Interactive Investor

The Oil Man: Oil price, Hurricane, Sound, EnQuest

9th September 2016 13:19

Malcolm Graham-Wood from interactive investor

WTI $47.62 +$2.12, Brent $49.99 +$2.01, Diff -$2.37 -11c, NG $2.81 +13c

The Energy Information Administration (EIA) provided almost all the news yesterday and it was bullish across the board, from the Short Term Energy Outlook (STEO) to the gas consumption figures and finally the inventory stats.

Taking the last first, even after the American Petroleum Institute number, after hours on Wednesday, the draw of 14.5 million barrels was bigger than expected - even after the Hermine shut-ins, which also caused import delays around the gulf.

As usual on these occasions, it will be wise to keep one's feet firmly on the ground and wait until next week, just to see if the numbers average out. The big draw in gasoline stocks also pepped up the marché and there is less weather excuse here; if anything it would be the Labor Day weekend that "drove" that.

The STEO from the EIA also caught the bears on the hop a bit, as it suggested that supply is falling and will be less than demand by the third quarter next year, thus taking crude from inventory then.

I can see the bears' view; OPEC crude is pumping at up to 34 million barrels per day (b/d) and showing no signs of falling, and even Russia appears to have found some more and is up to 11 million b/d.

Finally those natural gas numbers: the EIA, again, suggests there has been record gas consumption this summer; indeed Wednesday's number of 36.2 billion cubic feet (BCF) was up with the best, and the Summer's average was 35.2 BCF per day, up 9% year-on-year and up 23% on the five-year average.

Thank goodness for all those stocks, I say - and remember that we actually had one week of draw in the summer build months!

Hurricane Energy

Hurricane has announced that 205/21a-7, the pilot well, has completed its logging and testing phase and will now be abandoned in preparation for side-tracking the top hole to form the 7Z horizontal well.

There can be little dispute that this has been a genuinely significant discovery which adds meaningful barrels to the company's reservoir model, exhibited at their Capital Markets Day back in June. The bare facts are that the company has announced a "very significant" hydrocarbon column of at least 620 metres (m), which extends well below the structural closure at 1,380m total vertical depth sub-sea (TVDSS).

The provisional analysis indicates a minimum "oil down to" at 1,620m TVDSS, 240m true vertical depth below structural closure and wireline samples of Lancaster type oil at 1,640m.

If that wasnt enough, then the secondary target of the Victory sandstone reservoir flowed at 6,600 barrels of oil per day (bopd) up to 11,000 bopd with artificial lift and submersible pump which is way better than expectations.

What does this mean for the Lancaster resource range? Well, the numbers immediately move up from the 200m barrel mark shown at the capital markets day, which was then a 50% chance and is now more like a 90% chance - and with such a discovery one should make the range at least 350 million barrels and more likely 500 million a realistic target, if not significantly more.

This confirms the discovery to be one of the largest in recent UK continental shelf history and more than justifies the management decision to abandon the farm-out discussions and raise money from Kerogen, Crystal Amber and other institutions.

With the company moving on to drill the horizontal well, which is designed to provide a second future production well and be part of the well stock for the EPS, things can move ahead fast. One of the big advantages of this is that first oil is likely as soon as 2019 from two wells with a floating production, storage and offloading (FPSO) unit; if this is much bigger than earlier thoughts, these plans may yet change.

The high case EPS number indicates that, should all these numbers be vindicated, this truly is a "UK game changing field development" and this will truly be only the first stage in such a development.

With a probable farm-out on better terms and not forgetting other portfolio prospects such as Lincoln, Warwick and Whirlwind to assess, I consider the 50% rise in the stock this morning to be just the start for Hurricane, as if anyone ever doubted it...

EnQuest

Just a quick word on EnQuest, which produced results yesterday which again showed the company's ability to reduce operating costs. In its case, costs have fallen from $46 to $23 per barrel, echoing the move by Premier recently.

For EnQuest, which has Kraken coming on stream, it also shares the problem of high net debt, but some asset sales and some rejigging of the debt should enable it to weather the storm.

Operationally the announcement was good; production up 43%, pushing up earnings before interest, tax, depreciation and amortisation and pleasing analysts; the storm is not weathered yet but EnQuest looks, like others, to remain afloat….

Sound Energy

Also yesterday Sound announced that it was flying along, with the Tendrara TE-7 well onshore Morocco and that it has reached the second casing point.

Sound continues to do well and the shares, which touched 80p yesterday, remain good value if those numbers - in the high-trillions of cubic feet - are achievable.

Shore Capital E&P Conference

I was lucky enough to be invited to the annual Shore Capital thrash yesterday and, as usual, they provided a number of companies who shared their current thoughts.

Opening remarks from Giles Clarke were positive and the thoughts from the perennial market expert Gervais Williams MD of Miton Asset Management highly informative.

Ahmet Dik, CEO of Victoria Oil & Gas, addressed "successfully monetising African gas" which should be more appreciated by the market. With a huge well to drill with Exxon next year, Arthur Millholland talked about Liberia as he has done before, its now down to the drill bit.

Following a recent raise, Andrew Knott, CEO of Savannah Petroleum talked through his "early mover advantage" in Niger's Central African Rift system in good company with CNPC. Also having had a recent raise, Jay Bhattacherjee, CEO of Aminex, was clearly pleased to be receiving money from Kiliwani North - as was Neil Ritson, who was in the audience taking notes.

The fund managers from CQS New City also spoke about the market and US shale and shared the views above from the EIA about the market moving into supply and demand balance next year.

A new presentation from Nick Harrison of Amerisur finished proceedings and he was upbeat about building a long term proposition for the company in Latin America.

AMER raised money earlier in the year and, with the OBA pipeline due anytime now, showed that drilling in Platanillo and the OBA "cluster" strategy have the firepower to go after the significant resource potential.

In the big audience it was good to see a number of old friends: Rob Arnot, Hurricane Chairman, giving away nothing, Paul Welch, CEO of SDX Energy, Brian O'Cathain relaxing a touch, Cathal Friel of Fastnet and many more.

And finally…

My apologies to all those rugby fans to whom I did a massive disservice by not mentioning the start of the Premiership season last week.

The big double header at Twickenham was quite a day and, although Sarries were never going to lose, the Quins nearly did. This weekend the best matches look like the Chiefs v. Sarries and the Tigers v. the Wasps, with the small matter of Worcester v. Gloucester thrown in…

With Muzza going out at Flushing Meadow, it leaves brother Jamie holding the flag in the doubles…

And in the Prem, it's the first really big derby of the season, as the Red Devils host their Noisy Neighbours tomorrow lunchtime.

The other big game is the Foxes going to Anfield to play the HubCap Stealers; is it me or have they had a particularly difficult start to the season?

The Hammers have Dimi back and host the Hornets - and with Hull City Tigers at Burnley, it leaves David Moyes and the Maccams to host his old team, the Toffees.

Over at the O2 we will watch Kell Brook go up two weights and try and take on Gennady Golovkin - a task rather too much, you may think.

Adding to all this there is the St Leger at Doncaster; city types who dont know about racing will know the date, as the old adage goes: "sell in May and go away and dont come back 'til Leger day"...

And, of course, the Paralympics are underway and in the first day team GB picked up five golds, which puts them straight into second in the table.

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.