A little over a month ago, I made the case for buying shares in oil explorer Hurricane Energy (LSE:HUR) if you were looking for capital gains (and BP for income).
It’s still early days, but that call is already looking good with news the company has achieved first oil at its Lancaster field in the Rona Ridge area, west of Shetland. The field — discovered 10 years ago — has been estimated to hold more than 500m barrels of oil.
This is a huge achievement by Hurricane and its CEO Dr Robert Trice — who first proposed looking for oil in fractured basement reservoirs in the UK — and an egg-on-face moment for those who doubted it would ever happen.
For sceptics, this method was too difficult and costly to be worth the trouble, despite already being employed successfully elsewhere in the world.
According to the company, the combined flow from the wells hit the planned production rate of 20,000 barrels of oil per day during the 72-hour production test and marks the beginning of the development of Hurricane’s “considerable” resources in this area.
What next?
Having got the Lancaster field into production, Hurricane will now be looking to ramp up its Early Production System (EPS) with the goal of achieving operating efficiency of 85% over the long term.
As previously indicated by the company, it expects efficiency of 45% over the first three months with an average production rate of 9,000 barrels. This will then rise to 65% and 13,000 barrels for the following three months.
It’s hoped the data acquired during the EPS phase will allow Hurricane to “optimise” locations for additional wells in the future. According to Dr Trice, as much as “12 months of stable production will be required in order to provide a clear view of the reservoir” and allow Hurricane to plan for turning Lancaster into a full field development.
I don’t hold. Have I missed the boat?
Not necessarily. Given that Hurricane’s shares are up 33% in value in less than a month, there were bound to be a few investors out there wanting to bank some profit and ‘sell on the news’. Indeed, the stock already appears to have lost momentum after initially spiking 7% this morning.
Nevertheless, I’m of the opinion Hurricane’s potential resources make it one for risk-tolerant investors to tuck away for a while. Let’s not forget that Hurricane believes Lancaster and another discovery (Halifax) have the potential to be a single, massive accumulation of oil and that it owns 100% of the licences covering this area.
The same goes for the Greater Warwick Area — which features the Lincoln field and Warwick prospect — which is currently being developed through a 50/50 joint venture with Spirit Energy.
Last week, analysts at Berenberg set a target price of 100p on the stock. That’s 66% higher than where it is right now. Naturally, it may be a while before it gets there but today’s update, coupled with the fact Hurricane delivered first oil when it said it would (and within budget) leads me to suspect it could hit this target within the next year.
The £1.2bn-cap will hold a Capital Markets Day next month where it intends to reveal the results of initial analyses.
