Hannam and Partners27 Jul 2020 17:59
300% upside core NAV
Hurricane Energy
Cautiously positive to see increased production from Lancaster Early Production System
Lancaster Early Production System update: production stabilised at 17kbbl/d
Hurricane announced a positive operational update on production from
Lancaster and the successful commissioning of the electric submersible pumps
(ESPs). Since the last update on 8 July, production has increased by 2kbbl/d to
17kbbl/d, with 12kbbl/d from 205/21a-6 (“6-well”) and 5kbbl/d from the
205/21a-7z (“7z-well”), which was previously shut-in. On the 6-well, the water
cut increased marginally, from 11% to 12% and the well is back on natural flow
rather than using the ESPs, at the same rate at which it was producing before
the commissioning of the ESPs. The EPSs are being used on the 7z-well, with a
water cut of 53% (46% in April), which has stabilised for now. Having the ESPs
functioning allows Hurricane to produce from 7z, which would otherwise not
have been possible. It will be important to see the water cut remaining stable to
gain confidence in the longer-term production of the 7z-well.
Meaningful impact on cash flow generation if production rates maintained
We currently forecast 13.4kbbl/d for H2’20 at US$35/bbl Brent. For now, we
are maintaining our production forecast until we see longer sustained
production rates. Increasing our production estimate for H2 to 16kbbl/d
(factoring some downtime on the current 17kbbl/d and a planned maintenance
shutdown in September), would increase revenue by US$14mm. Increasing the
oil price to around current levels of US$45/bbl would add another US$14mm.
With little incremental variable costs and no tax payable, this would contribute
an extra >US$25mm in cash flow in H2’20 (versus our US$36mm forecast) or
around 15% of the current market capitalisation. We currently forecast
13.5kbbl/d of production in 2021, and are keeping our estimate unchanged, for
now, ahead of the results of the technical review. Assuming 16kbbl/d in ‘21 and
US$45/bbl (rather than our base case of US$60/bbl), we estimate US$113mm
of cash flow from operations.
Technical review expected by September; limited committed capex
The technical review will be released at the latest by H1’20 results
(provisionally scheduled for 11th September). The Technical Committee is peer-
reviewing the critical technical judgements, including all the information
available and considering a full range of geological and reservoir models. A new
Competent Person’s Report is currently scheduled for release no later than the
end of Q1 2021. We have already significantly risked the contingent resources
that we include in our NAV. We have updated our estimates of capex for 2020
and 2021 to only include committed capex. We now forecast US$53mm for
2020 and US$60mm for 2021.
We continue to see an attractive risk / reward given the upside potential
Our risked NAV of 45p/sh (US$35/bbl Brent in 202
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