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Following the most recent RNS, Hurricane states that following the technical review, there "may" be a material downgrade in contingent resources.
From the 2017 CPR reports, ignoring associated gas resources with the oil (using oil case for whirlwind):
Lancaster - STOIIP of 2160 with a recovery rate of 22.5% --> 486 MMstb 2C
Lincoln - STOIIP of 2514 with a recovery rate of 22.5% --> 565 MMstb 2C
Halifax - STOIIP of 5143 with a recovery rate of 22.5% --> 1157 MMstb 2C
Whirlwind - STOIIP of 409 with a recovery rate of 30% --> 123 MMstb 2C
Strathmore - STOIIP of 182 with a recovery rate of 18% --> 33 MMstb 2C
In total, the 2C oil resources are 2364 MMstb (not including associated gas resources). Including associated gas resources, the contingent 2C resources are 2563 MMstb.
So my first question is. How much of a downgrade is this likely to be?
Personally, I think the WORST case would be:
Lancaster - 18% recovery rate
Lincoln - 18% recovery rate
Halifax - 18% recovery rate
Whirlwind - 24% recovery rate
Strathmore - 15% recovery rate
Or a downgrade of 20% overall at a WORST case scenario, providing 1890 MMstb 2C oil reserves, or 2050 MMstb 2C including the associated gas reserves.
My second question: Clearly the technical committee aren't happy with the current reservoir models to call for this review. The team at HUR spent years developing these models for each asset. What new evidence do they really have to justify all this rework?
And finally, as the downgrades are for 2C contingent resources, are the board confident with the Lancaster 2P reserves, or is this likely to also be downgraded with the resources?
Opinions?
"The 2017 Competent Person's Reports attributed independently certified reserves to the Lancaster EPS
development and contingent resources associated with the overall West of Shetland
portfolio. The outcome of the technical review may lead to a material downgrade of these
contingent resource estimates. "
From this they are saying there is a possible downgrade of contingent resources of overall portfolio. I think that will be a probable given the poor drill results of GWA last year. There has to be serious questions on the contingent resources of GWA element - which is why in my mind i wrote it off last year. immediately on drill results the market hammered the SP down at the time by a ridiculously large percentage so this is already priced in and then some.
They are not talking about Lancaster reserves which is what matters at this moment in time. In fact trice stated there is a lot more oil down there at lancaster than they have previously stated so the reserve figure at lancaster should go up in the CPR
From what I can tell The current sp is giving zero value to the contingent resources anyway.
From what I can tell the current sp applies zero value to anything ....
I seriously doubt Warwick will ever produce commercially now. I can't see anyone having the appetite to drill there. HUR may as well relinquish the licence on it. If there's oil there, it's going to stay there in perpetuity now.
Think you can forget about Whirlwind and Strathmore now. Seem to remember we are handing those back (see Dec RNS). Can't help but hope this is going to be the 'material downgrade' mentioned
fandg - that was my assumption - write off whirlwind and strath...i think lincoln will also take a bit of a hit - which gives the potential material downgrade they talk about. I am anticipating lancaster contingent resources going up from what trice said...- which if they can put a plan together increases reserves.
halifax was always the big one and trice said it was like lancaster.....but we will need a partner for that now.
"Clearly the technical committee aren't happy with the current reservoir models to call for this review. "
Not so sure it is clear anyone is unhappy. With the data from the 3 wells drilled last year I'd guess the models can be updated and/or with Dr Trice moved to the shadows 'a second pair of eyes' having a look at the data could be a just 'a good idea', as this years plans have gone pear shaped.
Be nice if the CPR is being done by a different outfit from last time though, just to get another set of independent views on whats down there.
Great to see some insightful thoughts and comments today a Good read for a change .
Thanks all for your responses.
Yes, Strathmore and Whirlwind have been written off and costs absorbed in 2019. That leaves total current 2C resources at 2326 MMstb. Of which, if you were going to neglect associated gas resources then 2208 MMstb oil resources.
Since they are talking about the "overall" portfolio, i'd imagine each license to be downgraded as a result? Including Lancaster.
Whilst Trice was optimistic about Lancaster, he has also been booted out of the company.. The current board clearly don't align with his thinking IMO.
From the statement, the current technical committee came to the conclusion of this material downgrade based on the Lancaster geological and reservoir models. And will likely affect all other current models (Halifax and Lincoln), hence the downgrade.
A 20% downgrade as a worse case in Halifax, Lincoln and Lancaster leaves a total contingent resource estimates at 1861 MMstb. Which will definitely be a hit, but is it something that we should be concerned about? I'm not too sure as it's likely that the downgrade is much much less.
How can you be a competent person (CPR report) if you make a much more error than 20% in estimating the resources?
Sorry got carried away on my last post and hit send too soon lol
Meant to also comment on:
"What new evidence do they really have to justify all this rework?"
Back in the day, peer reviews use to happen all the time. Talk is cheap, making mistakes in design, cutting steel and drilling is expensive (relatively). So the rework might just be normal office processes
Totally agree that they should go to another independent company to re-evaluate the assets (If they're going to do the re-work).
Ofcourse talk and feasibility studies are cheap, but they've already drilled, so the rework in the models seem odd unless there's something significant missing here from the models.
"A 20% downgrade as a worse case in Halifax, Lincoln and Lancaster leaves a total contingent resource estimates at 1861 MMstb. Which will definitely be a hit, but is it something that we should be concerned about? I'm not too sure as it's likely that the downgrade is much much less. "
Personally I don't see a 20% downgrade, just a view really!
The problem is that any sort of significant downgrade (say greater than 10%) will be seen by the market as a major negative, even though at the current sp there is zero value attributed to 2C reserves!!
Separately, on the potential takeover front, the issue for any prospective bidder, is that the money required to develop the assets far outweighs the likely takeover cost. Even an offer of say 35p (which just about everyone would jump at!) is only £700m, the bidder would need to invest billions more to go to FFD on both GLA and GWA.
I agree with Fred_Bloggs that quite possibly means GWA FFD is a dead duck. Maybe thats the problem with the OGA re-Lincoln, maybe they say you cannot tieback Lincoln alone without a commitment to FFD!?
Hi MCB55,
I agree that the downgrade will be much less than 20%. The 20% was just the worst case scenario.
35p takeover is very very optimistic.
Any takeover offers is likely to be a 50% premium to current share price. Assuming 7p, that'll be 10.5p, or £186m.
The buyer will indeed have to invest millions more developing the assets, but Hurricane is also currently producing at a profitable rate from Lancaster EPS.
Unrestricted cash balance as at 1st April 2020 - $152m
Let's assume that on a worst case basis, for whatever unknown reasons 30% of it spent to end of June - $106m
I estimated that to end of Q2, Hurricane will have approx positive cashflow of circa. $40m (taking into account contingencies and best guess estimates).
Convertible bond due July 2022 - $230m
So a takeover offer of $186m as at end of June (to include the net debt of circa. $84m) would be in theory a $270m offer including the bond.
Going forwards, If we do have a second wave, and oil prices take a hit (and or production as we have seen in Q2) - cashflow to end of year would be around $80m for the year.
At the current cash generation from operational activities, the payback period for the buyer would be circa. 3-4 years if no investment made to develop fields. Ofcourse, if other fields are developed, likely more cash could be generated. I don't believe that money required to develop assets outweighs takeover cost @ $186m.
Hurricane is definitely a takeover target atm.
- Less than $300m required to offer for a takeover with a 4 year payback.
- No CEO present at HUR (which further improves takeover by a larger company)
- The Lancaster license for production was extended to 2022 (3 years) which makes up close to the 4 year payback
The company that took over RRE said they are looking at further acquisitions.....interesting times for HUR.
Will 10.5p be acceptable for long term holders ?
I doubt 10.5p will be acceptable considering loads here have a average of 20p++
slift...as soon as trice went the for sale sign went up in my view. he would have been resistant especially to a low ball offer. I think that is why he had to go. it is why i think it is all guns blazing to get production up and make the company "shiny"" for any potential buyer
10.5p...absolutely not !!
Been in HUR since Jan 16 when I got my initial tranche at 9.9p (for four years I was delighted to have bought those) but bought all the way up to 50p and a fair amount on the way down at 22p. 10.5p would creat financial problems for me......need a lot more
CaptainSwag,
Yup! Completely agree that the sale sign went up then. It seems as though the company is working towards profitability rather than trying to further prove fractured basement concept. I'm kind of with the company here, no point proving it further when it's already viable. Though I would like to see a full field development to see how that plans out in comparison to the EPS.
Donscot,
Here's a possible scenario:
50% premium is offered --> Share rises to 10.5p on news --> BOD approaches major shareholders --> Major Shareholdes against offer --> BOD rejects offer --> SP rises further or declines --> repeat
But I don't expect more than 50% premium on "current" price.
All IMO.
There is no way 10p would be acceptable to shareholders or the board ...It wouldn’t consider any of the reserves or production/profit of the company and future potential of the other fields... I would see a Mktcap of at least 400/600mil to tempt anyone, the share would have already rerated well before any buyer was rumoured to be making any offer...In my opinion this will rerate between 10/15p within the next three months... With the caveat of no big second wave of C19 and collapse in the oil price.
They have already hedged 10k bopd at 35 dollars and can use the option in the event price of oil collapses....
Dickbat 13:17, Good logical Post, I agree with you. I have recommended your post. Many miserable people with agenda blowing their negative frustration here.
Ammu123, 13.24, If true good info. Very positive sensible thinking. your post recommended. Ignore the miserable Posters.
Dickbat - i agree that there could easily be an increase to 10/15p in september if the production were increased towards the 20k with stable water cut and the plan for lancaster is announced. i think we we will head towards 7p soon when pelham get to the point they want whether it is all out or a lesser stake..could be a further lift to 8/9p when near term production rate is announced in another week or so
we will also wait on news of lincoln...whether spirit are in or out and this could give a lift as well
£500m at 25p might not be unreasonable in that scenario - i think after the last few months that would be tempting for quite a few .
all guesswork - but i dont think unfeasible
Agreed Ammu I was referring to the sentiment in general if the oil price collapsed again...not our sensible hedging position with our oil.
Agreed Captain, I also believe Pelham will be completely out within the next week or two I think they have and continue to close there position, and then I wouldn’t be at all surprised if they went long..!we've had serval weeks of a big seller and we’ve had good volume so they must be nearly out it will jump as soon as it’s cleared... I then feel sentiment will change it is so undervalued compared to every metric of value in the oil sector..
CaptainSwag, 13/35, Good realistic Post making good reading, I have recommended your post.