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Edited Transcript of HUR.L earnings conference call or presentation 28-Mar-19 10:59am GMT

Full Year 2018 Hurricane Energy PLC Earnings Presentation

GODALMING Oct 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Hurricane Energy PLC earnings conference call or presentation Thursday, March 28, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alistair Stobie

Hurricane Energy plc - CFO & Director

* Robert Trice

Hurricane Energy plc - Founder, CEO & Executive Director

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Conference Call Participants

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* Anish Kapadia

Hannam & Partners (Advisory) LLP, Research Division - Analyst of Energy Research

* Ashley Keith Kelty

Cantor Fitzgerald Europe, Research Division - Research Analyst of Oil and Gas

* Christopher Courtenay Wheaton

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Sanjeev Bahl

Edison Investment Research Limited - Analyst

* Sasikanth Chilukuru

Morgan Stanley, Research Division - Research Associate

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Presentation

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Operator [1]

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Good morning, and welcome to the Hurricane Energy Final Results 2018 Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Dr. Robert Trice and Alistair Stobie. Please go ahead, sir.

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Robert Trice, Hurricane Energy plc - Founder, CEO & Executive Director [2]

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Good morning, ladies and gentlemen. Thank you for joining us this morning. And I hope you enjoy this presentation. And I'll give you some guidance for later this year's Capital Markets Day as well as giving you the opportunity to ask both Alistair and I some questions.

So let's start with Page 3, the highlights. Well, I am very, very pleased to be able to confirm that Lancaster EPS first oil is on schedule and is on budget. And in parallel with that, as I'm sure you're all aware, our Spirit Energy farm-in has not only given us a potential $378 million (sic) [$387 million] additional value but has more importantly opened up us 3 wells this year. That's drilling and testing 3 wells this year.

So where we are on the closing cash, $83 million, this effectively means that we will have -- comfortably have enough cash to see through to 4Q this year. But really, that scenario is a nonsense because we're fully expecting to be producing oil by then. And for us not to be producing oil by then means something dreadful has gone wrong. As far as losses for the year, $60.9 million. Well, about $40 million of that reflects the embedded derivative related to the convertible bond, and the rest is simply operating expenses.

So if we can move on please to Slide 4. So as it says, significant steps forward on the GLA and GWA in 2018. We got to where we are, being on track for first oil in 2019, by successfully completing the SURF last year and the mooring installation. As you're aware, the well completions were undertaken successfully with the Paul B. Loyd rig, and the hook-up of the buoy happened in March of this year. So we're now entering the commissioning phase.

With respect to the Greater Warwick Area, which the Spirit Energy farm-in has allowed to happen in parallel with Lancaster, we've got up to $387 million carry across 5 conditional phases. Now the first phase gives us fully carried to $180.6 million, and that work program will include the drilling and testing of 3 wells. Now the deal was announced and obtained regulatory consent in September '18. And the first drilling phase will be with the Transocean Leader. And that is, as I said, signed up for a 3-well program starting Q2 '19.

If we turn over, please. This graph, which is from Wood Mackenzie's commercial technical reserve ranking, demonstrates where Hurricane sits where -- and it shows our challenge, which is to monetize the largest undeveloped resources on the U.K. continental shelf.

So let's look at how we're going to approach that monetization by reviewing where we are on the Greater Lancaster Area. And if you could turn to Page 7, where we start with a very simple summary. So the Lancaster EPS is a simple development, and it's designed for data acquisition and to give us cash flow.

The target initial production is 17,000 barrels of oil per day, so that's net. And we expect to actually be producing 20,000 barrels of oil per day. That's 10,000 barrels of oil per well. But with the 85% uptime, that takes us to a net value of 17,000 barrels of oil per day. What this means is that after we've -- we're in full, as I say, run time basis, that's in excess of $200 million a year, and our average operating costs are $22 a barrel.

So how do we get to that situation of where we are today? If we flip over to Page 8, we can look at the development being delivered on time and on budget through to 3 phases. I am not going to spend deep -- much time on this. You are aware of them, and the pictures tell a thousand words, too. So offshore installation has been complete. The buoy fabrication, we mustn't forget, that was a major piece of engineering done in Dubai. And then the other key point is the FPSO upgrade and life extension works also undertaken in Dubai. So they were there sitting with a vessel which has a 10-year life capability, West of Shetland.

If we turn to Page 9. It's probably more interesting, we're now looking at -- looking forward rather than looking in the past. You can see, as we are approaching first oil, we started with a successful hook-up in March 2019. No doubt you've seen that RNS. We're now in the commissioning phase. Now we've not given you a time for commissioning because it could either be Kraken long or Catcher short. But what I will say is when we introduce hydrocarbons into the system, we will be making an RNS. And that's simply to avoid confusion because once the hydrocarbons are in the system, we will be lighting the flare, and local infrastructure will see that flare. But for us, that is not a key stage.

The key stage and where there will be a full RNS is the provisional acceptance of first oil, and that's when we've actually got the oil all the way through the system and we are content that the facilities are working.

So the provisional acceptance first oil will then lead us into our first lifting, and then we will go through a series of expected profile ramp-ups, which will take us to, after approximately 6 months, our full production rate.

Now when we talk about ramping up to 10,000 barrels of oil per day on a consistent flow, I must make it very clear that this is not a function of the subsurface. We don't -- I'm not expecting there to be any challenges with the subsurface. It's simply ensuring the facilities are all working to allow us to continue production to a continued salable product.

And that leads us to the point I made very early on. We will be having a Capital Markets Day to explain what we have seen and what it means to the company going forward. A date of that will be circulated at the appropriate time.

Next slide, please. Slide 10. This is a slide I'm very pleased to talk about because it's a very nice graphical summary of what we have been mentioning over the last months. It's actually getting our reserves from our current state to a potential of over 100 million barrels by H1 2020.

Now this will be achieved by confirming that the Lancaster production will go on for 10 years rather than the current 6. It -- with the success of the gas export line, we will then be able to take advantage not only of FPSO debottling but also additional oil coming in from the single GWA tie-back. So all those items give us a target of in excess of 100 million barrels reserve by 2020.

Slide 11, a diagram we've seen before, basically just demonstrates that we have a very low-cost development. I don't know if you want to say any extra on this, Alistair, before we move on to Warwick?

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Alistair Stobie, Hurricane Energy plc - CFO & Director [3]

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Yes. I think really the only key point here is that we're currently talking about $22 a barrel of OpEx through the initial stage of 20,000 gross barrels a day. As we double that into 2020, we would expect to see those OpEx numbers come back down into the middle teens, and we'll build a little bit further about that at the Capital Markets Day once we've got our head around what that real OpEx cost is.

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Robert Trice, Hurricane Energy plc - Founder, CEO & Executive Director [4]

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Very good. So we're going to move on to the Greater Warwick Area. So the first part of monetization was EPS and now we're going to talk about the Greater Warwick Area. And basically, the key point about this is that we are trying to accelerate a development that will lead to a 0.5 billion barrel gross reserve by the early '20s.

Again, this is a diagram that's been presented before. I'm going to ask Alistair just to talk you through the financial aspects of it, and then I will talk about the wells that we are planning -- currently planning for this year. Alistair?

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Alistair Stobie, Hurricane Energy plc - CFO & Director [5]

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So the first part of the program are the -- is the 3-well program, which is fully carried by Spirit, and in addition to that, the spend of this year, the long leads that we need to be in a position to install during the summer weather window of 2020. So umbilicals and pipeline really being the key to it, and Technip's new lovely Xmas tree, 2-point turret. And those contracts will be awarded the second half of the year.

That then takes us into the installation period in -- during '20. And that carry is, well, for half of our interest. So Spirit will be paying 75%. We'll be down at 25%. And that's a single well tie-back to the Aoka Mizu.

Concurrent with that, we'll be drilling a further 3 production wells on the Greater Warwick Area. And we're out looking for a rig right now. Some of you may have picked up the inquiry. And then that will -- we will then, at the end of that 3-well program, hand over to Spirit to operate as we move into a full field development. And as Robert said, that's targeting 0.5 billion barrels of our FPSO somewhere on the Greater Warwick Area.

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Robert Trice, Hurricane Energy plc - Founder, CEO & Executive Director [6]

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Thank you. So Slide 14, the wells, you can see this year. That's -- one is going to be drilled on Lincoln and 2 on Warwick. And as I'm sure you're aware, Warwick is yet to be drilled. It's an undrilled prospect, but Hurricane and Spirit believe that Lincoln and Warwick are one giant oil accumulation. And so these 3 wells are designed to, as a first phase, of establishing whether this is, in fact, the case.

Now the interesting thing about the first well we're drilling, which is what we call Warwick Deep, the 205/26b-C well, this is a first for Hurricane, in that we are looking at determining how the fracture system outside what we call local structured closure is going to behave with respect to fluid flow. So this is an extremely exciting well for us because we're effectively looking at deeper oil and deeper fracture properties. We then will be drilling the Lincoln well, which is basically to test the existing discovery and see how that flows. And then finally, a shallow well on Warwick, the 204/30b-A well.

Now all of these wells are going to be tested, and in a success case, they are going to be suspended with pressure gauges in. And that means that when we test the Lincoln well, we should see it respond with the first well's pressure gauges. And then when we drill the final well, the 30b-A well, that test should be seen on the previous 2 wells' pressure gauges. And we'll be leaving those pressure gauges in the holes for subsequent drilling in '20. And the idea is that they will be able to help us confirm or refute whether we have a single giant oilfield or we have a series of fields separated by faults. So that's the plan, and we'll be able to tell you more about our drilling in '20 once we've seen the results of these wells.

So financial results, I'll pass on to Alistair for that.

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Alistair Stobie, Hurricane Energy plc - CFO & Director [7]

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So I think probably the financial results for the category, as with any pre-revenue company, are being remarkably uninteresting. We do make a fairly bumping loss, which is the rather bizarre result of the embedded derivative on the convertible bond. The higher our share price grows

(technical difficulty)

that we make, which is entirely counterintuitive. Other than that, there is nothing odd. In fact, it's about as simple as it could possibly be. I'm delighted to take questions but I really don't feel there's very much to be said until we're actually a producing oil company.

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Robert Trice, Hurricane Energy plc - Founder, CEO & Executive Director [8]

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So with that, I'll summarize with the final slides, and then we'll take some questions. So it's looking at the outlook, how we are going to target the initial full field development financial -- final investment decisions on both the GLA and GWA.

So I'll look at the Greater Lancaster Area first and then talk about the GWA. So first half or the top half of the diagram. Clearly, we are approaching first oil in 2019, and then that will lead to a debottling target on the Aoka Mizu of 40,000 target, up to 40,000 barrels of oil per day throughput. Now currently, our target constraint is 20,000 barrels. So that's a material outlook. And in order to achieve that, we will need to confirm gas export solution. And Alistair and his team are working very hard on that, and we are targeting that first gas for Q4 2020. And so that with gas production, that means we'll be able to optimize the oil throughput from the Aoka Mizu. As I said, target is 40,000.

So then the idea will be to do further drilling and up to an additional 3 appraisal wells, which we designed as future producers -- production wells, which will give us additional well stock and also additional geological information ahead of another full field development final investment decision targeted at around about 2022.

So a lot to be done on Lancaster, but the big prize, we mustn't forget that Lancaster is -- has a 2C resource of 0.5 billion barrels. And potentially, it's bigger if we are able to confirm that Lancaster and Halifax are a single giant field. So much, much excitement to come there.

GWA, if we look at that now. So we're currently in the stage of drilling the 3 wells: the 1 on Lincoln, 2 on Warwick. They're all horizontal wells. They're all designed as producers, and in a success case, they will be suspended and left as production wells. As those well results come in, we'll be planning for 3 appraisal wells the following year, the idea that we will end up at the end of '20 with 6 wells suspended as production wells for future development.

Naturally, in parallel with all this work, there's planning -- engineering, planning, acquiring of long lead items. And then, of course, the GWA tie-back final investment decision in the latter part of this year. Which well that will be, whether it's Lincoln or Warwick, it will be determined by the well results. And then we will go through the development phase, leading us to first oil on the GWA. That will be 10,000 barrels gross tie-back to the Aoka Mizu. And then production from that data, again, helping us inform on the field development. And as Alistair has pointed out, after those 6 wells are completed, we will be handing over operatorship to Spirit, who'll be running the FEED and then the development.

So pretty exciting times for Hurricane looking ahead through to '21 to '22. And on that note, I think I will conclude. And thank you very much for your attention. Yes, so if the operator would like to give instructions for Q&A?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Ashley Kelty from Cantor Fitzgerald.

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Ashley Keith Kelty, Cantor Fitzgerald Europe, Research Division - Research Analyst of Oil and Gas [2]

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Just a quick question on the GWA. Do you believe that there's the same aquifer drive across Lincoln and Warwick as there is at Lancaster?

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Robert Trice, Hurricane Energy plc - Founder, CEO & Executive Director [3]

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Yes, we do. That's the current exploration model. We have no regional data to suggest otherwise.

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Ashley Keith Kelty, Cantor Fitzgerald Europe, Research Division - Research Analyst of Oil and Gas [4]

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And I was also wondering if the Lincoln well will give you any more information if you're going to have the pressure gauges down there about the -- sort of whether you'll get an idea because you'll also be in production that the Brynhild Fault Zone does provide the seal between Lincoln and Lancaster, or whether it might actually be the same structure.

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Robert Trice, Hurricane Energy plc - Founder, CEO & Executive Director [5]

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Okay. The Lincoln production well this year may see the Brynhild Fault Zone. It really depends on the anisotropy to the fracture network which way the pressure pulse goes. But it is possible that we will see that either through the shut-in that we're going to plan this year or alternatively, through the subsequent long-term test of the well that gets tied back.

Of course, the other point is actually that with those long-term gauges on, if we see a Lancaster production field, that will answer the question rather neatly.

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Operator [6]

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We'll take our next question from Sasikanth Chilukuru from Morgan Stanley.

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Sasikanth Chilukuru, Morgan Stanley, Research Division - Research Associate [7]

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This is Sasi from Morgan Stanley. I had actually 3 questions, please. The first one on the 2019 CapEx guidance. I mean I was just wondering, the remaining spend that's left on the Lancaster EPS, how much that was. It seems like the spend so far is already marginally above your previous indication of $467 million of CapEx. I was just wondering where the difference was.

The second question I had was on the connection between Lancaster and Halifax. You've just highlighted if -- it could well be the case that it's a well -- it's one big connected reservoir. In that context, when will we -- when do you expect to have more clarity on that? Will the EPS, Lancaster EPS give you that confidence? Or will you have to do additional present drill -- additional drilling to get to that conclusion?

And finally on M&A. I was just wondering if there's been any additional interest lately, at least just from the start of the -- from the start of this year regarding farm-in for the Greater Lancaster Area. When will you be willing to engage on discussions here? When do you think you'll be ready?

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Robert Trice, Hurricane Energy plc - Founder, CEO & Executive Director [8]

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Okay. We'll answer question 2 first, and then we'll answer question one and three after them. So with respect to -- if you go to Page 4, you can see that we have drawn a line between Lancaster and Halifax, which indicates that we believe that it is one large accumulation. That's the exploration model. To answer your question, when we'll be able to ascertain whether that is realistic, well, it won't be from the early production system data from our current 2 wells. We will need another well on Halifax. And we are -- we have plans for such an eventuality, the object being that such a well would be tested, and then we would determine whether that test is seen by the Lancaster EPS infrastructure. If it's seen, of course, that proves that there's no pressure barrier between the Halifax well and Lancaster. So that's something that we'll be planning, and the earliest that any such well would be likely to be drilled would be '21.

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Alistair Stobie, Hurricane Energy plc - CFO & Director [9]

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The -- so I'm going to -- just to really confuse you, Sasi, we'll go for question 3 on M&A first and then come back. So there have been no formal approaches to us. And you would not probably expect anybody to be so bold as to do so whilst they're waiting for the core data. I think we even hear rumors that people are postponing drilling placement wells until we see the results of the EPS. I couldn't possibly comment on who that might be.

The -- in respect of when we will formally open a data or not is an ongoing conversation between us or amongst us. But we currently believe a 6 deal to Royal and given our deal with Spirit, the next phase of appraisal drilling on Lancaster, Halifax or the Greater Lancaster Area is something that we can comfortably fund ourselves. And as Robert says, if you stick a well somewhere around about the intermediate full block or indeed, the government and post boundary between the 2 that demonstrates [the block], then I think that's a fairly substantial value changer. So really, the question then is how do we fund 2 substantial developments at the same time in '21, '22? And I think that's the point at which we would be seeking to have a partner. Though we're never going to say no to a fundamentally well-funded approach.

In respect of 2019 CapEx guidance. At this point, we are not overspent on our $467 million. In fact, we are 1/71 to inside our target of $467 million. Within the numbers that you see presented by way of non-GWA CapEx into 2019, we do have a Technip deferral that probably sticks out as being -- has to be repaid June 2019, and therefore, that probably just makes it look as though we're spending more than the $467 million. And that was capital that was incurred during 2018.

The balance of our spend to first oil in terms of CapEx is effectively one diving support vessel opening up the wells at the part -- the introduction of hydrocarbon. So I think we are reasonably confident that barring anything horrific, that we will get there. Though it would be quite nice if the weather just calmed down for a little bit up in Scotland.

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Operator [10]

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We will take our next question from Chris Wheaton from Stifel.

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Christopher Courtenay Wheaton, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [11]

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Two questions for me, please. First, I'm asking for clarification on the 40,000 a day debottleneck FPSO production number. Presumably, that's on the same basis as the 20,000 versus the 17,000, i.e., that's a gross number before you take out FPSO downtime.

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Robert Trice, Hurricane Energy plc - Founder, CEO & Executive Director [12]

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Correct. Yes.

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Christopher Courtenay Wheaton, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [13]

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Great. The second question was on the testing capacity or capabilities of the Transocean Leader rig you have for the upcoming GWA, in utilizing GWA exploration wells. What test -- what flow rate capacity from the wells could that test? I'm interested in whether there is a constraint that might mean that the well -- that's going to constrain the flow rates at which you could actually test those wells you're drilling.

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Robert Trice, Hurricane Energy plc - Founder, CEO & Executive Director [14]

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All equipment on an exploration or appraisal drilling rig will be constrained and off. So what we will be aiming to do is to achieve flow rates in excess of 5,000 barrels a day.

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Operator [15]

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We'll take our next question from Anish Kapadia from Hannam & Partners.

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Anish Kapadia, Hannam & Partners (Advisory) LLP, Research Division - Analyst of Energy Research [16]

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I had a few questions, please. Just sorry, I didn't quite catch the response to the CapEx question. Could you just repeat what the expected total CapEx is going to be in 2019?

Second question is just relating to your existing convertible funding and any other kind of debt funding. I'm just -- just wanted to kind of get a bit of an update. Are there any kind of plans to either refinance the convertible? Or are you looking at any further debt financing this year?

And then my other question was on the GWA full field development FID. I think previously, you were looking at kind of a mid-2021 FID, and it seems to have slipped now to 2022. Just if you can give some detail around that.

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Alistair Stobie, Hurricane Energy plc - CFO & Director [17]

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Let me address your last question first. The -- I think you just probably got the GLA and the GWA -- we moved Greater Warwick Area down on the corporate presentation versus where we put it when we were doing the announcement of the deal. So GWA full field development FID is slated for second half of '21.

The -- in respect of our convertible and other debt financing, we don't expect to be out in the debt market this year. That makes -- will make little sense in respect of our future spending plans. The convertible is due 2022, but there are some features that may allow us to extinguish it in advance of that if the prices are right. Clearly, we want to have as clean a balance sheet as we possibly can as we approach 2021 when we start taking FIDs on full field developments.

And then in respect to CapEx. So including the amount accrued for under the -- in the accounts, the CapEx outstanding on the early production system is de minimis. What you will -- what we have to spend outside of the farm-in, or Phase 1 of the farm-in, includes the repayment of certain deferred Technip development costs and then some elements of long leads in respect of 2020 drilling campaigns and so on. But frankly, it's -- the numbers are almost entirely insignificant against cash flows expected to be generated in the second half.

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Anish Kapadia, Hannam & Partners (Advisory) LLP, Research Division - Analyst of Energy Research [18]

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Okay. Great. So I'll just add one more. Can you just give a bit of an update on the gas monetization discussions? And I think they may kick off a bit later this year, but what you'll be watching for there?

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Alistair Stobie, Hurricane Energy plc - CFO & Director [19]

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Well, they kicked off in the middle of last year because we are dealing with -- gas infrastructure is slow and painful. And whoever came up with the concept of divide the price of pipelines needed to be flogged publicly. The -- we have in-principle agreements to it and towards across the Shetland Isles and to get out onto the East of Shetland Pipeline, these are now being turned into fully termed agreements. I think it's probably worth noting that at a $60 oil, we expect to make just north of $200 million of operating cash flow. At GBP 50 a therm, we make 5% of that by way of gas netback operating revenue. So our gas sales is a black wall enabler and nothing more.

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Operator [20]

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(Operator Instructions) We will now take our next question from Sanjeev Bahl from Edison.

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Sanjeev Bahl, Edison Investment Research Limited - Analyst [21]

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It was just a follow-up on the gas export, given that seems to be on the critical path to increase the EPS production up to the 40,000 barrel a day number. Is that going to involve some form of hot tap into the WOSPS pipeline? And can you give us an estimate of how much that might cost in terms of the CapEx? And also how long will we -- how -- what's the lead time on the equipment and the time line on actually progressing the pipeline and the tap-in?

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Alistair Stobie, Hurricane Energy plc - CFO & Director [22]

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So thankfully, when the WOSPS -- when they built WOSPS, they acknowledged the future of Hurricane and kindly put the plan directly on our Whirlwind acreage. I think the plan being the tie-in point, and so there are -- there is both a north and a south tie-in for us. I think it's -- 11 kilometers is the underwater crow flies from the Aoka Mizu.

In terms of CapEx, other than we're still obviously trying to work up both profiles and what's available, but it's a remarkably simplistic downpipe from the Aoka Mizu to the -- to a tie-in. We obviously, as a standard, then provide a -- when you take up a tie-in point, you have to provide another one. But it's very definitely contained within the $787 million of CapEx.

In respect of long leads, we are -- it is -- they are not on the critical path. Some of the valves that we're working through with BP's technical authorities will be ordered in the second half of the year. But down gas pipeline is a relatively standard process that will be ordered at FID. But in terms of direct -- exact CapEx for the specific time, it doesn't spring off the top of my head because really, I think, the core to it is the re -- reconfiguring of the gas compression system on the Aoka Mizu is really the core item. And that will start as soon as the commissioning beds are freed up at first oil.

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Operator [23]

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It appears there are no further questions at this time. I would like to turn the conference back to Dr. Robert Trice for closing remarks.

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Robert Trice, Hurricane Energy plc - Founder, CEO & Executive Director [24]

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Thank you very much, ladies and gentlemen. Some very good questions. Glad that we're able to answer them. And I look forward to presenting to you at the Capital Markets Day, if not before.

Alistair, do you have anything else to add?

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Alistair Stobie, Hurricane Energy plc - CFO & Director [25]

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I think really, it was a presentation to say we look forward to seeing you post first lifting to talk about where the EPS is taking us. Thank you.

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Operator [26]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect your lines.