morgan stanley comments14 Sep 2018 12:45
Hurricane in-place oil volumes are ~9.3bn bbls.
It specialises in geologically complex 'Fractured Basement' reservoirs, a new play type for the UK.
High uncertainty over recovery underscores company estimates of contingent resources of ~2.3bn bbls.
However, shares incorporate value for only 45mn bbls of reserves:
The high risk and uncertainty over recovery of reserves has led the market to price information in the line of vision.
Despite strong performance YTD, we estimate the share price incorporates only a 6-year Lancaster Early Production System [EPS] program, due to start in early '19, and the 50% GWA farm-out deal.
Our base case, excluding value for contingent resources, implies 27% upside:
We assume 10-year Lancaster EPS and 8-yearGWA EPS program unlocking value for 74mnbbls of reserves
But the upside could quickly move – our bull case implies ~600% upside.
Assuming$10/bbl value for to ~785mn bbls of Lancaster and Lincoln 2C reserves, we arriveat a 292p NAV.
Assuming $80 oil prices, we see potential for a bull-case NAV of 381p.
Our bear case implies ~65% downside:
Negative EPS results could lead to a total reset of current plans.
We assume lower production for 6-year Lancaster EPS and $50/bbl oil, leading to a NAV of 18p.
We initiate an Overweight rating, given the 27% upside in the base even without thevalue of contingent resources
a significant ~9.0x skew between bull case upside and bear case downside, and potential for value to be realised suddenly.
We do not set a Price Target:
With the wide range of valuation outcomes and uncertaintyeven in the base case, we think assigning a price target is not relevant at this time.
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