Valuing Hurricane Energy using a Simplistic Approach

Tuesday, Jul 01 2014 by
19
Valuing Hurricane Energy using a Simplistic Approach

This time last week I had not even heard of Hurricane Energy. Having piled in last Thursday and Friday and had the good fortune to see the share price almost double since then, I now find myself with an unexpectedly (uncomfortably?) large holding in a company which is relatively new to me.

I have tried to get hold of analyst reports and valuations – I think that Cenkos has done some work – but I have not yet succeeded. That being so, I spent some hours last night plodding through the 286 page Prospectus and trying to produce a simple valuation model.

I do not often bother to do this. With companies I know better I tend to rely on published analysis moderated by judgement and instinct; but with a company I do not know very well, and which seems to be under the radar of the analyst community, I have found it useful. If nothing else the results will inform my thinking about the advisability/timing of top-slicing.

No doubt what I’ve come up with is over-simplistic, no doubt it is incomplete and contains errors. But it seems to me to be worth sharing here. I’ll be delighted to get constructive criticism/comments/feedback/corrections and will incorporate them as appropriate.

I have deliberately set out to be conservative in my calculations. What I want to figure out is the value of the low hanging fruit not the stuff growing on the tall branches that reach high up into the blue sky. That will come later.


2C value CoS % risked unrisked
Discoveries awaiting appraisal bbls $/bbl
$ million $ million

Lancaster

200

5

75

750

1000
Whirlwind oil 117 5 50 292.5 585
Strathmore 32 5 50 80 160
Tempest/Typhoon 26 5 50 65 130

total - whirlwind oil case

375


 

1187.5

1875


Lancaster


200


5


75


750


1000
Whirlwind gas 44 5 50 110 220
Strathmore 32 5 50 80 160
Tempest/Typhoon 26 5 50 65 130

total - whirlwind gas case

302



1005

1510

3C value CoS % risked
Prospects awaiting exploration bbls $/bbl
$ million

Lancaster upside

53

5

9

24
Whirlwind upside 51 5

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Disclaimer:  

The author may hold shares in this company. All opinions are his own. You should check any statements that appear factual and seek independent professional advice before making any investment decision.


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Hurricane Energy plc is engaged in the exploration of oil and gas reserves principally on the United Kingdom Continental Shelf. The Company's acreage is on the United Kingdom Continental Shelf, West of Shetland, on which the Company has approximately two basement reservoir discoveries, each containing approximately 200 million barrels of oil equivalent (MMboe). Its licenses include P1368, P1485, P1835 and P2294. The Company has approximately 450 million barrels of 2C Contingent Resources on acreage. Its Lancaster discovery is located in blocks, including 205/21a, 205/22a and 205/26b. The Whirlwind discovery is located across blocks, including 205/21a and 205/22a in the West of Shetland. The Lincoln Basement prospect is located in 205/26b block. The Typhoon prospect is located in blocks, including 204/22a, 204/23c, 204/27a and 204/28a. The Strathmore Prospect is located in the 204/30a block, and contains oil in Triassic-aged sandstones. more »

LSE Price
46.9p
Change
-1.3%
Mkt Cap (£m)
919
P/E (fwd)
51.5
Yield (fwd)
n/a



  Is LON:HUR fundamentally strong or weak? Find out More »


3 Comments on this Article show/hide all

rhomboid1 1st Jul '14 1 of 3
3

Just a brief question from me ..I admire simplicity just as much as the next simpleton but why $5 per barrel, what fiscal terms apply to Lancaster ?

From the CPR the following snippet is interesting;

"Hurricane has approached the appraisal stage of Lancaster in a sensible and methodical fashion. Since the 2011 CPR Hurricane has undertaken a series of engineering studies to comprehensively review the various development options for the field. They have commissioned numerous studies to review the critical aspects of the development. This Development Case section primarily uses the results from Hurricane’s Concept Select Cost Estimate and Economics Report61 as a basis to discuss the possible developments, in order to generate costs for the economic analysis.
The development cases and associated costs provided by Hurricane were reviewed by RPS and, in general, were found to be reasonable. The costs (FPSO, topsides, drill centres, subsea systems and pipelines, etc.) had been generated by Hurricane based on work carried out by various experienced contractors, primarily EPC, incorporating input and reviews from specialists such as Crondall for the FPSO; AGR for the drilling and Axis for artificial lift aspects of the well design.
Although a significant amount of work has been carried out, there are still sufficient unknowns in the project to suggest that the accuracy of these costs would typically be expected to be -20% to +50%. RPS believes the contingency of between 20% and 30% used by Hurricane is reasonable.
Several different combined development cases were considered, all based on a standalone Lancaster (hub) development – subsea production wells, drilled from several drill centres, tied back to metering hubs and then via pipelines, to riser base manifolds, which in turn, were connected to a new build, FPSO (Floating Production Storage and Offloading) unit by flexible risers and umbilicals. In all cases it was assumed that oil would be exported via shuttle tanker.
In all development cases it was assumed that there would be a gas import/export pipeline. Currently there is only one system within the vicinity of Lancaster - the West of Shetland Pipeline system (WOSPS) operated by BP, however Hurricane advises that they are aware that an alternative gas export line may be installed in the West of Shetlands in 2017, operated by Chevron for the export of Rosebank gas and potentially third party gas. If however the WOSPS remains the only viable export route for processed gas then, depending on the point of sale i.e. offshore or onshore, subsequent transportation and processing will be required. The East of Shetland Pipeline (EOSP), NLGP (Northern Leg Gas Pipeline) and FLAGS/SEGAL (Far North Liquids and Gas Pipeline/Shell Esso Gas and Liquids) systems could be used to deliver sales quality gas into the UK National Transmission System at St Fergus in the northeast of Scotland, with the delivery of separated natural gas liquids into either the Shell operated SEGAL system or the onshore section of the BP operated Forties Pipeline System. In addition, this will not only reduce flaring, but will also provide a back-up supply of fuel gas which could be necessary if the gas produced from Lancaster is less than predicted. This is unlikely to be required before the end of year three.
From the information available on the Lancaster Field, it would appear that the Basement reservoir encountered does not differ significantly from those found in Vietnam. The most significant differences between the Lancaster Field and the fields containing Basement reservoirs in Vietnam are the environmental conditions and the water depth.
The deep water over the West of Shetland continental slope is exposed to a large westerly fetch and strong winds (particularly from the west and southwest); these conditions generate an extreme wave regime in the area. The wave climate is far more severe than the northern North Sea as illustrated in Table 12.1 below; it is relatively calm for only 12% of the time West of Shetland compared with 41% in the North Sea."

So what are the cost implications , the new FPSO next door cost big bucks;

"Harbourmaster Colin Reeves said BP was busy clearing out the last of the oil and water from the 30-year-old FPSO.

He said: “They are basically just cleaning up the vessel prior to it going off service. It’s somewhere between two and three years that they are expecting to get the new FPSO on site. It is being built at the moment.”

Mr Reeves admitted losing Scheihallion would come as a blow to the port, but he regarded the anticipated oil coming from the Clair Ridge as a positive development.

He said: “There are fewer tankers than we’ve had. We do have the possibility of getting Clair Ridge coming in the next couple of years, so it’s not all bad news but there is certainly a dip for the next couple of years.

“We’re hoping it will pick up again after that, and we’re hoping we will get Schiehallion back again once the new FPSO’s on site, but that’s not confirmed yet.

“It’s a fairly damp crude oil they get out of Schiehallion. That’s why it comes to Sullom Voe so the waters can be taken away. They’re hoping the new FPSO will be able to do that, but until they’ve got it on site and tried it no-one really knows.”"


http://www.shetlandtimes.co.uk/2013/03/14/schiehallion-oil-f...

BP view;

http://www.bp.com/en/global/corporate/careers/working-at-bp/...

"Key facts about Clair Ridge

The £4.5 billion second phase of the Clair development.
Clair Ridge lies to the north of Phase 1.
Oil volumes under Clair Ridge are believed to be another 2.5 billion barrels. The development is targeting 640 million barrels of recoverable resource.
Designed for a 40-year field life.
Involves the installation of two bridge-linked platforms.
Oil production to start in 2016/17.
Additional production capacity of 120,000 bpd.
Oil production will connect to the existing oil pipeline at Sullom Voe Terminal.
Key facts about Greater Clair

BP and partners approved the £300 million Greater Clair appraisal programme in March 2013.
One of the biggest appraisal drilling programmes BP has ever undertaken in the North Sea.
The programme is expected to last two years and makes a third phase of Clair development a real possibility.
Initial plans to drill five wells in the area – first well recently completed.
Number of wells expected to rise to between eight and 12.
The power of technology

Horizontal drilling in the Clair field has enabled us to tap into previously inaccessible reservoirs.
High-quality seismic imaging has allowed more efficient drilling.
When it begins production in 2016/17, Clair Ridge will be the world’s first offshore facility to deploy low salinity water injection to improve oil recovery rates."


So how does a dry light oil Lancaster fit in this picture and how do Tie back and harsh environment FPSO access issues impact value??

I've no clue but would love to hear views..

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tournesol 2nd Jul '14 2 of 3
4

Hi Rhomboid

Thanks for taking so much trouble in your response.

I'll give you two answers - the real/true one is as follows............

Sorry to disappoint but I have no deep and detailed justification for using $5/bbl. It simply seemed like a very undemanding figure which would not lead me to an over-optimistic conclusion.

In terms of Haldane's famous frisbee parable (1), it seems to me that you are like a physicist looking for a mathematical formula that predicts the trajectory of a frisbee. I am a simple minded dog, that is trying to use a simple heuristic to help me catch the damn thing. What you are after is fiendishly complicated. What I want is very simple.

My objective is NOT actually to place a value on the co that would be fair and reasonable in an open market sale - such an exercise would require the kind of sophistication/precision you are seeking - but rather to figure out whether the value of the assets covers the current SP with a decent safety margin.

In effect I concluded that the Lancaster asset alone, if valued at $5/bbl - which seemed undemanding - would imply a value of 70p/share. That gives me a simple rule of thumb for assessing the current position.

At an SP of say 50p the co is being valued at 5x50/70 = $3.6/bbl for each of the bbls in Lancaster. That seems to me to be very undemanding. That's the level of analysis I'm looking for.

Sorry not to be more complicated!

I'll give you a second answer in a separate post. That one would stand up better in court than the above but is, to be truthful a post facto construct. Still useful to think about though.

regards

T

---------------

note 1: Haldane's speech about frisbees and dogs is well worth reading - see www.bankofengland.co.uk/publications/Documents/speeches/2012/speech596.pdf

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tournesol 2nd Jul '14 3 of 3
3

Hello again Rhomboid

This is a second answer to the same question. It might satisfy you more than the first.....

In the prospectus and in various presentations, Hurricane has quoted an NPV 10 valuation of $1.2 billion for Lancaster. That includes 200 million bbls of oil and 7 million boe of gas.

If you strip the gas out of that - just on a pro-rate basis - you get $1.159 billion which translates to a value of $7.7 per bbl.

That translates to a share price of 108p.

Given the early stage of the project and the many and various risks to which it is still subject, then it does not seem unreasonable to take a more conservative approach for the time being and drop down from $7.7 to $5 which gave me the 70p target figure.

That provides us with an adequate tool for determining whether or not the SP is over-extended. Which is after all my objective.

regards and thanks

T

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About tournesol

Tournesol

I'm an active private investor specialising in the oil and gas sector. I decided to focus on this area after having a disastrous experience 10 years ago when I naively delegated investment to a "professional" who subsequently lost most of my life savings and my pension. That experience taught me that it was foolhardy to invest in industries/companies you don't understand properly and that many "professionals" are doing just that, often based on the most superficial analysis and the most inadequate understanding of the underlying business. I decided that I'd take my financial destiny into my own hands.   I chose oil as a specialist focus partly because it was the industry I'd spent most of my career in over many years in >25 countries all over the world. That prior experience gave me a good  understanding of E&P from an operational perspective and I've subsequently leveraged that into an appreciation of the sector from an investment perspective - quite a different thing. But the one really helps the other.   I find that my background and my specialist focus help me get access to management and help me talk to them when I get in.  I've been seriously astonished at the open-ness and responsiveness of many top managers in this industry. Sensible questions, asked in a sensible manner almost always receive a very full response. (I have to single out Tom Cross of Dana for his readiness to go the extra mile to help small PI's understand his business).   Of course the other reason I chose to specialise in oil was that ten years ago it was very easy to figure out that the price was going to rise in a sustained manner over a long period. I still find it hard to believe that everybody else didn't see that coming at that time. I certainly can't claim any credit for doing so. It was just too obvious to miss - provided that is you looked at things from the right perspective. (there's an article to be written on this topic when I can find time........) more »



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