The latest Investing Matters Podcast with Jean Roche, Co-Manager of Schroder UK Mid Cap Investment Trust has just been released. Listen here.
Essentially I see this like Frontera and Ascent. Lots of promise but ultimately end up in a death spiral. HUR in my opinion are now in that death spiral and it will take a miracle or divine intervention to get out of it.
They wouldn't buy other North Sea production would they for instance?
Not at all. My view remains equity being killed stone cold dead by July 2022 best case.
There maybe short term trading opportunities, but that's not what I'm commenting on.
Slift I hope that model works for you.
But what about the financial obligations along the way? The Convertibles will consume equity if there is any value to be had and HUR have insufficient capital to redeem. Then there's the OGA obligations.
Never mind all the what ifs such as either well becoming unstable and having to be P&Aed, which must be a risk given the instability experienced by well 7z.
It seems to me the heels of both wells are too deep, will they sidetrack? Drill another producer?
Stu,
Cash flow is one thing, meeting financial obligations is another. I agree shorter term existing shareholders may get lucky with an RNS showing continued stability. The ESP will certainly help with the water issue. The question is how much?
Mk111, I agree but September is to soon to come to any conclusions unless water cut increases or stability becomes a problem.
This is a bite yer nails share if ever there was one.
Sorry that should read above 1597m so a shallower OWC than stated in the CPR.
Sorry I don't follow?
The latest RNS states:
The Technical Review is ongoing and final conclusions have not yet been made. However, as a result of the review and analysis performed to date, which has incorporated both existing and new data, Hurricane's Technical Committee has concluded that there is a reasonable probability that the oil water contact in the Lancaster field is shallower than the range of oil water contacts envisaged in the 2017 Competent Person's Report by RPS Energy.
That's a massive hint that the water is coning from the aquifer to me.
The CPR states 3 cases for OWC:
Shallow 1597m
Mid 1653
Deep 1678m
So they are suggesting that OWC is below 1597m
Where that leaves STOIIP is then below the low case of 1330MMstb. but how lower? Best case was 2083MMstb so it looks like any downgrade is going to be in the order of 40% plus.
No I don't buy that given that HUR have stated that both are producing from fractures close to the heel. The heel depths of both wells are fairly similar. 7z is more tilted and less horizontal than 6 so it's toes a little deeper than 6.
Stu,
Which bit of the CPR haven't you read? I've posted it again for clarity:
Due to the limitations of the Material Balance modelling method, the models are not dual porosity/dual permeability models and therefore do not capture the impact on field behaviour of the fracture network.In the event of water breakthrough for example, water cut is anticipated to increase quickly after breakthrough due to the high permeability of the fractures and may result in production rates being curtailed or potentially a well watering out completely.
So the rate of 1% per month is highly optimistic, it's more likely to be an exponential rise a'la Coronavirus.
Then you mention 70% water cut. Have a look at what happened with 7z.
27th April 7z 47%, 6 7%
22nd May - 7z stability issues affecting production from 6
27th July 7z 53% on ESP, 6 12%
So well 6 nearly doubled water cut in 3 months.
Do you really think a single well producing say 2k bopd and 70% water cut will be viable with the FPSO?
Stu,
If, if and a bigger if
There's more chance of total wipeout than £200m of value here. The EPS is in such a perilous state that production could cease pending expensive intervention or abandonment at any time. Quite simply over time the water has continued to get worse.
I'm not paid, just a PI whose been in this sector a long long time.
The only ones I currently trust in this sector are TXP and JSE.
Slift, and interesting question.
This materially depends on where the OWC is.
If it's structural closure 1,380m TVDSS then this https://sp.lyellcollection.org/content/397/1/81 suggests P50 < 60m barrels recoverable.
But that doesn't mean the existing wells can recover the oil, far from it. They may need more $75m a pop wells.
We know 7z had material stability issues that affected 6. The ESP has constrained this for now. Will it continue? Will water cut continue to increase?
Remember increasing water cut == less oil production == less revenue.
Where's the cut off point for abandonment? i.e. at what point does the FPSO become uneconomic? The CPR assumes rates not going below 11k bopd.
The CPR actually states this:
Due to the limitations of the Material Balance modelling method, the models are not dual porosity/dual permeability models and therefore do not capture the impact on field behaviour of the fracture network.In the event of water breakthrough for example, water cut is anticipated to increase quickly after breakthrough due to the high permeability of the fractures and may result in production rates being curtailed or potentially a well watering out completely.
So the risk here is large and very real. None of us know how this will ultimately play out but in my opinion the odds aren't good for equity.
Gleeful?
I bought from 35p all the way upto 55p.
I've lost more on HUR than any other share I've ever owned.
I also had some experience with Fractured Basement reservoirs so really believed the story and honestly thought this was the best share on the market as others didn't understand it but would do once the cash started flowing.
Unfortunately the EPS which is designed to gather real world reservoir performance has shown that all the models previously put forward and the CPR are plain and simply wrong.
We were told that the fracture connectively was excellent, which means water being perched is far less likely and if it is won't flow very easily due to the poor connectivity.
Just look what happened, 7z had increasing water cut, Dr T told us he was confident it was perched but didn't provide the public domain with all the data to prove it. That's why some of us including DSPP began asking questions. No answers were forthcoming. In the meantime the water cut was getting worse and worse.
Stobie went in February, did he foresee the Convertibles he issued being unable to be repaid in 2022. You know the ones that materially suppressed the share price during the good times?
Dr T resigned in June, note the mutual consent bit. Did it become apparent to all on the BOD that the baby had died in infancy? Why else would Dr T leave his baby? He worked his balls off for HUR.
My personal conclusion bluntly is that its rats leaving a sinking ship. They know the games over.
I'm posting here not to be gleeful as it's put my retirement back by 5 years at least but to offer a reasoned argument to those that portray alls rosy in the garden. I'll be delighted if this blooms but personally put that option as less than 5%
I really do think equities dead.
Sure I got the bonds date in my head wrong on occasion but so what. Nothing fundamentally changes.
The next Rns should make you all concede good old Jonny got it right again.
Where do you all think the OWC Is?
What evidence do you have?
Why do you think the waters perched given Dr T got run out of Dodge City?
What evidence do you have that the waters Perched?
Robert Trice got it wrong. That’s why he’s no longer with the company he founded.
He was confident the water was perched but didn’t publicly provide categorical information required to prove this.
Given the last RNS stating ‘Hurricanes Technical Committee has concluded that there is reasonable probability that the Oil Water Contact in the Lancaster field is shallower than the range of Oil Water Contacts envisaged in the 2017 Competent Persons Report by RPS Energy’
That infers two things:
1) OWC is above structural closure given that was the shallowest point in the CPR
2) Given 1) the water is coming from the Aquifer
You really think a well producing 53% water cut isn’t going to increase water cut over time? It would have to change the laws of fluid dynamics to do so unless perched.
This water given the recent RNS isn’t perched, it’s coming from a higher than modelled OWC. In layman’s terms it’s coning from the aquifer.
Current fundamentals are:
Increasing water cut on both wells
OWC higher than modelled
Contingent Resources and Reserves to be downgraded from the CPR
Prior to commissioning the ESP on 7z swabbing was occurring affecting ALL production
Water likely coming from the aquifer
Both existing wells likely to water out within months
We have to remember this is a carbonate reservoir not sand. All reservoirs produce water, in sand some gets trapped in the pore space.
In carbonate like this with little/no matrix permeability hydrocarbons are stored and produced from fractures. What can happen is that some fractures aren’t well connected which can result in perched water. Ie some fractures contain water some hydrocarbons.
At the moment we really know nothing beyond that and in my opinion they shouldn’t have updated the market until they have something more definitive.