WTI $ 101.28 +$1.02, Brent $107.83 +80c, Diff $6.55 -20c, NG $4.58 +18c
WTI is still the go-to marker at the moment and news from the US is still reasonably good on the economic front although a Fed spokesman said last night that rate rises would not come until ‘mid 2015’ at the earliest. In the UK we have final 4Q GDP figures this morning but should rubber stamp the 0.7$ rise already announced.
Apart from that its just possible enlarging of sanctions on Russia and the situation in Libya that are talking points in the market. Regarding sanctions, I suspect it is more jaw jaw rather than anything stronger at least at the moment. In Libya the protesters have managed to shut the pipeline from the al-Wafa field which takes off another 30/- b/d and along with the El Feel field going off reduces total exports to around 150/- b/d.
Eni has announced that it has started the process of reducing again its holding in Galp Energia. A process of book-building is underway to place 7% of Galp with institutions after AEBV did not exercise its right of first refusal. We should hear the outcome today.
My most recent visit to an oil company was to go and see the team at Hurricane Energy in their highly sophisticated offices in Surrey. Hurricane has been in existence since 2005 when it was founded by the current CEO Rob Trice whom I had known since Enterprise Oil days when he also believed wholeheartedly in fractured basement plays. I met with Rob as well as CFO Nicholas Mardon Taylor and CAO Keith Kirby.
Initially a JV with Sunshine Oil, Hurricane now owns 100% of all its discoveries such as Lancaster and Whirlwind in relatively shallow water West of Shetland. These discoveries of over 200 MMboe each of 38° API oil make Hurricane not only a potential major player but are considered a strategic resource for the UK. Having recently raised a short £20m at IPO, in addition to its pre-IPO funding of £32m, ( as well as others) the company now has sufficient funds to be able to press ahead with the drilling of the Lancaster appraisal well expected to spud in late April.
It is worth noting that fractured basement plays are neither new nor anything to do with fraccing and are a world-wide phenomenon and commonly associated with large reserves. In Hurricane’s case the assets are on and alongside, the same ridge and oil source as BP’s Clair field, reported to have 8bn boe in place. For avoidance of doubt, the company identify the Greater Lancaster Area (GLA) which includes Lancaster and Lincoln, separately to the Whirlwind prospect to the north and other prospects such as Typhoon and Strathmore to the south and the west.
One of the key points about Hurricane is not whether there is any oil there but will it deliver? The fact that the management have visibly elected not to farm down their acreage at all and come to the market via IPO has attracted some critical commentary but you have to respect the company for its vision and confidence. It is also true to say that is has a very solid and totally supportive list of shareholders who have mainly stuck with Dr Trice and team right from the start. There has been one fly in the ointment, one substantial shareholder has been in administration for some time and I suspect one of the reasons for the recent price weakness has been market concern that this 5.5% holding is ‘overhanging’ the market and may be sold at any time. This however should not cause too much concern and is being dealt with by the company.
Having looked at the background it is now worth assessing how the upcoming well on Lancaster will be drilled and what happens after that. As already mentioned I expect the well to spud in the second half of April using the Sedco 712 which is significantly over-specced and ideal for the task. I expect the well to take about 75 days or so, split between vertical and horizontal drilling through a number of fault zones and of that about a third should be testing. Any success for this well, will in my opinion, not only confirm that Lancaster is a serious development project, but will also set the ball rolling for the process of farming-out the discovery and reward the shareholders. I consider that it is inconceivable that Hurricane has not had oil companies from across the globe waiting to see how this goes and for this well to significantly de-risk the prospect and thus increase the value of the company. Looking at the CPR prepared by RPS as recently as November 2013, I can get to a pretty high valuation just using the 2C resources number of 444-470 MMboe and the P50 number of 133-143 MMboe in existing discoveries but the upside from here is massive and in my view the risk is less than almost any other I can see. Don’t forget its not just about Lancaster and Whirlwind, other blocks contain potential as well.
In summary I feel that the risk reward in owning these shares is significantly tilted towards the upside, the vision of the founder and management has created a play which should be deliverable and might be substantial. Success in the upcoming well will result in commerciality, potentially bring in development partners and offer the chance of debt financing as an option as well if needed to maintain the position of strength they will have achieved. The shares have performed abysmally since the IPO less than two months ago, that may be for technical reasons such as the perceived overhang, it may be because it only just ‘got over the line’ and the process exhausted all potential buyers but a halving of the price is way too much. The next few months, whilst bound to be nerve-racking, will I suspect, transform the company and reward its supporters and success will make 22p a share a thing of the past, I genuinely believe that if this works it could be nearer 100p in due course…
The roller coaster ride that is Nighthawk continues with results coming in ahead of expectations this morning. With six new wells coming on this year production increased from 280 b/d in January to 1556 b/d in December. This contributed to revenues of $26.2m, operating profit of $14m (loss $3.9m) and Ebitda of $17.8m (loss $2.9m). With these numbers giving a boost to revenue and planned drilling on the way there is no reason why hawk should not revisit the previous highs of 12p.
I have had a number of enquiries about Lamprell since the figures and some suggestion that I was backing away from my previous bullish stance. Whilst I am cautious following another profit warning from the company I am still pretty positive about the addressable market and I really rate Jim Moffatt and his team. As a result I am staying bullish although I would very much like to ‘kick the tyres’ but its almost impossible to get to meet the company one to one over here, let alone visit them. I suppose if institutions struggle to meet the company the rest of us are hardly likely to get an audience…I am going to stick with the buy recommendation ahead of what I hope will be some decent orders in coming months.
I promise I will have the Range meeting in Mondays blog, its been a busy week but I am about to set to work on it right away, it has taken some thought especially having been so bearish for so long.
I am seeing Fastnet next week I hope and that will be most interesting as I think that whilst the Morocco well isn’t a maker or a breaker it will determine the immediate future and following the excellent farm-out its pretty much a free go at the acreage.
I am also hoping to see Thalassa in the next week or so as one or two of my most respected institutional investors have recommended I see Duncan which is now in the diary. A number of people are urging me to meet with Xcite which I will try to do but that has never been that easy…
Finally may I remind you that the interviews I recently did on Interactive Investor and TipTV are on the website www.malcysblog.com.
In the cricket, the match against Sri Lanka looked like a lost cause at 0-2 after the first over but the in became a Hales/Eoin show as the former particularly destroyed the bowling attack, even Malinga the slinger couldn’t make a difference. Just got to beat South Africa tomorrow then…if so its the Dutch…
It’s the Malaysian Grand Prix at the weekend with the cars going round sounding like sewing machines saving on petrol the fun appears to have been rather eradicated…
In the Premiership it may be quite a definitive weekend at both ends of the table as The Gooners host the Noisy Neighbours and Spurs go to Anfield. At the bottom, Swansea host Norwich and the Baggies host Cardiff, both six pointers as they say…