Troubled oil firm Hurricane Energy is preparing for crunch talks with key stakeholders in a bid to unlock funding for new wells on its Lancaster field, west of Shetland.
Bosses at London-listed Hurricane want to boost production from Lancaster by drilling a sidetrack on one of the field’s two wells next year, followed by a water injection well in 2022.
The company has just delivered its first major market update on its hopes for Lancaster since it announced a huge downgrade to resources in September.
Hurricane said today the sidetrack well would cost £44 million and the injector, which would enhance output by increasing pressure in the reservoir, would set the firm back £55m.
The firm has to repay or refinance a £180m convertible bond in 2022.
It had cash reserves of £64m at the end of last month.
Hurricane said “substantive discussions” about funding would start shortly with certain key stakeholders, including holders of outstanding convertible bonds.
It warned of the “risk of dilution” to existing shareholders from a possible restructuring or “equitisation” of the bonds, sending shares nosediving 38% to 2.61p.
The firm also said further development activity on Lancaster “might not be possible” if it cannot hammer out an agreement.
Hurricane would then continue production from existing wells until the field reaches its economic limit, at which point it would be decommissioned, “with potentially limited or no value returned to shareholders”.
Bosses said they knew the risks and would “endeavour” to secure the best outcome for all stakeholders.
The company delivered a painful blow to shareholders three months ago by slashing its contingent resource estimates for its Lancaster and Lincoln fields to 103m barrels of oil, from 1.05 billion.
Assuming no further development took place, Lancaster would only produce 16m barrels, of which about 9.4m remained, down from an initial target of 37.3m.
It followed the resignation of long-serving chief executive Robert Trice in June.
Since then, the company has done a “significant amount of work” to further refine the interpretation of the field’s complex fractured basement reservoir systems.
Those steps included a “remapping exercise” and an “extensive rebuild” of the reservoir model.
On Friday, new chief executive Antony Maris, who took charge on the same day the downgrade was announced, said: “We will now commence a period of stakeholder engagement to seek alignment on the merits of this further Lancaster activity, and the support and approvals which may be required to execute this programme.
“While there can be no certainty as to the outcome of this engagement, we continue to believe there is significant value in Lancaster and our broader west of Shetland portfolio, and we remain focused on delivering that value for the benefit of our stakeholders.”
Ashley Kelty, senior oil and gas research analyst at stockbroker Panmure Gordon, said Hurricane’s debt remained the firm’s “biggest issue”.
“Until they can get some sort of solution in the form of a restructuring of the debt, I can’t see where the company goes in the near term,” he said.
He said Hurricane appeared to be “starting from scratch” in terms of the reservoir model, which could be a step towards “managing investor expectations”.
Mr Kelty said the sidetrack could be “helpful”, but would eat up a lot of Hurricane’s cash balance and wouldn’t add anything to Lancaster’s downgraded reserves.
The analyst also said Lancaster’s production numbers were “somewhat disappointing” and that the water cut seemed to be “creeping up again”.
Lancaster, which is served by the Aoka Mizu FPSO, came on stream in May 2019.
Only one of its wells is producing currently, at a rate of around 12,000 barrels of oil per day, with a 23% water cut.