Hurricane Energy retrace lesson in banking profits

On June 26th, Hurricane Energy, the North Sea focused fractured basement reservoir oil and gas explorer produced excellent results from its Lancaster well with the flow tests significantly exceeding expectations – “Production tests achieved a sustainable oil flow rate using an Electrical Submersible Pump (ESP) of 9,800 stock tank barrels of oil per day (STB/d), the established oil flow rate being constrained by the capacity of the surface test equipment”.

The shares subsequently spiked from 28p to the mid-40p range on the day and then went as high as 54p in the next couple of days. Today they sit at 38p, quite a retrace from the highs achieved last week and below the IPO price of 43p. Long term investors in AIM oil and gas shares will know that they never go up in straight lines especially with the long lead times to prove up reserves, order equipment and build infrastructure before first oil.

Hurricane energy’s Lancaster well result was transformational for the company but many investors seem to have got carried away as to how quickly things might happen.

Some were expecting news of a reserves upgrade this week after the rig demobilisation RNS simply stated that the rig had finished its work on the field and then the shares started heading backwards. The company’s reserves auditor will now be sitting on all the data from the Lancaster well and it will take some time for them to assess the information from the flow test and potentially move up contingent reserves and increase their certainty of recovery issuing a proven and probable number. This process doesn’t take days, normally months.

Farm out discussions apparently started in January, but it is usual for these things to take at least 9-12 months, and in the case of Xcite Energy, a lot longer! Therefore it would be surprising for Hurricane to announce a partner for its assets any time soon. More drilling will take place in 2015 to appraise its other assets off the West coast of the Shetlands and also to further appraise Lancaster.

News will come from Hurricane, but don’t expect a ground breaking announcement in the next few weeks. The end of 2014/early 2015 should be interesting though especially after the excellent result from the  Lancaster well in June. The share is a good lesson in not getting carried away with hype on AIM and talk of imminent news and huge further gains. After a big spike, it can often make sense to bank some profits unless near term news flow is assured (e.g. Leni Oil and Gas spiked and kept going from 0.8 to 4p since the RNS’s kept on coming). You can miss out on maximum gains, but a profit’s not a profit until you’ve banked it.

Contrarian Investor UK

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