The development of Hurricane Energy's (LON:HUR) Lancaster early production system (EPS) remains on track for H119 first oil. We estimate a 1 January 2018 point-forward IRR of 63% for the EPS phase based on current commodity price forecasts. We use the EIA’s short-term oil forecast with Brent at $66/bbl for 2019 and long-term $70/bbl (from 2022). We believe the market is fully valuing a 10-year Lancaster EPS phase (34.7p/share net of debt), a project that has the potential to significantly de-risk our RENAV of 81.0p/share (increased from 78.4p/share). Our RENAV includes a risked value for Lancaster full field development and two mid-sized field developments (250mmbo) at Lincoln and Halifax.
Focus shifting to EPS commissioning
Execution of Hurricane’s Lancaster EPS development appears to be progressing in line with management’s unchanged expectation of first oil in H119. We believe market focus in the coming months will shift to commissioning, data gathering and 2019 production expectations. Management guidance of gross 10kbod per well initial production rate implies low initial draw-down with potential production upside once data gathering objectives have been met. Our 2019 production expectations reflect an end-H119 first oil and slightly more modest 12-month production ramp-up than company guidance. A more aggressive view on first-oil delivery will have a modest positive impact on NAV, but of greater significance will be the data gathered by Hurricane once production has stabilised, which will shape Lancaster’s full field development.
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