Hurricane Energy (HUR)

[PeterGray]

Not at all clear what those figures are supposed to represent?

However, I would agree that the probability of the highest possible outcome has reduced somewhat over the past 12 months, WC questions and lack of immediate Warwick productivity are the obvious contributors.

But equally the lowest case outcome probabilities are reduced following successful commissioning and higher than expected initial productivity.

In effect that’s what you might reasonably expect to happen during the initial stages - a narrowing of the range of outcomes.

Since the mid case valuation is significantly above the current sp I’m more than happy to hold, and to argue HUR are in a better position than 12 months ago.

[PeterGray]

I don't disagree with that, though it would be a steal for anyone who paid that. It's always been clear that the full potential won't be obtained by HUR, but I didn't expect us to be in a situation where 50p would likely be accepted.

I think the CMD in March is the crunch. If the message in the Dec TU is repeated, and filled out, the extent of undervaluation will become clear. If they have to backtrack then confidence in management will be hit, I'd still see HUR as probably being worth more than the current SP even then, but that's unlikely to be reflected in the sp for a while!

[dspp]

In my opinion you completely misrepresent the situation, in simplistic terms this is what I see having occurred, from

High case - 100 - probability 33%
Mid case - 50 - p33
Low case - 25 - p33

Now we are at, again in simplistic terms :
High case - 75 - p15
Mid case - 35 - p40
Low case - 10 - p45

So the size, and probability of the high case have reduced. To suggest otherwise is to ignore the facts.

Assuming you are referring to Lancaster only, then I would suggest the probability of the mid-case reserves (i.e. the initial 50/50 case) has reduced from 50% to perhaps 35%.

That, in my opinion, is because the STOIIP volumetrics are decreased, and also because the technical RF% decreases, and also because the capex & opex costs go up which in turn reduces the commercial RF%.

I say "perhaps 35%" because we do not have the data to be sure. Personally what I have done is marked the 50/50 volumetrics down by 33% on Lancaster to take account of the data that has been released so far.

This is different from what you are saying because you are suggesting the PoS of the mid case has increased from an initial 33% (which is wrong, as in fact it was initially a 50% case), to now 40%. I would however agree with you that the outcome is indeed more skewed to the low side than the high side, again based on the data so far released in public.

In another 15-16 days we will get our next monthly data point courtesy of the OGA, irrespective of whether HUR announce it, though it seems they intend to only produce the dry well - being as they say up north, frit about producing the wetter well for some reason. There may also be another tanker offload in about a week, though without volume data from that it gives us little of technical interest.

regards, dspp

[JoyofBricks8]

I don't disagree with that, though it would be a steal for anyone who paid that. It's always been clear that the full potential won't be obtained by HUR, but I didn't expect us to be in a situation where 50p would likely be accepted.

I think the CMD in March is the crunch. If the message in the Dec TU is repeated, and filled out, the extent of undervaluation will become clear. If they have to backtrack then confidence in management will be hit, I'd still see HUR as probably being worth more than the current SP even then, but that's unlikely to be reflected in the sp for a while!

Quite agree. I think for those of us who bought into the story awhile ago, it's still somewhat intact. Though, I can no longer envisage HUR monetising any value from Warwick. If Warwick ever goes into serious production I think it will be for the next owner to do so. I believe HUR's management now need to double down and demonstrate beyond reasonable doubt the value that can be released from Lancaster. On it's own if needs be. In reality though, after holding throughout Dubai dry dock, hook up and commissioning through to today, I really didn't think my investment today would be under waer like it is. The Spirit Energy farm in has been a pretty sad sideshow in all. It's a risky business and I think if this stock is going to multi-bag still, it's not going to be a really exciting windfall like I once thought it might be. Time will tell.

At this stage I have written Warwick off as a bad job. I mean, if it was worth anything going forward it would be getting drilled this year with the rig already contracted for the job. But that got kyboshed for reasons of no joy last time they poked holes in the formation.

[Biffadog]

"though it seems they intend to only produce the dry well - being as they say up north, frit about producing the wetter well for some reason." so says dspp.

Dear dspp,

HUR are planning to produce from both wells at a combined rate of 20k bopd at the end of January.

They are only producing from Well 6 (dry) at the moment whilst they carry out the individual flow tests.

They were very recently producing from Well 7Z (wet) between October and December and only switched to Well 6 in December to complete the individual flow tests. It's all in the December Trading Update.

I don't know why you are saying HUR are “frit” to produce from Well 7Z when they have done so very recently and plan to do so again in a few weeks time and for the rest of 2020.

It doesn't sound like they are very “frit” to me, but each to his own.

Hopefully this posts meets with your high standards for accuracy and manners.

TTFN
Biffadog.

[Tinderboy]

BIFFADOG

How do you know Well (6) remains dry?

From here it looks as if your accuracy has dropped its standards...

[PeterGray]

TB, It was dry a month ago, of course that may have changed, but since it had remained dry for several months by then I’d say it’s currently reasonable to assume it remains so. His accuracy seems fine to me on that issue.

[Biffadog]

Well 6 has had negligible water cut since inception up until at least the December Trading Update. That much is fact.

So far it has been dry.

Not sure what your point is and what I have said that could be inaccurate with the facts we have at our disposal.

You boys should try harder as you seem to be missing your best angle of attack. Never mind.

TTFN
Biffadog.

[Tinderboy]

Peter

Not the case, the dry well was not used for long periods between September and December due to Z7 testing, so it has only been flowing since the fateful RNS in mid-December, thats 4 weeks its been producing alone, so im not sure how anyone knows how it is behaving with regards to oil flow and potential WC.

[Biffadog]

I also note that dspp referred to Well 6 as “dry” in his post today, so I am not alone. Maybe you should take it up with him as well. Just a thought.

[Tinderboy]

Biffa

I believe the point im trying to make is that the alleged dry well may have an increasing WC, I’m sure you remember Z7 started out at 2% and ended up at 30% to everyone’s astonishment, hopefully it behaves but the jury is out yet again!

[dspp]

"though it seems they intend to only produce the dry well - being as they say up north, frit about producing the wetter well for some reason." so says dspp.

Dear dspp,

HUR are planning to produce from both wells at a combined rate of 20k bopd at the end of January.

They are only producing from Well 6 (dry) at the moment whilst they carry out the individual flow tests.

They were very recently producing from Well 7Z (wet) between October and December and only switched to Well 6 in December to complete the individual flow tests. It's all in the December Trading Update.

I don't know why you are saying HUR are “frit” to produce from Well 7Z when they have done so very recently and plan to do so again in a few weeks time and for the rest of 2020.

It doesn't sound like they are very “frit” to me, but each to his own.

Hopefully this posts meets with your high standards for accuracy and manners.

TTFN
Biffadog.

biffa,

Here is the relevant section from the RNS:

"Lancaster EPS

The Lancaster EPS is benefiting from high vessel uptime and good well productivity, as it delivers its objectives of providing long-term data whilst generating cash flow. Production since 20 September has averaged approximately 12,500 barrels of oil per day, exceeding guidance for the quarter of 11,000 barrels of oil per day.

The heels of the 205/21a-6 well ("6 Well") and 205-21a-7Z well ("7Z Well") are only 350 metres apart. Data gathered thus far indicates immediate and strong pressure communication between the wells, suggesting that together they act as a single well. Furthermore, the Company believes that only approximately 50-60 metres of each 1 kilometre wellbore is contributing to production. Both wells are currently drawing on only a small section of the reservoir. Since late October, Hurricane has been carrying out individual flow tests to establish the optimum combined flow rate from the two wells under these conditions, and to assess individual well fluid dynamics. These results will refine understanding of reservoir performance without the impact of interference from the other well.

The 6 Well is currently flowing individually at approximately 14,700 barrels of oil per day with minimal water cut. In a prior individual well test, the 7Z Well flowed at approximately 9,400 barrels of oil per day with a stable water cut within a range of between 25-30%. These rates were achieved on natural flow. In both cases, the bottom hole pressure showed minimal decline following an initial stabilisation period, giving management confidence in the long-term productivity of these wells and the Lancaster field. The productivity performance of each well on an individual basis is in excess of the Company's pre-start-up expectations.

The Company is confident that the water cut observed is related to perched/stranded water, based on temperature data, lack of rate-dependency, and water production behaviour after shut-in periods.

Production will continue from the 6 Well on a standalone basis until late January, at which point both wells will be flowed concurrently. Results from the tests will be presented at the Company's Q1 2020 Capital Markets Day. The Company has previously outlined that it will take six to twelve months of steady state production before it is able to confirm its reservoir model and continues to see this timeline as an appropriate horizon.

Notwithstanding the instant communication between the two wells, and that the wells are effectively acting as a single well bore, the bottom hole pressure response observed to date gives the Company sufficient confidence to reiterate 2020 guidance of 20,000 barrels of oil per day, before operational downtime. This will be kept under review as the data acquisition programme continues. Facilities availability for 2020 is expected to be 90% before any shut-ins, which may be required for tie-ins or debottlenecking."

If you read it carefully the RNS has been extremely carefully wordsmithed. Without seeing the well/reservoir test proposals/programmes to establish the audit trail of intent vs time, one could not for certain stand up the points you are seeking to make.

If you add that perched water paper that Fabian put up to the cartoon slides I sketched you can hypothesise perched water accumulations that could be of considerable extent (and impact). If they are not very extensive, then the pocket of perched water ought already to have been produced out, or at the least showing signs of depleting. If they are extensive then the watercut from the wetter well could stay high or further increase. From a reservoir appraisal perspective almost the most important well test HUR ought to be doing is to produce the wet well to determine which of those two extremes is more applicable. Instead they are preferring to test the dry well. This suggests to me they are frit. They are doing exactly what I would be doing if I had the company management, as well as reservoir appraisal, concerns to manage in a combined 'optimal' fashion. If on the other hand I was only interested in reservoir appraisal I would probably be focussing in on downside exploration of the risk curve. That is why I draw the somewhat concerned interim conclusion (? suspicion ?) that I do at the moment. Looking at the shareprice it seems Mr Market is of a like mind to me.

I have no doubt that the HUR management team are extremely capable. That is why a goodly chunk of my money is still in their hands, in that respect I am agin the market. But I have read too many well test proposals, programmes, and outcomes, and corresponding RNS's (or equivalent) over the years to be anything other than extremely cautious in drawing overly optimistic conclusions. I say again, the HUR team are being very careful in their wordsmithing. Oddly enough they then went and released the PI of one of the 2019 Lincoln-Warwick well tests in a magazine interview with no RNS, an item of great significance to all shareholders - it is a funny old world.

As a by-the-way, regarding the produced water issue : good of you to get confirmation from the company on the no-offtake point. The reason it was a hypothesis in my collection is because I have seen that sort of behaviour before in another field. There are a great many clever, motivated, and inventive people in the oilpatch and they do not always reveal exactly what they are up to for very understandable reasons.

regards, dspp

[StepOne]

Biffa

I believe the point im trying to make is that the alleged dry well may have an increasing WC, I’m sure you remember Z7 started out at 2% and ended up at 30% to everyone’s astonishment, hopefully it behaves but the jury is out yet again!

Hi Tinderboy,

Don't forget that the sky could also fall onto their heads.

StepOne

[Tinderboy]

StepOne

Something needs to fall on their heads, perhaps a plan would be a start?

[StepOne]

StepOne

Something needs to fall on their heads, perhaps a plan would be a start?

[PeterGray]

StepOne

Something needs to fall on their heads, perhaps a plan would be a start?

What is your evidence that they don't have a plan - they have after all been pretty clear on the overal plan for several years.

They may not yet have put forward a plan to deal with the failure of Warwick to produce as hoped, or with, as yet unproven, issues with WC. But it's clearly far too soon for either of those. Both will/would require significant detailed analysis of their data - some of which they may not yet have in the case of the EPS - and the planning. The worst thing they could do is rushout a half thought out "plan" to satisfy provide short term support to the SP, but fail to properly tackle the issues in a way that maximises future shareholder value.

[ammonite]

dspp
"From a reservoir appraisal perspective almost the most important well test HUR ought to be doing is to produce the wet well to determine which of those two extremes is more applicable. Instead they are preferring to test the dry well. This suggests to me they are frit. They are doing exactly what I would be doing if I had the company management, as well as reservoir appraisal, concerns to manage in a combined 'optimal' fashion. "

I have no issue with you trying to see the dark side of every corporate action ; it is sensible as an investor to look for a company's weaknesses, and to try to decipher what managements choose to tell us.

But I would suggest 2 points to you re the above, and indeed, re the current WC issues.

Firstly, wrt to your supposition re HUR being "frit", to flow the 7z, they will have had a clear plan b4 FOIL on how they could best flow wells to maximise data acquisition. I imagine that plan will have been carefully crafted, and that varying it on the hoof could significantly hamper data acquisition. If, as they say, they are confident this is perched water, why mess with their planned program just bcos there's a bit of fuss on BBs? Data acquisition is the key objective of the EPS, and they will not wish to forego any of that just to calm a few investor nerves.

Secondly, on your worthy, and very detailed, efforts generally to analyse the WC issue. For all the effort and expertise you bring to this, (and clearly your expertise is above the level of not just me, but almost every BB poster) you are forming theories based on far less, and less timely, information than HUR have, in order to reach a proposition that is at odds with company statements. Nothing wrong with that, except that it leaves a judgement to be made.

Fwiw, my call is that HUR have the credibility, expertise, and datasets to get my vote. All of us here, and elsewhere, will I am sure be hoping I'm right.

[dspp]

dspp

Fwiw, my call is that HUR have the credibility, expertise, and datasets to get my vote. All of us here, and elsewhere, will I am sure be hoping I'm right.

Ammonite,

If what HUR has said in their RNS is right then the implication looks something like this slide, which is not what was hoped for in the CPR. This is the reduced case that I have considered when I most recently revised my fagpacket valuations. The slide below is consistent with that working of the HUR reservoir image that I gave a few weeks ago, except that I haven't artificially put the wells at 180-deg to each other this time. If what HUR has said turns out on closer examination of the data to be incorrect then the implications are unlikely to be as good as this. The slide below is consistent with the company's interpretation of the data:

- Both wells are in very rapid pressure communication, but (apparently) not flow communication.
- The wet well is pulling in water, but the company view is: temperature (presumably cooler, shallower), pressure build (presumably fast, small volume), and lack of rate dependency (i.e. horizontal inflow, not vertical connection to aquifer) lead to conclusion it is perched.
- Most flow coming from area very close to heel of each well.
- The 6 well has a higher flow rate than the 7z well, more than just fluid density would account for, i.e. it is connected to a less permeable network.
- The cartoon arrangement shown would satisfy the company view; and also satisfy the observed behaviour of one dry well (6) that is very close by to another that is wet (7z); and the rapid pressure communication.

The shareprice action over the last few months implies that MrMarket considers both myself and HUR to be overly optimistic.

Regards, dspp

[Nimrod103]

dspp

Fwiw, my call is that HUR have the credibility, expertise, and datasets to get my vote. All of us here, and elsewhere, will I am sure be hoping I'm right.

Ammonite,

If what HUR has said in their RNS is right then the implication looks something like this slide, which is not what was hoped for in the CPR. This is the reduced case that I have considered when I most recently revised my fagpacket valuations. The slide below is consistent with that working of the HUR reservoir image that I gave a few weeks ago, except that I haven't artificially put the wells at 180-deg to each other this time. If what HUR has said turns out on closer examination of the data to be incorrect then the implications are unlikely to be as good as this. The slide below is consistent with the company's interpretation of the data:

- Both wells are in very rapid pressure communication, but (apparently) not flow communication.
- The wet well is pulling in water, but the company view is: temperature (presumably cooler, shallower), pressure build (presumably fast, small volume), and lack of rate dependency (i.e. horizontal inflow, not vertical connection to aquifer) lead to conclusion it is perched.
- Most flow coming from area very close to heel of each well.
- The 6 well has a higher flow rate than the 7z well, more than just fluid density would account for, i.e. it is connected to a less permeable network.
- The cartoon arrangement shown would satisfy the company view; and also satisfy the observed behaviour of one dry well (6) that is very close by to another that is wet (7z); and the rapid pressure communication.

The shareprice action over the last few months implies that MrMarket considers both myself and HUR to be overly optimistic.

Regards, dspp

Great diagram. It is certainly one possibility - though IMHO a rather unlikely one (more of this later).

But carrying on producing -7z at a high water cut is not really telling HUR much they don't know already about that part of the field, as the pressure support will come from the oil column of the whole field, while continuing to cut water, perhaps for a long time, until (and if) the (so called) perched water pool is depleted - which may never happen if it is contiguous with a large aquifer on one side of the field.

My preferred appraisal approach, based on the data we have in the public domain, would be to flow the -6 well on its own, in the sincere hope that it doesn't cut water. If it does cut water, ISTM that it is game-over. I think that is what HUR are now doing.

If -6 starts to cut water, I think it supports the view that the porosity (& therefore the STOIIP) of the reservoir is lower than was postulated in the CPR. That was always my view as to the principle risk of this field, not adequately described in the CPR. Potentially a lot of egg to be thrown at faces all round. HUR must be praying that -6 remains dry.

[PeterGray]

Nimrod,

I tend to agree with your reasoning for flowing the 6 well, but I'm not sure I agree that if water appears it's game over. That's certainly one possiblity, but if the company is correct in viewing the water in 7z as being perched, why should 6 not start producing perched water too as it produces from a wider area? That could/would impact negatively on estimates of potential resources as dspp has suggested, but it would not necessarily mean game over, there's considerable potential resource there, that could still reduce and yet leave a commercial development. Of course if both wells start producing water in large quantities and the final conclusion is that it's direct from the aquifer that would be bad news indeed. That is not where we are at the moment.