Hurricane Energy (HUR)

[dspp]

dspp, would be interested in your opinion, if possible, on the following points as you seem to know what you are talking about and objective:

1. A graph was shown a day or two ago showing an increasing water cut on which you commented briefly. Others have suggested that a. the increase was only in line with increasing production and therefore to be expected and b. that is is quite common for the water cut to increase on initial production ( up to several months or longer) and then to decrease as the water is cleared. It does also seem that the water cut increase is indeed in line with production increase almost exactly linearly and would this not suggest that the water is NOT water ingress from below as that would be unlikely to be so in line with production. Would you like to comment on that?

2. If there is an increasing water cut that is not so readily explained away what effect do you think that would have on the GLA story?

3. Since the RNS on Monday Spirit sources still seem quite upbeat on their GWA plans talking of "being pleased" and looking forward to going ahead as operator. What is your take on that?

4. The figures you quote for FFD funding are obviously daunting but they would be staged gradually and each stage would presumably result in significantly increased income ( assuming success but then that success should be very likely if they have accrued sufficient evidence to proceed to a FFD ?). Do you not feel that such a FFD could be self funding with enough income generated by each step to proceed to the next?

5.Do you think that the doubts generated by the GWA well results will affect the GLA FFD plans if all is well with Lancaster results?

6. Halifax seems to be on a back-burner at the moment but there have been suggestions from time to time that HUR may proceed early next year to revisit Halifax . Any thoughts?

Thanksin anticipation for any thoughts that you may be able to offer.

pcp,

Flattery will get you everywhere . As you say there are other folk here on TLF who are equally - if not more - capable than I am in assessing the situation, and I would welcome their insight as well. However here is my stab at your Qs.

1. Watercut development. The available OGA data does not allow us to discard this as a concern, nor yet to panic over it, though it must remain a perfectly valid concern until the data undeniably shows otherwise. There is an apparent upwards trend in the %watercut from 2.5% to 8% over five-months. We do not know the month-by-month flow ratios between the two wells, one of which is supposedly dry and the other of which has a watercut. It could just be that as they have been opening/closing either/both wells this has created an apparent trend. It could be that metering uncertainty plays a part in creating a false trend, just maybe. However if one takes the data and graphs a scatter plot of watercut % vs monthly oil flow rate you will see that it is fairly linear, i.e. greater watercut is associated with greater oil rates. That is what one would expect if, on aggregate over a month, both wells were flowing in a constant ratio, but one well was experiencing sufficient drawdown to lift water from source to surface and that drawdown was of course increasing as rate increased. A rate-dependent watercut is what one would typically expect if there is water being sucked in somewhere, and the question is therefore "where!". In contrast with perched water one would ordinarily expect it to be relatively constant, maybe fluctuating a bit vs drawdown depending on how it is distributed. One could postulate a zone of trapped/perched water that gets accessed at high drawdowns but ....... occams razor suggests something else. [edit: using my Mod powers I have inserted the relevant graph below.] It is a strikingly linear rate-dependent relationship. Now it could just be coincidence of the way they have managed both wells during each month, and month-by-month, but that is one heck of a coincidence ! I have yet to see anyone out there in the investment community do even this trivial analysis (I am available for hire by the big boys ....). The GOR trend is pretty flat by the way, both in time and as rate-dependent, so I am inclined to think the GOR-wobbles are more to do with metering accuracy and start-up/shut-down issues.



2. Watercut can be managed. Essentially one has to drill more wells, suck on individual wells less, and have waterhandling facilities. It means drilling capex goes up, facilities capex goes up, and opex goes up. The question to my mind in fractured reservoirs is ordinarily not whether water needs to be managed, but more when during field life does one need to manage it ? I have produced wells at much more than 90% watercut but it sure as heck makes the economics challenging at those levels. If one sucks too hard early on then there are real reservoir issues regarding stranded oil that gets bypassed, which is a major problem in fractured fields as many of the normal sub-surface approaches don't work so well. Therefore I would rather know now that this is an issue, so it can be planned for during FFD design, than to be lulled into a false sense of security and then have to retrofit the relevant reservoir strategy & wells/facilities after things are going awry.

3. In public Spirit have to be upbeat right now because they are trying to sell themselves as expensively as possible. If I was negotiating on the buy side against Spirit I would be turning up the heat against them. As far as Spirit-Hur relationships are concerned my guess is (based on the very limited public data) that Spirit will now be seeking to slow down major $$$ committments, i.e. no rushing headlong into Lincoln-Warwick FFD, at least until they know what the appetite is of their new owners. But frankly with these results I don't think anyone would rush headlong at LinWar right now, it will definitely need more appraisal wells and a good examination of the subsurface models against what has been learned in this year's drilling/producing.

4. Bootstrapping is possible, but slow and unlikely. Nevertheless it has to remain the central pathway until a suitor(s) slips a ring(s) on the finger, as to do otherwise would be to encourage buyers strike behaviour. Alternative financial mechanisms are possible to farmin/acquisition, and if I were in HUR I would be exploring them as well, likewise I would be exploring non-traditional partners. Going slow is not a good thing as it a) reduces NPV, and b) increases risk that these fields will never be fully developed vs renewable alternatives (which are coming despite what the dino-juice luddites say). However if going the bootstrapping pathway then kiss dividends goodbye for 10+ years, and LSE-AIM is not set up for that level of long term investment patience.

5. Of course. Can you tell me what Lancaster 'deeper' looks like from a reservoir perspective ? If not how can you plan a 'perfect' Lancaster FFD ? But whether that causes significant delay to Lancaster FFD decision pathway I don't know as I have not seen the relevant data. However at a programmatic level - in the Lan-success case - it might now mean that Lancaster FFD gets phased before LinWar FFD (as LinWar is definitely not a full-on success right now). The public domain data does not tell us whether such a resequencing would be advisable. It might be that a good-enough 120,000 bbl/d phase 1 on Lancaster can be reasonably be designed even without answering all the questions for flanks and depths, and that doing this is the best strategy to get the data. Without looking at the detail I am not sure. But I am so far happy that the company is asking itself these questions and doing the relevant analyses so as to be able to make these decisions as correctly as one can be.

6. Clearly Halifax and Whirlwind both need to be revisited. I think there is a drill or drop obligation on Whirlwind (correct me if I misremember) that rather forces the timeline on that (and it makes sense from a overall FFD-strategy data need perspective) so that is likely to be first-up. Re Halifax in the success case I would be pushing to go back there fast, but in the less successful case we are seeing right now it seems appropriate to concentrate the firepower on the core area to get that right.

I am as open to hearing others' views on this, as I am quite capable of missing insights if left to my own devices.

I am also pretty keen that someone(s) who knows what this is all about quizzes the company on camera in public, both about the technical issues and the commercial/investment issues. So far they have been able to control the public messaging in a way that is not as helpful as it might be. So a good red-meat interrogation would be useful, but it must be in public and by someone who knows their stuff. Doing it in private with a bunch of wet-behind-the-ears investing interns is not adequate. And nor is Malcy in any way at all, he is embarrassing.

I am by the way very worried at what I see out there on the various bulletin boards as it shows that there are too many folk with too much at risk, who really have no idea of the level of risk at play here. They could lose it all for technical E&P/O&G reasons. They could equally lose it for market 'management' reasons, and you see those games being played constantly out there.

regards, dspp

(* reminder to myself, per Breelander advice use imgur.com)

[pcpaul]

WOW, thank you very much for the most complete and in-depth assessment I have seen for a long time. Will give me something to digest and ruminate for some time. I guess a 120,000 bbl/d phase 1 while everything else is assessed and analysed would not be a bad option.

Thanks again

[PeterGray]

The difficulty of any analysis of water cut at present is that they are taking oil from 2 wells, in different quantities at different times. Early on with the flow line problem it was one well at a time, though no longer.

HUR have stated that the two wells have produced at different water contents, and seem convinced they are dealing with perched water. On that basis, given we know they are now collecting data by selective shutting in I can't see how any interpretation can be made of water cuts, other than they have not raised massively, and seem within the range HUR seemed happy with.

Clearly HUR will have far more detailed data from the 2 wells and will be able to build a much better picture of what's going on. I'd expect to hear some of that at the CMD in Jan.

[dspp]

The difficulty of any analysis of water cut at present is that they are taking oil from 2 wells, in different quantities at different times. Early on with the flow line problem it was one well at a time, though no longer.

HUR have stated that the two wells have produced at different water contents, and seem convinced they are dealing with perched water. On that basis, given we know they are now collecting data by selective shutting in I can't see how any interpretation can be made of water cuts, other than they have not raised massively, and seem within the range HUR seemed happy with.

Clearly HUR will have far more detailed data from the 2 wells and will be able to build a much better picture of what's going on. I'd expect to hear some of that at the CMD in Jan.

Peter,

I fully accept that the analysis will be clouded by this issue. Let us for example say that one well is of 0% watercut and the other well is 8% watercut, and that watercut is not rate-dependent and that on any given day they are flowed in random different ratios. If I then made a scatter plot for 5-months of production, using daily data of volume vs watercut (i.e. 5x30=150 scatterpoints) we would get a equally distributed cloud of 150-points with no trend discernible.

However by aggregating monthly data (so only five scatterpoints) what we are seeing is a very clear trendline, which in turn suggests watercut is rate dependent. An alternative hypothesis is that in the high production months they flowed the high watercut well, and in the low production months they flowed the dry well, and in the mid-production months they flowed both in middling volumes. They would have to carefully balance that neat trick out for five months in a row to get the fairly linear plot I have presented.

The point is that in the course of a month the amount that any given well is flowing vs shut in, or choked in, is likely to balance out. For sure some months will be oddities (that flowline issue, cleanup, etc), but on average you'd have to try very hard indeed to get that trendline which the watercut vs rate scatter data appears to show by any other means except for a rate-dependent watercut.

In contrast the GOR vs rate data shows no (very little) rate-dependency at all, which is as I would expect it for this reservoir.

I am as curious as you are to know what is going on here, but am I making an error in my analysis ? Is there another hypothesis that fits the facts we were passed by Carcosa (I didn't download C's data from the OGA, but I did quickly inspect the OGA data and C's copy looks about right to me). Please remember we are dealing with mother nature here, and so we must look at the data, not at our hopes.

regards, dspp

[pcpaul]

dspp,

have taken time to study your analysis and thanks for your efforts. It would seem that you are suggesting that caution is required both in predicting the possible outcomes and in taking investment decisions. My tendency is to perhaps sit on the sidelines until the December update and then again possibly until the CMD in Q1 2020( and not Jan 2020 as is commonly quoted) but, if I am correct,you have recently confirmed your decision to remain fully invested in the meantime. Would you be willing to explain your thought process ( I would completely understand if you preferred not to)? Do you see the potential upside from these presentations more likely than the downside. My concern is that recently any potential bad news, however uncertain, is punished severely whereas good news, however positive, results in a a lukewarm and temporary rise in the SP. Would appreciate your thoughts.

Thanks

[dspp]

dspp,

( I would completely understand if you preferred not to)?

Thanks

You got that bit right, regards, dspp

[Howyoudoin]

I think the lesson here is that you can write reams and reams of stuff that you think is happening but none of it is worth tuppence when the results come out.

HYD

[JoyofBricks8]

A week out from the big drop, and I am still mulling the situation over. I am in Hurricane as a binary gamble- it’s a go big or go bust business, and I was content with that before I got in. So no tears over spilt milk from this corner at least. Every portfolio needs to find room to take well researched risks and this is mine.

I had a stoploss in place but the price dropped straight through that. The size of the drop was greater than I had expected as in some ways the result was the worst of all possible- enough oil to tempt further spending on development by Hurricane and Spirit but not enough to be sanguine about commerciality.

There is a big question mark over what happens next vis-a-vis Warwick development. I don’t see water cut as a big issue at current levels on Lancaster, but obviously that can change drastically with coning. I think scepticism about the perched water contribution is probably healthy.

As the terms of the gamble are becoming clearer I have reduced my total shareholding by 30%. It may yet be a winner, but I am taking the hint that the geology is giving us.

[dspp]

In the latest RNS from HUR they say, (https://ir.q4europe.com/Solutions/Hurri ... d=14530043)

"As part of the data gathering exercise for the Lancaster EPS, the Company has been carrying out periods of production from the 205/21a-6 and 205/21a-7Z wells separately, to assess fluid dynamics and measure reservoir performance without the impact of interference from the other well. An interim update will be made when these flow periods have been completed, which is expected to be later in December 2019." and then they go on to say "In 2019 we have generated a wealth of new data from both the GWA and Lancaster and I look forward to presenting our findings in detail at our proposed Capital Markets Day in Q1 2020.".

Until this RNS was released I don't think we have seen any announcement regarding an "interim update" on the EPS which would take place during 2019. They had previously only committed to an update at a CMD during Q1 2020. Correct me if I am wrong on this.

I am wondering if they have realised that they need to provide an interim update because they have an obligation to communicate material facts to all investors simultaneously (except those who are subject to the 'closed' periods). Since they also are presenting 3-month lagged EPS production data to the OGA that goes on public view (which is where Carcosa got the data that I have graphed) then it is becoming fairly easy for news about EPS production and Lancaster reservoir performance to start leaking, just as the combination of Carcosa and I have done. This creates the risk of a disorderly market developing. So I wonder if that is what is driving the decision to provide this interim update on EPS.

Turning to the data itself. I continue to think that it shows - on the face of it - a rate-dependent watercut, or there is one other possible explanation. After sleeping on it overnight the data suggests that the watercut in the wetter well is likely to be exceeding 8%, or alternatively that the dry well is now cutting water. For it not to exceed 8% one would have to believe that for all of August and all of September the dry well was almost completely shut in and just used as an observation well, or alternatively that the previously dry well is itself now cutting water. I wonder perhaps whether the previously dry well has been progressively cutting water and is now (maybe) stabilising at 8% watercut. That alternative hypothesis could give the scatter plot that I have graphed - that is the most benign explanation that I can conjure up so far that is not a rate-dependent watercut explanation. The company will know that another few data points on that graph will likely make it clear to all that it must be one, or the other. Again that takes me back to the scheduling of the interim update. It would also solve the oddity that one well was intially dry, the other initially wet, yet they were in almost instantaneous communication with each other. If indeed the dry well is now wet, and one can suck as hard as one likes on either well and it remains at and does not exceed 8%, then this would tend to disprove the rate-dependency hypothesis in favour (for now) of the stable 8% perched water hypothesis.

Turning to shareprice behaviour. I am not at all surprised that this has blown through quite a few stop-losses out there. There are people actively trading HUR very aggressively in both directions, as well as people investing in HUR, and it makes for quite a volatile situation. Since it is on LSE AIM it attracts a lot more of this activity than if it was a main market share, and there are quite a few of them who are adept at all sorts of sentiment-affecting tactics.

Turning to shareholder behaviour it is quite clear that quite a lot of people would rather clutch onto the canticles of the by-now-dated CPR, and of well-out-of-date company presentations, than believe facts that are staring them in the face. They also very obviously don't understand that well production data is not a model, it is just mother nature doing her thing.

Combine all of this and one has a innately high-risk situation, in a volatile market, with plenty of faith-based shareholders who have limited ability to do anything but gamble blindly, being predated on and manipulated by others who have no knowledge of the underlying risk, but who are highly adept at exploiting and driving that volatility.

Am I missing anything ?

regards, dspp

[pcpaul]

As I understand it (and I am willing to be corrected) the Interim H1 2019 report confirmed an increase in the watercut to a sustained aggregate of 7.5% while confirming that the 6 well remained dry and that all the water was emanating from the 7z well (ie. by implication, at a rate of 15%). This now seems to have increased to an aggregate of 8%, implying in all likelihood 16% from 7z with 6 still being dry although obviously other combinations are possible. HUR still maintain that this is within their expected range. HUR have said all along that they would keep us up to date with all relevant progress and obviously notify if any parameters deviate enough from the expected to affect any aspect of GLA production. The proposed update later this month I would read to be on GLA and not on GWA and might simply be their analysis of the 6-12 months production progress and conclusions but as you say (dspp) may be on another matter such as watercut etc.etc. ?

[Nimrod103]

Everyone is talking here about oil and water production data that is over 2 months old. Any more recent data on production rates?

[dspp]

Everyone is talking here about oil and water production data that is over 2 months old. Any more recent data on production rates?

No, not yet. The OGA data has a 3-month time lag before it gets posted publically, and is in any case only broken down to field level, not to well level. It was only recently posted which is why we are (courtesy Carcosa's hint) able to inspect it. However the OGA data does give us GOR, BSW, oil.

Lifting data only gives us an approx field gross oil volume.

Until HUR give us an update we are very much in the dark. As you know we also do not have any pressure data either. Or water fingerprinting.

I can appreciate HUR's dilemma in this regard. The more data they give us the more questions we ask, and the more information & explanation pressure they are put under. But without the data the questions aren't even sensible ones !

regards, dspp

[JoyofBricks8]

In spite of the gloom over Warwick, let's not lose sight of Dr Trice declaring that the two Lancaster wells are work class producers. It's easy to forget what Dr T and his team have achieved. Seldom do O&G companies large or small manage to do what HUR have done in terms of project delivery. We need to get off the AIM market where the company should attract a more serious pool of investors. Beyond the AIM casino.

Without Warwick I do not see this leaving AIM.

[feste]

Hi dspp et al,

The timeline of recent developments is quite interesting : the watercut issue was kicked off by a post from Carcosa on 2nd Dec following OGA's release a day or so before of quarterly stats to Sept.

Note : always 3 months in arrears.

Dr T gives a talk on 28th Nov and people are looking for body language re WD outcome. He's described by various attendees as 'totally relaxed' and master of his brief.

Remember, he's here in front of his professional peers, a rare opportunity for him to shine and 'prove the doubters wrong'.

We know he knows the results of WD....yet he's outwardly unconcerned. 'Tis but a scratch, sire' - it's a blow, but not fatal.... Spirit's carry, a scale-back in expectations, perhaps.

OTOH, he'd also know on 28th Nov that Q3 info release (including water cut) was imminent ...and he'd know the position, not only to Q3 but probably to 27th Nov. ie 2/3rds of the way through the next quarter and 4 weeks away from the next OGA update.

I find it hard to believe that - if the water cut issue was turning into a 'killer' , a crippling blow to his FB thesis , about to be revealed - he'd have been able to display the equanimity that he reportedly did.

Or he deserves an Oscar.

NAI, DYOR and ATB

[dspp]

Hi dspp et al,

The timeline of recent developments is quite interesting : the watercut issue was kicked off by a post from Carcosa on 2nd Dec following OGA's release a day or so before of quarterly stats to Sept..... Or he deserves an Oscar.

NAI, DYOR and ATB

feste,

I appreciate all that. I also appreciate all the fine-sounding words in the previous presentations & corporate documentation. I have written the same sort of stuff myself in the past, and given the same speeches, and done the same Q&A sessions, wearing the same grins. It is what you have to do. Internally you know there is a range of outcomes arising from the inherent uncertainties, but you know that very few people in the audience can cope with the nuances of that so you stick very closely to your scripted party line. Until the day that the new evidence is in, and then you change the party line and deliver a new one. Again it is what you have to do in public. Internally you explore the full range hammer & tongs, but not externally, at least not if you are a board member of a listed company (or an unlisted one if you have external investors).

Some folk are getting all hung up on what I am saying. All I am saying is, "hang on a moment, there is now some evidence that 1) might suggest a rate-dependent watercut, or 2) might suggest perched water now entering the dry well, or 3) might suggest a fiendishly distracting testing sequence, or 4) something else I am not clever enough / do not have the data to hypothesise; and this evidence was not available in public before but this is exactly what the EPS is there to test (amongst other things). So am I missing anything ?". So far the clever people have wisely not said anything, or at least have not said I am being daft because they too can see the implications. And (unlike me) they would rather not be laughed at as a consequence of hypothesising in public.

I expect we will find out some more during December. Which is in itself another piece of information .....

regards, dspp

[nigelpm]

Hi dspp et al,

I find it hard to believe that - if the water cut issue was turning into a 'killer' , a crippling blow to his FB thesis , about to be revealed - he'd have been able to display the equanimity that he reportedly did.

Or he deserves an Oscar.

NAI, DYOR and ATB

I think that it is an incorrect thesis.

An increasing watercut whilst unfortunate does not negate the value of the well - it just raises the level of opex required.

[Proselenes]

We know one well is dry (no water) and the other well produces some water.

We know they do not produce equally from each well, its weighted between them in differing amounts, depending on ongoing work and ongoing testing.

If you dont know how much oil the dry well was producing and how much the wet well was producing, you have no clue as to whether the water cut is increasing or not.


Therefore this is a pointless topic until data is released showing the weighting of production from each well for each month.

[dspp]

We know one well is dry (no water) and the other well produces some water.

We know they do not produce equally from each well, its weighted between them in differing amounts, depending on ongoing work and ongoing testing.

If you dont know how much oil the dry well was producing and how much the wet well was producing, you have no clue as to whether the water cut is increasing or not.


Therefore this is a pointless topic until data is released showing the weighting of production from each well for each month.

Not quite.

We knew one well was dry.

We now have additional info via OGA production data that is only explainable by some hypotheses, one of which is that the dry well, is no longer dry, and another of which is a rate-dependent water cut in the wet well, and some other explanations. The point is that we have additional info which allowed us (and motivated us) to develop those hypotheses which are not random ones.

Shortly I expect we will have even more info. HUR will be fully aware of the implications of this data being in the public domain.

regards, dspp

[feste]

Hi dspp,

Thanks for your insights.

I'm sadly all too familiar personally - as a former banker at a time of great change in the industry - with the corporate guideline…"so you stick very closely to your scripted party line. Until the day that the new evidence is in, and then you change the party line and deliver a new one...."

My only quibble with the tenor of your reply would be that - in this instance - we're not talking about 'the corporate party line' , but about Robert Trice's life work, a thesis he's spent the last 15-20 years developing.

If a trend in water-cut were to be threatening to undermine the commercial viability of FB on UKCS, I would imagine that would upset him considerably more than it would his PI investors !

Anyway, we should get some clarification shortly.

ATB

[PeterGray]

Not quite.

We knew one well was dry.

We now have additional info via OGA production data that is only explainable by some hypotheses, one of which is that the dry well, is no longer dry, and another of which is a rate-dependent water cut in the wet well, and some other explanations. The point is that we have additional info which allowed us (and motivated us) to develop those hypotheses which are not random ones.

Shortly I expect we will have even more info. HUR will be fully aware of the implications of this data being in the public domain.

regards, dspp

Yes, a simple assumption of averaging 8% + 0% from two wells doesn't seem to fit the current data. But if the company's view from the summer, that they were extracting perched water, is true, then you would also expect that a well that was initially dry would start to produce perched water as the zone from which oil was extracted increased. There's no real likelihood that the (close) zones from which the two wells are producing are so different that one will remain water free and the other will continue to produce with the same water cut. If they are right we would expect the water cut from both wells to vary with time (possibly both up and down).

Clearly from what's in the public domain at present we can't make a judgement on that, and, as ever, we will need to wait till the company makes a report. But their earlier model seems plausible, and until we know otherwise, I can't see much in the current water cut ratios to be concerned about. As ever the risks that the EPS won't be successful, or that it won't lead to an FFD, for a number of possible reasons remain, and as investors we are surely all aware of that? But for now I'm quite happy with the way things are progressing, at the EPS. (And much less unhappy than many with the GWA!)