There was good news for Hurricane Energy (LSE: HUR) shareholders on Thursday. The North Sea oil driller confirmed that the recently-completed Lincoln Crestal well had flowed commercial levels of oil under testing.
At the time of writing, the HUR share price was up by 8%, at 49p. Hurricane’s largest shareholder recently sold a quarter of its shares and the business is now valued at almost £1bn, despite having just 37.3m barrels of commercial oil reserves.
In this article, I’ll explain the significance of today’s update and take a broader look at this business. Is this the right time to be buying?
We’ve got a gusher
The Lincoln Crestal well is the second of three wells being drilled by Hurricane this year in the Greater Warwick Area. Although the first well (‘Warwick Deep’) failed to produce commercial flow rates and was abandoned, Lincoln Crestal has been much more successful, flowing good quality light oil at stable rates of up to 9,800 barrels per day.
This well has now been suspended and will be used as a future production well. The company hopes to link the well back to its existing floating production platform in 2020, adding about 20m barrels to its commercial reserves. In turn, this should boost cash generation and provide data for a larger-scale development of the GWA.
It looks like a good result to me. How does this fit into the broader picture for investors?
A 2.4bn barrel company?
Hurricane’s main assets fall into two groups, the Greater Lancaster Area (GLA) and the Greater Warwick Area (GWA). Together, these are thought to contain about 2.4bn barrels of potentially recoverable oil and gas.
GLA is wholly owned by the firm. Early-stage production started from the Lancaster field in June, pumping about 14,400 barrels per day. The long-term plan is for a larger field development to begin in 2022, targeting GLA’s 1.7bn barrels of known oil and gas resources.
GWA is operated by Hurricane but is 50%-owned by Spirit Energy, whose majority shareholder is FTSE 100 utility group Centrica. In return for its stake in the GWA, Spirit has agreed to fund up to $387m of work, including this year’s three-well drilling programme.
If appraisal drilling in 2019 and 2020 is successful, Spirit and Hurricane hope to carry out a large-scale development of the GWA. This would aim to convert about 500m barrels of resources into commercial reserves from 2021 onwards.
By 2025, Hurricane boss Dr Robert Trice is hoping to have built a business with more than 700m barrels of reserves and production of more than 100,000 barrels per day.
Is this for real?
Hurricane’s ambitions are large. But the evidence so far suggests to me that the firm’s North Sea assets have the scale and quality needed to become major producers. The company has proved technically able and has delivered consistent results and guidance for the market.
Of course, the situation isn’t without risk. We only have a few weeks’ production data from Lancaster so far, and mixed results from the GWA drilling programme.
I also note that the firm’s largest shareholder, Kerogen Capital, recently cut its holding from 21.9% to 16%, selling about £55m of stock. Is Kerogen simply rebalancing its portfolio, or turning cautious?
We don’t know. But on balance, I think Hurricane remains one of the best buys in this sector for investors targeting long-term capital gains.
Roland Head owns shares of Centrica. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.