Hurricane Energy storming higher

Well, the results are in and Hurricane Energy's Lancaster oil discovery west of Shetland has smashed pre-drill expectations - perhaps unsurprising given the explorer has had more success here than anyone else. The share price is up as much as 17%, but clearly there's potential for much more.

According to third party analysis, "a very good quality reservoir" could deliver production rates of at least 20,000 barrels of oil per day (bopd), said the company. The hurdle rate to demonstrate commercial flow rates was 4,000bopd.

"With a 100% interest in all licenses and over 400mmboe of resources, this excellent detailed well result will both excite and encourage potential industry partners (who have been keenly waiting for this result) and will concentrate their attention as to the potential prospects of the Greater Lancaster Area," reckons Cenkos Securities.

Hurricane had already flagged up a sustainable rate of 9,800 Stock Tank Barrel of oil per day (STB/d) under artificial lift and at 5,300 STB/d under natural reservoir pressure. And founder and chief executive Dr Robert Trice believes this level of productivity means that an early phase of field development and commercial production could be begin with just one more horizontal well.

Interestingly, the results also revealed a well productivity index (PI) - an indicator of production potential - of 160 Stock Tank Barrel of oil per day per pound per square inch.

"This shows that the wells could flow at a higher rate for longer meaning reserves are recovered quicker, which reduces overall opex - particularly advantageous in a high-cost environment such as that west of Shetland," says Cenkos. "Many 'good' wells have PIs of less than 20."

"At current levels (37.75p), Hurricane is trading at a 61% discount to our target price and 76% to our risked NAV (net asset value). We believe that this result dispels some of the market's concerns about the production potential of Basement, and would anticipate that the discount will unwind as the company moves towards the development of the Greater Lancaster Area."

Of course, the upcoming Scottish referendum adds an element of uncertainty short term. It is, however, unlikely that the regime under an independent Scotland would differ that much from the one in place now. The economics, therefore, would be broadly similar.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.