Hurricane Energy is now “arguably” a takeover target for companies brave enough to “take a punt on basement plays” after it revealed a huge downgrade to its resource base, an analyst has said.
Earlier today, the company reset contingent resource estimates for its Lancaster and Lincoln fields, west of Shetland, to 103 million barrels of oil, from 1.05 billion in a competent person’s report in 2017.
Ashley Kelty, oil and gas analyst at Panmure Gordon, said it was difficult to see how Hurricane could move forward in a meaningful way on its own, given that it has to repay or refinance a £180 million convertible bond in 2022.
Nathan Piper, head of oil and gas research at Investec Securities, said Hurricane had become a “completely different investment case”, having gone from “hundreds of millions of barrels to tens of millions” at Lincoln and Lancaster.
Mr Piper said the firm had “thrown in the kitchen sink” by completely resetting expectations on new CEO Antony Maris’ first day and letting him build from a low base.
The company was set up to deliver hydrocarbons from naturally fractured basement reservoirs, like Lancaster, which is located on the Rona Ridge and started production in May 2019.
Led by former CEO Robert Trice, the firm set expectation levels very high, previously saying it had total combined 2P reserves and 2C contingent resources of 2.6 billion barrels.
But there is long-held uncertainty within oil industry circles about fractured basement reservoirs’ ability to deliver stable production, due to their complex and unpredictable nature.
Mr Kelty described today’s updates as “horrible” and “awful”, adding that the market had “reacted appropriately” as Hurricane shares fell 50%.
He said the company appeared to have “torn up all its previous work and started again”.
Mr Kelty said total reserves no longer looked compelling and would be difficult to increase without drilling new appraisal and production wells, but that management “doesn’t seem to be in any hurry” to do that.
Hurricane is weighing up drilling a water injection well on Lancaster to increase reservoir pressure and boost production.
Drilling the well and connecting it to the Aoka Mizu FPSO would cost up to £62m, according to Hurricane, which had net free cash of £83m at the end of June.
Hurricane was given some breathing room in May when the Oil and Gas Authority extended the deadline for plugging and abandoning a well it drilled on the Lincoln field with Spirit Energy to June 30, 2021.
They were also given until June 30, 2022 to start drilling a commitment well on the Lincoln field, a job initially scheduled for next year.
Mr Kelty said: “The balance sheet is stretched now and the convertible bond needs to be refinanced. In the short term, that will hold back spending.
“Until the balance sheet is sorted I can’t see how Hurricane can move forward in a meaningful way.
“It is arguably now a takeover target for anyone who wants to have a punt on basement plays.”