Oil and gas investors who latched onto Hurricane Energy (LSE: HUR) during last year’s lows have done very well — the stock is worth 378% more than it was one year ago.
Recent news releases from the firm have sent the shares skyrocketing higher. But news today that estimated recoverable resources have risen by 162% to 523m barrels of oil caused the shares to fall by 2%. Why was this?
As expected
Hurricane’s recent drilling results have made it clear that a significant increase to the company’s resource base was likely. So today’s good news was already reflected in the firm’s share price.
The company’s new Competent Person’s Report (CPR) for the Lancaster field assigns 2P reserves of 37.3m barrels to the planned six-year early production system (EPS). According to the CPR, producing this oil should generate a discounted net present value (NPV10) of $525m. That’s a measure of the cash profit expected from the production, discounted at a rate of 10% per year.
In my view, today’s report provides confirmation that Hurricane’s Lancaster field has genuine commercial potential over the medium term. However, it’s clear that this value is already reflected in the group’s market cap of £742m. I’d need to see significant additional value to consider investing at current levels.
$3bn upside potential?
Today’s reserves report and NPV imply a value of about $11 per barrel for Hurricane’s 2P reserves. If we assume that the firm’s best estimate recoverable resources of 523m barrels might be worth half this much, we get a potential value of $2.9bn, or around 185p per share.
There’s also the potential for a further upgrade to resources later this year. Today’s CPR only applies to the Lancaster field itself. But Hurricane’s recent drilling results appear to suggest that Lancaster is joined to another of the firm’s fields, Halifax. These could form the basis of a Greater Lancaster Area development. Resource figures for this and the remainder of Hurricane’s portfolio are expected later this year.
Although I’m only estimating the potential value of Hurricane’s resources, it seems plausible to me that in time — probably over several years — the firm’s stock could be worth upwards of 200p.
This slow burner could double
Offshore Africa specialist Ophir Energy (LSE: OPHR) made a name for itself with a series of big gas discoveries, totalling trillions of cubic feet.
The problem is that these giant gas fields can’t be developed on a small scale. It’s all or nothing. Each development is likely to cost billions. For example, the firm’s Fortuna FLNG Project is expected to cost $2bn to reach first gas. Final sign-off on this project is expected later this year, but no gas will be pumped until 2020.
The market for further big LNG projects is uncertain. Supplies have increased over the last couple of years and investor appetite has cooled. Ophir faces a big challenge in finding development partners or buyers for its remaining gas fields.
In the meantime, the group’s shares trade at a 50% discount to their net asset value. For long-sighted investors, this could prove to be a value opportunity. But it’s worth remembering that the potential returns and timescales involved are highly uncertain. In my view, Ophir remains fairly speculative and is only attractive as a small part of a long-term portfolio.
