Valuing Hurricane Energy Using A Simplistic Approach

1st Jul '14 by Cuthbert C

3 comments 16702 reads

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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rhomboid1

1st Jul '14

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..

Cuthbert C

2nd Jul '14

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

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

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

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

Valuing Hurricane Energy using a Simplistic Approach

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Cuthbert C

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