-year period of the planned Early Production System ("EPS") at Lancaster
· The remaining 484 million barrels are classified as 2C Contingent Resources as 'Development Unclarified or On Hold' whilst the EPS assesses full field development potential
· Should Hurricane extend the EPS to ten years, 2P reserves volume would rise to 62.1 million barrels
· Best estimate of oil in place of over 2.3 billion barrels of oil, an increase of 120% compared to the equivalent 2013 CPR figure
· An NPV of $525 million is attributed to the 2P reserves for a six-year EPS at a 10% discount rate

[dspp]

I'm a geoscientist. I have not seen inside any data room, but I have read the CPR thoroughly and can understand the issues discussed therein.

Nimrod,
I expect you are reading the updated Lancaster CPR. Section 7.4 sets out their view on the contacts. Any comments ?
regards, dspp

[StepOne]

Their oil price predictions seem a bit optimistic. Looking out to 2030, year-by-year, they have the following US$ prices;

50.50
56.00
58.30
61.60
65.70
71.80
75.20
78.90
83.87
85.63
87.42
89.25
91.12
93.02

From that they get a NAV of US$525m for the EPS. Doesn't seem a great return if it costs $400m, or (stupid question time), does the NAV already take account of the EPS costs?

Thanks,
StepOne

[PeterGray]

The NAV is NET - so yes it includes EPS costs. Also the CPR figure quoted assumes a 6 year production time scale for the EPS - on the assumption they would be moving towards FFD by then. If it runs it's full possible course of 10 years the NAV is a lot higher.

The real purpose of the EPS is, of course, not to produce revenue, but to show the world that HUR has other options than farming out/selling out cheaply at this stage. It allows them to say they are going to create revenue for themselves and at the same time provide additional proof of concept for the fields, which should increase the final take out price. I will not be surprised if HUR never develops the EPS, I'd expect the primary intended route to value maximisation involves moving getting a decent price for the asset before then.

Peter

[PeterGray]

I'm also not sure I agree that the PoO forecasts are that optimistic. They certainly have a large degree of uncertainty in them, but they are probably a reasonable start point. There is a shortage of large projects coming on stream in future years, and though shale will have an impact unless it spreads significantly outside of the US the gains in supply from there are unlikely to prevent demand building against supply over the next decade.

It's also worth looking at table 9.4.1 in the full report: https://www.hurricaneenergy.com/~/media ... Issued.pdf

which gives the NAVs for the low, mid and high PoO cases, they assume $345m nav 2p at 10% dr for their low case - which assume mean PoO of $35bbl for 2017 rising to $73 by 2030, which seems reasonably conservative to me.

Peter

[Nimrod103]

I'm a geoscientist. I have not seen inside any data room, but I have read the CPR thoroughly and can understand the issues discussed therein.

Nimrod,
I expect you are reading the updated Lancaster CPR. Section 7.4 sets out their view on the contacts. Any comments ?
regards, dspp

I have a quick scan of the reservoir section. There is obviously uncertainty in the contact. The MDT plot is interesting - I am surprised they got data in the oil column because it requires the probe to actually sit on a fracture, but the water line is completely hypothetical, so is the contact based on the intersection of the two gradients. My principle worry remains how they estimate and distribute porosity - a worrying lack of hard data from core analysis to back up the log analysis. Log analysis (on its own) of fractured reservoirs has a tendency to be along the lines of 'How much porosity do you want there to be?' cf what has happened recently with TaqTaq reserves.

[HaiderAli]

The real purpose of the EPS is, of course, not to produce revenue, but to show the world that HUR has other options than farming out/selling out cheaply at this stage. It allows them to say they are going to create revenue for themselves and at the same time provide additional proof of concept for the fields, which should increase the final take out price. I will not be surprised if HUR never develops the EPS, I'd expect the primary intended route to value maximisation involves moving getting a decent price for the asset before then.

Peter

Working off their CMD presentation, they'll be making a final decision about the EPS by the end of Q2 2017. They've said that they are looking at a range of funding options. If a farm-in is not agreed by that date, it'll be equity and debt.

My assumption has always been that a blue-chip farminee will bring such credibility to the party that the negative impact on us will be less than if HUR have to pursue the other two options.

So if they don't get that farminee or an an asset sale (as you seem to be suggesting) before the end of June, the share price could get a bit weak.

[dspp]

1. A bunch of warrants, about £14m: http://www.investegate.co.uk/hurricane- ... 05049389E/

2. That's a reminder that there is more than one way to fund an EPS. Unusually this minnow is not strapped to a barrel and gasping for cash.

3. By the way constructing a farm-in on just Lancaster for a major would be difficult as it would require a unitisation clause to be inserted re Halifax. So I am more inclined to the view that a investment by a non-oil source, or a debt+equity deal, is more likely. But whatever comes I am sure it will be worked through carefully.

regards, dspp

[PeterGray]

3. By the way constructing a farm-in on just Lancaster for a major would be difficult as it would require a unitisation clause to be inserted re Halifax.

Or they could just buy the company!

I still see that as a significant option in the short term business plan.

Peter

[StepOne]

Or they could just buy the company!

Where's Victor Kiam when you need him!?

StepOne

[PeterGray]

That's who it was - I was trying to remember his name this morning!

[HaiderAli]

I remember seeing these people at an oilbarrel many years ago and thought I'd check out their obituary:

It opted to carry on drilling in order prove the full potential of the Bentley field before bringing in an industry partner to shoulder the costs of development. It’s not an uncommon strategy and it’s an approach that could have added tens of millions to the sum a potential partner might pay for a chunk of Bentley. Initially things looked good. It built a number of partnerships with operators and incentivised contractors.

But none of them were the kind of ‘farm-out’ partnerships that investors (and one assumes management) hoped for where a larger, deeper-pocketed business shoulders the cost of construction and expansion.

It meant that Xcite was left as sole operator and developer of an asset that didn’t really fit the conventional mould. For while Bentley is estimated to be host to 900 million barrels of crude, it is thick, viscous heavy oil that often has to be blended or might sell at a discount to lighter products.

Read more: http://www.thisismoney.co.uk/money/inve ... z4gxS1fA1K

Unconventional play - check
Large oil numbers being quoted - check
Creative financing - check
Lack of farm-in - (HUR still trying)

[PeterGray]

A salutatory story, though the real problem with Xcite was always that:

For while Bentley is estimated to be host to 900 million barrels of crude, it is thick, viscous heavy oil that often has to be blended or might sell at a discount to lighter products.

Thankfully, not HUR's problem

Peter

[HaiderAli]

Hi Peter

From what I've been able to understand looking a various XEL RNS's from a couple of years ago, while they had used various creative methods to address funding issues, for example, they seem to have used a similar structure to the one HUR are proposing i.e. a limited company whose shares they gave to Transocean (IIRC) they still needed funding and it was ultimately resolved with bond issue.

Subsequently, they could not meet the payment terms and equity holders were left high and dry. AIUI the licences are now forfeit, though I guess in a higher POO environment someone could pick up where they left off, at a far lower cost than if they had farmed in.

Now they may well have been more susceptible to the oil price than HUR claim to be, but interestingly the XEL share price started to drop at the start of 2014, the oil price drop happened in August 2014.

The longer there isn't BigCo farm/buy-out interest the more likely it becomes that HUR follows the XEL route and then it will be a matter of assessing how well insulated they are against cost overruns etc. and needing to raise money either or usurious terms and/or risky ones for shareholders.

[dspp]

HaiderAli,

I would suggest that - at a minimum - there is a realistic prospect of HUR being able to source EPS funds, without too much dilution. That EPS would assist in resolving FFD uncertainties and at the same time be cash-generative. That is a different situation than XEL was in, is it not ? Of course the EPS could prove the uncertainties are to the downside, but that's the point of an EPS in this game as we all know.

(noting that the HUR CFO didn't exactly cover himself in glory on today's podcast, hey ho)

regards, dspp