The development of Hurricane’s Lancaster early production system (EPS) remains on track for H119 first oil. We estimate a 1 January 2018 point-forward IRR of 63% for the EPS phase based on current commodity price forecasts. We use the EIA’s short-term oil forecast with Brent at $66/bbl for 2019 and long-term $70/bbl (from 2022). We believe the market is fully valuing a 10-year Lancaster EPS phase (34.7p/share net of debt), a project that has the potential to significantly de-risk our RENAV of 81.0p/share (increased from 78.4p/share). Our RENAV includes a risked value for Lancaster full field development and two mid-sized field developments (250mmbo) at Lincoln and Halifax.
Execution of Hurricane’s Lancaster EPS development appears to be progressing in line with management’s unchanged expectation of first oil in H119. We believe market focus in the coming months will shift to commissioning, data gathering and 2019 production expectations. Management guidance of gross 10kbod per well initial production rate implies low initial draw-down with potential production upside once data gathering objectives have been met. Our 2019 production expectations reflect an end-H119 first oil and slightly more modest 12-month production ramp-up than company guidance. A more aggressive view on first-oil delivery will have a modest positive impact on NAV, but of greater significance will be the data gathered by Hurricane once production has stabilised, which will shape Lancaster’s full field development.
The recent rise in Brent crude increases the likelihood and value retained net to Hurricane in the event of a farm-out of its asset base. In our view, a farm-out on the back of supportive data from the Lancaster EPS seems a plausible scenario and Hurricane is keen to ensure that value is ascribed to the all of its Rona Ridge assets through continued appraisal of contingent and prospective resource. We continue to assume a development farm-out in our base valuation using a farminee 20% IRR.
Our RENAV stands at 81.0p/share (up 3% from 78.4p/share) as we mark to market for EIA 2019 oil price assumptions and increase our EPS commercial chance of success from 90% to 100%. We continue to include 10% capex cost contingency, which we expect to release closer to first oil.