Maiden operating profit and positive operating cash flow. Hurricane’s H1’19 results were largely in line with expectations and all guidance was re-iterated.
Hurricane’s first oil sales took place in H1’19 and despite just one cargo being sold, this was enough to generate EBITDA of US$12mm and cash flow from operations of US$15mm (pre-working capital).
To date, Hurricane has sold 4 cargoes (higher than originally expected) but is guiding to a lower rate for the remainder of the year (2-3 further cargos) to factor in some downtime in Q4’19, especially given the weather in the West of Shetlands. Overall FY’19 guidance has been maintained at US$150mm of revenue (in-line with our estimate). Hurricane expects its unrestricted cash position to be broadly flat at YE’19 (~US$80mm) and will look to start layering in some hedging around the end of the year.
Lancaster: no concern over water production; potential for Hurricane to go it alone on FFD
There was little new in terms of operational updates on the Lancaster EPS. Hurricane re-iterated that the water cut is currently 7.5% (up from 4.5% at the Capital Markets Day) and that all the water was coming from one well. Despite the increase in water-cut, Hurricane said that it is even more confident that the water is “perched”, i.e. a stranded zone of water, rather than coming from the aquifer.
It also believes that the wells are only producing from the heel of the entire horizontal section, so as more of the well bore starts to contribute, the percentage of oil will increase, as other fractures are expected to be only hydrocarbon bearing. Hurricane also stated that it is evaluating options for doing the full field development (FFD) on its own, so that it isn’t restricted in terms of development by another company’s schedule.
Greater Warwick Area (GWA): gas export approval key to proceeding with tiein; Warwick West well to spud shortly
The critical path item for the GWA tie-in, planned for around end-2020, is the finalisation and approval of the gas export infrastructure. The final hurdles to signing an agreement have been addressed and the key remaining step is receiving regulatory approval by end of Q1’20, to be able to achieve first oil on schedule.
Hurricane is still awaiting pressure build up data from the successful Lincoln Crestal well but is very pleased with the flow rates – this well will be used for the GWA tie-in. It is close to spudding the Warwick West well after which it will be in a position to choose locations, with its partner Spirit, for a 3 well drilling campaign, planned to commence in H1’20. Notably there has been no slow-down in activity on GWA, following the announcement by Centrica that it is looking to sell its stake in Spirit.
Valuation and catalysts
Our risked NAV is 135p/sh (up 5p/sh on a mark to market of £/US$ FX rates). Our fully diluted core NAV of 51p/sh, only gives credit for the 2P reserves from Lancaster EPS, the EPS extension to 10 years and the firm carry provided by Spirit.
With the shares trading at 46p/sh, this implies the market is ascribing no value to Hurricane’s >2Bboe of contingent resource – it trades at ~US$0.5/bbl of 2P+2C resource. The next few months of production performance from Lancaster will be very important to proving the play and Hurricane will hold a follow-up CMD in January next year to discuss this and the understanding of the 3 GWA well results.
We also expect an update on securing a rig to potentially bring forward GLA drilling to 2020. At US$70/bbl in 2020, we estimate operating cashflow pre-interest of ~US$350mm. We estimate that Hurricane is trading on <4x EV/EBITDA in 2020.
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