Has Lancaster still got what it takes?4 Jan 2021 09:52
In the 'Kitchen Sinking' RNS report of 11 sept2020
We had the Company current estimates of:
Lancaster field remaining 2P (oil that can potentially be recovered by the current infrastructure of 9.4mmbbls so at the then 14,500bopd extraction = 648days more production = to ~ june 2022.
and Lanc 2C (oil potentially producable with further infrastructure and development) they put at 58mmbbls which at the then extraction rate of 14,500bopd would give ~ another 4,000days production = ~ 10.95years - If a few new wells are added to enable HUR to produce it. But at $60mil or $70mil a well, is it worth while?
Well, taking an approx 10 year period and that 'the guesses' have it that Brent may well be somewhat more expensive than now throughout that time, so if we attribute it a potentially modest average of $55/bbl then the revenue from 58mmbbls = $3,190million or ~ £2.398 billion.
And if using their approx $20/bbl cost of production (if we take out the Capex costs) then a $55brent gives a net of around $35/bbl or for the whole 2C about $2,030mil net from the resource. So compared to this, maybe 2 or 3 wells don't sound quite so expensive after all.
If we now add in some of those capex costs and the convertable bonds (debt repayment due mid 2022) and do a Net Present Value for this $2,030 net amount, distributing the revenues equally over 10 years at a discount of 10% per year, I get that to come out at a present day 'total 2C produced value' of $1,247.2mil but from that we need to deduct $230m for the conv bonds at par and if we deduct 3 wells at say $70mil each and say another $70m for other infrastructure , our NPV becomes $737.2mil.
and at 1992mil shares that's ~ 37cents/share or ~ 28p/share as the current value of what could be returned over a 10 year production life of the 58mmbo 2C.
So, looking worthwhile so far, but now the slightly more tricky bit.
The maths has the oil money covering the well costs okay and a share value well above todays share price, but very obviously, HUR needs the money for the new wells up front, in order to get all that oil produced.
The question is: is dilution, by issuing more shares inevitable? And if so, by how much?
Or how else could they move on from here? And however, will that move be to the benefit of ordinary shareholders?
There certainly still looks to be a worthwhile 'prize' to be had.
And that is just Lancaster and it's without any possible upside from the overlying sand.
Do we have anyone with substantive knowledge on how the Bond negotiations should pan out?
My thoughts and my calculations.
So, as always, please do your own calculations and research before making any investment decision.
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