Hurricane Energy PLC (LON:HUR) shares gave up close to 20% in Monday’s early deals as its final drill result for 2019 evidently disappointed investors.

The Warwick West well was confirmed as a discovery and it measured oil flows, but at 1,300 barrels of oil per day the result was weak in comparison to most of Hurricane’s previous wells.

Success, technical at least, at Warwick West rounds off a three-well campaign in the West of Shetland waters, offshore Scotland, where Hurricane is partnered with Centrica-backed Spirit Energy.

The scorecard for the 2019 campaign was mixed, to say the least.

  • Warwick Deep well (in July) failed to flow oil at commercial rates
  • Lincoln Crestal well (September) achieved rate of 9,800 bopd
  • Warwick West well (December) flowed at 1,300 bopd

Spirit Energy led the drill campaign with Hurricane’s 50% share of costs covered by the 50/50 joint venture deal that brought the Centrica-backed firm into the project.

Subsequently, the British Gas owner has said it is looking to sell its E&P arm for a price analysts pitch at £800mln.

As Spirit took care of new drilling, Hurricane itself has been focussed on the delivery and subsequent monitoring of the Lancaster field early production system, which has so far pumped around 2.5mln barrels of crude since coming online in June.

Drilling distracts from production success

Hurricane shares are down around 14% in 2019 to date, valuing the company at £750mln.

This zoomed-out view of the share price performance belies the value-adding progress made in the year.

Indeed, the retreat from the 30 May high of 60.8p underlines how the market’s view of Hurricane is skewed to hit-or-miss exploration results rather than the establishment of substantial revenue-generating production.

Is this simply a case of a long tail of retail investors and speculators wagging the small-cap dog?

Certainly, one would assume that Hurricane’s private-equity shareholders have longer-term criteria when judging the oil driller’s success or failure.

At the very least such holders (Kerogen holds the largest stake at 16% though overall private equity funds hold well over 20% of the company’s shares) don’t simply trade stock well-by-well like many AIM-punters do.

Even in the current climate, where we’ve seen equity markets punish well disappointments particularly harshly, a bigger question remains.

Why isn’t Lancaster a stronger mitigating factor?

The answer is perhaps that the EPS only represents something like 3% of the total Lancaster discovery.

This highlights two things. One, that Lancaster and the broader project areas really are massive.

And, two, because they’re massive projects Hurricane has limited financial capacity to handle the broader developments alone – the capex bill will most certainly be counted in billions.

This shouldn’t be news to any investor in Hurricane, the idea of either a big farm-out deal or even a takeover has always been part of the conversation when discussing the big picture investment proposition.

What is left for Hurricane to do?

Arguably, Hurricane has brought Lancaster to a point where many might assume it is ‘deal ready’.

So, as we look at the results of a three-well programme across the Greater Warwick Area, are we now getting a glimpse at the reasons why Hurricane has yet to be scooped up?

The neighbouring Lancaster field was a slam-dunk.

Each well sunk stood up to scrutiny and in many ways exceeded expectations.

With these successes, Hurricane delivered for its private equity backers and, in London, the explorer built a solid following of public shareholders – along with the usual cabal of transient spud-following punters.

Evidently, with the Lancaster field, Hurricane could do no wrong.

Inconsistency elsewhere in the neighbourhood, however, may perhaps reintroduce industry uncertainties over the predictability and repeatability of Hurricane’s Lancaster successes to date.

Delivering Lancaster EPS was an important threshold

This summer, the company achieved an impressive long-term goal.

It brought Lancaster – a small portion of it at least – into production while retaining 100% ownership of the project.

Such an achievement had appeared an ambitious goal years earlier when Hurricane put on hold farm-out partnering efforts and instead leaned on private equity for some US$520mln of funding.

After just six months, Lancaster has so far yielded 2.5mln barrels of crude oil and is presently producing in line with present guidance of 11,000 bopd.

Significantly, production rates are presently tempered by the need to gather well performance data and a ramp-up is anticipated as both EPS wells operate simultaneously after December.

This data-gathering exercise is a vital element of the EPS as it is intended to firm up Hurricane’s position in future new partnering negotiations, as proof of stable and sustainable production performance should go some way to assuage any remaining doubts over the field’s long term viability.