Shares in Hurricane Energy (LSE: HUR) have jumped in early deals this morning, bucking the wider market’s declines after the company announced its latest well success.
The oil producer, which has defied broader sector woes by rising nearly 400% over the past 12 months, announced this morning that it had discovered a massive oil column, measuring at least 1,156m at its Halifax exploration well in the West of Shetland region. The company’s announcement went on to claim that the Halifax discovery and nearby Lancaster field are part of the same single hydrocarbon accumulation.
This statement seems to imply that hurricane has stumbled across one of the largest undeveloped oil projects in the UK continental shelf as the Lancaster field is located some 30 km from the Halifax well.
A huge find
Hurricane’s Lancaster discovery is one of the most significant discoveries in the North Sea of the past few years, and if it does turn out to be linked with the Halifax prospect, Hurricane’s future looks bright.
Indeed, the firm’s boss has pointed to BP’s massive Clair field as an example of the size of field Hurricane could be sitting on. Clair was discovered in 1977, but challenging reservoir characteristics meant it was the mid-1990s before the area saw extensive drilling and 2001 before BP and partners approved a development plan. The 300 km field is expected to contain 640m barrels of recoverable resources, and BP is spending £4.5bn on field development. First oil is expected in 2018 and Clair is designed to continue producing until 2050 at a peak rate of more than 100,000 barrels of oil per day.
Currently, Lancaster is estimated to host 300m barrels of oil and Hurricane is planning to make a final investment decision on the prospect later this year, ahead of a proposed start-up in 2019. Management is planning to use an early production system at the well with the view to generating some insight into the kind of recoverability possibility that Lancaster has. Initial production is expected to yield 17,000 barrels per day.
The sky’s the limit
If the group gets its initial Lancaster production off the ground without any significant setbacks, shares in Hurricane could be a bargain at present levels. If the Lancaster/Halifax prospect does turn out to hold similar resources to that of BP’s Clair, Hurricane will own one of the largest opportunities in the North Sea, a development that will likely lead to huge returns for investors.
Still, as with all early-stage oil companies, Hurricane’s outlook is cloudy. If field development does not go to plan, cost overruns will see the company saddled with unplanned levels of debt, which may lead to disastrous consequences.
That said, the risk could be worth the reward. At the time of writing, Hurricane’s market capitalisation is only £685m. By comparison, struggling oil producer Tullow Oil, which is producing around 100,000 barrels of oil per day, is worth just under £2bn despite all of the company’s problems.
Put simply, if the Lancashire/Halifax prospect does turn out to be as large as Claire, shares in Hurricane could be worth multiples of the current price.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.