What achieving first oil at Lancaster field means for Hurricane Energy

When prospecting for hydrocarbons in one of the most inhospitable drilling zones of the world is your business, achieving first oil ought to win you a reasonable degree of investor confidence in a high risk, high reward game for black gold. That’s exactly what has happened at Hurricane Energy (LON:HUR), a West of Shetland Islands focussed smallcap. 

On 5 June 2019, the AIM-listed company revealed first oil at its offshore UK Lancaster field, as the combined flow from wells at the site reached and maintained a 20,000 barrels per day (bpd) rate over a 72-hour planned production period. 

The £1bn-plus market cap outfit is chasing a phased development of Lancaster, starting with an early production system consisting of two wells tied-back to the Aoka Mizu FPSO. 

The field has 523m stock tank barrels of oil, according to Hurricane, and what’s more Lancaster is 100% owned by the company. For its founder Robert Trice, the development is one of great satisfaction given that Hurricane was established in 2004 to discover, appraise and develop hydrocarbon resources from naturally fractured basement reservoirs in an exploration area that’s not for the faint hearted. 

Commenting on the development, Trice said: “Lancaster is the UK's first producing fractured basement field and the fact that Hurricane has delivered this industry milestone on time and within budget is an incredible achievement. I would like to thank the staff of Hurricane, our tier one contractors and our shareholders for having the vision to make Lancaster happen.” 

Of course, those very shareholders must be wondering, where the share price is headed to next. In the immediate aftermath of achieving first oil, the price leaped past 57p; but still didn’t cap an earlier 12-month high of 60.80p (30 May). 

However, few would dispute the potential upside of achieving first oil at Lancaster. Before the development, Morgan Stanley had a ‘buy’ rating on Hurricane, while RBC Capital Markets rated it as ‘outperform.’ Even ‘equal weight’ Barclays sees the upside. 

That’s because, at least on paper, Hurricane is aiming for its initial output to peak at around 17,000 bpd over the next 12 months. That would result in the firm producing around ~37m barrels in total over the first six years of production. 

So assuming Hurricane hits its target, during initial production the company can expect an annual cashflow of around $200m on an oil price of $60 per barrel using Brent as a benchmark. 

But caveats should not be ignored - targeting oil in small natural fractures can be very difficult and risky. No oil and gas company has ever managed to deliver sustainable production from a fractured basin in the UK before, although it has been done in the Norwegian sector of the North Sea. 

Conclusion: While achieving first oil is commendable, and a significant hurdle that has been overcome by Hurricane, its long-term investment case is only likely to emerge over the next 12-24 months. Some analysts (e.g. Berenberg) suggest 100p is achievable, while others (e.g. RBC Capital Markets) put forward a more conservative 70p price target. Somewhere in the modest middle of upper and lower targets would be about par, but for moment the upside is unmistakable. It is also rather well earned by long-term shareholders who once logged sub 10p prices in Q1 2016.