The shut-in of one of the Lancaster field’s two production wells is a “bump in the road” that didn’t warrant such a large drop in Hurricane Energy shares, an analyst said.
Ashley Kelty, oil and gas equity researcher at Whitman Howard, said that while Hurricane’s news was “clearly disappointing”, the 46% share price slump was an “overreaction”.
The early production system on the field, west of Shetland, was “designed” to highlight issues such as the “interference” which led to the shut-in, Mr Kelty said.
And given how low oil prices are currently, producing fewer barrels from Lancaster might have some benefits, as the company would have more to sell at a later date, hopefully at higher prices, Mr Kelty argued.
Hurricane chief executive Robert Trice said today that while the first two Lancaster wells had shown high productivity individually, their performance as a pair had been “disappointing”.
The setback meant sustaining Hurricane’s production target of up to 20,000 barrels of oil per day (bpd) had not been possible, leading to the suspension of its full-year guidance of 17,000 bpd.
The field came on stream in May 2019 and is thought to be capable of producing more than 500m barrels of oil if Hurricane progresses it from the EPS stage to a full development.
Mr Kelty said the long-term potential of the reservoir would not be impacted, given its sheer size and the plethora of well locations.
RBC Europe analyst Al Stanton said the drop in production wouldn’t present an immediate liquidity risk to Hurricane, but warned convertible loan notes maturing in 2022 were likely to come “under pressure”.
Mr Stanton also said pressure would increase on Hurricane to develop an additional production well to sustain cash flow while further appraisal and testing are carried out.
Before the oil price collapsed, Hurricane had been evaluating the idea of drilling a third Lancaster production well, but seemed keen on a less costly intervention on the well which has now been shut in.
Hurricane also hoped to develop the Lincoln Crestal well as a tieback to the Aoka Mizu vessel, which serves its wholly-owned Lancaster field.
But in March the company said it had been “unable to achieve regulatory consent” to undertake a field development.
Its “working plan” was to plug and abandon the well by June 22 in line with its licence obligations, but the suspension consent which provides the deadline for this activity was extended to the end of September due to the Covid-19 pandemic.
In April Hurricane said the extension would let it gather more long-term pressure data from Lincoln.
Hurricane and Spirit Energy, its partner on the Lincoln well, were seeking a “field determination” for tying back Lincoln Crestal or an alternative shallower producer to Aoka Mizu.
Mr Kelty agreed Hurricane may come under some pressure to accelerate the Lincoln tie back.
But he argued the latest developments at Lancaster may convince the Oil and Gas Authority to let Hurricane suspend the well as a future producer, rather than plugging and abandoning it.