Hurricane Energy (HUR)

[FabianBjornseth]

I was not around at the time of the EPS fundraising, but I've gathered that it was controversial. What were the alternatives that would have secured funding without diluting equity value?

[NigWit]

That’s a big can of worms Fabian.

At the 2017 AGM, which took place before the fundraising but after the warrants, Richard Bernstein stood up and asked Robert Trice if he’d sell Lincoln for £500m. Trice said it was worth more. I was sitting right behind Bernstien at the time and witnessed the whole short conversation.

On the morning of the day of the fundraising there was also a Crystal Amber investors conference, which I also attended and I spoke with Richard at length. He was upset by the warrants, said he’d have loaned the money instead and most clearly had the wherewithal to raise the £500m for Lincoln but I don’t know what he had in mind exactly. However, I am clear his question of Trice at the AGM was not hypothetical and he had a viable plan. Trice was due to attend the Crystal Amber day but pulled out at the last moment, when David Craik stepped in, as you have seen from the video recording. We now know that Hurricane were about to announce the fundraising after the market closed that same say.

Now, in effect, Lincoln has been sold for about the same sum as Bernstien suggested last year, which is why he's tweeted his vindication. I don’t know how much of a role he had in negotiations, if any.

I’m pleased with the farm out but, in my view, had it taken place last year instead of the warrants and fundraising there would have been no dilution, no allegations of bad governance and no public arguments in the press. The share price would have been much higher than now.

However, all that’s split milk not worth crying over so I’m looking where the headlights are shining and not in the rear view and I think others should do the same since the EPS execution has been well-managed.

Hope this helps.

[FabianBjornseth]

Thanks NigWit, that helps me understand more of the background for where the company is at today. I agree it's better to leave it in the past and focus on what's to come, as we should have a very interesting 12 months ahead. Beyond the attractiveness of the investment, Hurricane is just a plain fun company to follow!

[NigWit]

You’re most welcome Fabian. There’s always plenty of newsflow and speculation around Hurricane and it’s certainly fun to follow if one can keep oneself sufficiently removed. You’ve probably noticed that one of the other message boards is like the bastard child of Eastenders and Dallas, complete with mystery ships, mob rule, villains, misunderstood good guys and a ‘who shot JR’ type plot line.

[FabianBjornseth]

Operations update this morning from Dr Trice. Sub sea production systems now in place at Lancaster. All we need now is an FPSO hooked up. Very exciting indeed.

Absolutely! Although it's clear that the Aoka Mizu will not be ready for sailaway before the end of Q3. I'd say any hope of first oil before Q1 2019 is out the window. We might have to stay patient during the winter, as there might not be a weather window.

[PeterGray]

I'd say any hope of first oil before Q1 2019 is out the window

Agree it's unlikely - but was it ever not? Company guidance has always been for 2019. It's only BB chat that has become convinced otherwise.

Peter

[WessexMario]

Peter, not just bb chat; Hurricane have often said that foil might be possible in 2018, but I agree that they've never promised it until 1H19.

eg, the Environmental Statement says (page 3-3) "The first oil production is targeted for the middle of 2019 ["anticipated foil"], although it is possible it could begin as early as the end of 2018. [potential foil]"
Dr T has also stated in interview that Aoka Mizu might arrive in the field this year, but whenever pressed on a date for foil he's always stuck to the published plan with 1H19.

[FabianBjornseth]

Peter, not just bb chat; Hurricane have often said that foil might be possible in 2018, but I agree that they've never promised it until 1H19.

eg, the Environmental Statement says (page 3-3) "The first oil production is targeted for the middle of 2019 ["anticipated foil"], although it is possible it could begin as early as the end of 2018. [potential foil]"
Dr T has also stated in interview that Aoka Mizu might arrive in the field this year, but whenever pressed on a date for foil he's always stuck to the published plan with 1H19.

People have interpreted this in slightly different ways. For me, it sounds like the "technical limit" schedule would have allowed first oil to be this year. It would make sense then to flag that in the environmental statement to at least have the production permit in order, even though projects almost never come in on the technical limit.

However, the FPSO being ready for sailaway has been forecasted in company presentations to be within Q3 2019. If that is now in October, it is undeniably a delay, although a small one. Probably the Spirit deal should be seen in light of this, as further drilling was previously contingent on EPS production.

[feste]

Hi all,

Morgan Stanley, HUR's newly appointed joint broker has published an interesting note on the company, extract below :

Our base case, excluding value for contingent resources, implies 27% upside:
We assume 10-year Lancaster EPS and 8-yearGWA EPS program unlocking value for 74mnbbls of reserves
But the upside could quickly move – our bull case implies ~600% upside.
Assuming$10/bbl value for to ~785mn bbls of Lancaster and Lincoln 2C reserves, we arriveat a 292p NAV.
Assuming $80 oil prices, we see potential for a bull-case NAV of 381p.
Our bear case implies ~65% downside:
Negative EPS results could lead to a total reset of current plans.
We assume lower production for 6-year Lancaster EPS and $50/bbl oil, leading to a NAV of 18p.

You pays yer money, etc. The bull case scenarios seem broadly in line with dspp's numbers, if you knock off the effect of Spirit farm-in.

Note the 'health warning' conclusion " With the wide range of valuation outcomes and uncertainty even in the base case, we think assigning a price target is not relevant at this time. "

ATB

[NigWit]

Perhaps uniquely I’m intrigued by the 65% bear case downside to a NAV of 18p per share. Other cash in the bank, which would go the bondholders, anyway, what value would remain if the EPS is unsuccessful?

[feste]

Hi NigWit,

From the same source : "We assume lower production for 6-year Lancaster EPS and $50/bbl oil, leading to a NAV of 18p."

ATB

[FabianBjornseth]

Hi NigWit,

From the same source : "We assume lower production for 6-year Lancaster EPS and $50/bbl oil, leading to a NAV of 18p."

ATB

.
Seems like a reasonable downside case to my understanding. The risk is not so much that the wells suddenly stop flowing after two weeks, but rather that they display pressure/rate behavior indicating limited reservoir connectivity. The FPSO would still be on station as long as the rates are economical, but a full field development would be hard to justify.

[dspp]

I have had a moment to reassess my quickie-analyses of the situation for a HUR shareholder, now that the Spirit deal has been done.

Firstly in Table 1 here is a summary of my various analyses, some of which I don't think I have put here before. I have taken a few liberties with time allocation to make things easier to read. You can see how my view, and that of the market, have evolved. The latest is the lowest line of course, which I will turn to next.



I am rather pushed for time so if you don't at first glance understand Table 2+ then please read back through my earlier analyses as it is much the same. I have restructured to allow for the Spirit %. I have adjusted my $/bbl for status to delineate between a $3 and a $5 value-point in a way that is more conservative than before.






I hope this helps. It is a quick-and-dirty approach to the analysis as only a couple of these figures can be directly traced back to a DCF. It takes no account of recent oil price increases, at least not directly, and so is somewhat conservative. It ignores capital accruing or being spent for reasons I explain in other posts and which can be extended (roughly) to the period of interest here. All is on a fully diluted basis. I haven't had a chance to read the analyses of MS etc. so I'm not sure if I am on the same basis as them.

(I am not around TLF a great deal right now. I am extremely busy at work. I am (at least for now) still a TLF mod and so if I spot something untoward in my allocated area during a rare visit then I will do whatever is necessary.)

regards, dspp

[dspp]

HUR mid-year RNS
https://www.hurricaneenergy.com/communi ... ws-service
or
https://otp.tools.investis.com/clients/ ... id=1189009

extract below, but go and read the full thing online as it has plenty more detail if you are that way inclined.

*****************************************

Half-year Results 2018

Hurricane Energy plc, the UK based oil and gas company focused on hydrocarbon resources in naturally fractured basement reservoirs, is pleased to provide its 2018 interim report and half-year results for the period ended 30 June 2018.

Dr Robert Trice, Chief Executive of Hurricane, commented:

"During the first half of 2018, Hurricane has been focussed on the Lancaster Early Production System (EPS) development. I am delighted to report that operations have progressed to plan and within budget, allowing us to reiterate our first oil guidance of H1 2019.

The two production wells have been completed, the turret mooring system (TMS), subsea umbilical, risers and flowlines (SURF) have been installed at the field, and the upgrade and life extension of the Aoka Mizu FPSO is in its final stages in Dubai. Sea trials for the Aoka Mizu are due to commence by the end of September, with sailaway to follow shortly thereafter.

At 30 June 2018, the Company had $210.1 million in cash and liquid investments, of which $178.6 million was unrestricted. With the well completion, TMS installation and SURF installation phases complete, we remain confident in becoming cash generative based on existing funds. I'd like to acknowledge the outstanding contributions of all our staff and contractors, and our Tier 1 contractors: Bluewater Energy Services, TechnipFMC, Petrofac and Transocean, in delivering the operational progress that has allowed us to reach this position.

As we noted in our 2017 Annual Report, the task in front of us is to de-risk and monetise the substantial contingent and prospective resources across all of our assets. The recently announced farm-in by Spirit Energy (post period-end) to the Greater Warwick Area (GWA) is a first step on this path. The transaction accelerates the appraisal and initial development of the GWA and frees up cash flow from the Lancaster EPS to further appraise and develop the Greater Lancaster Area (GLA) and Whirlwind. We are delighted to have agreed a development strategy with a like-minded company which brings significant operating and financial capacity, together with experience in fractured basement reservoirs.

Following this transaction, Hurricane's outlook for 2019 now includes three GWA wells in addition to first oil in H1 from the Lancaster EPS. The next steps on the GLA remain subject to data obtained from the EPS. However, we believe that we will be able to undertake a drilling campaign on the GLA in 2020/21, ahead of planning for further development. We are entering a very exciting time for the Company and its shareholders. I look forward to first revenues and continued appraisal and development of our significant Rona Ridge resource base next year."

2018 Interim results summary

Financial results

· The Group's loss after tax for the first half of 2018 was $75.1 million (H1 2017: $4.2 million), including a non-cash fair value loss on the embedded derivative element of the convertible bond of $70.2 million

· Operating expenses for the period were $4.7 million (H1 2017: $6.0 million)

· As at 30 June 2018, the Group had cash, cash equivalents and liquid investments of $210.1 million (31 December 2017: $360.1 million). This includes $39.0 million of liquid investments held in term deposits which mature within 12 months and $31.5 million held in escrow accounts

· The net decrease in cash, cash equivalents and liquid investments in the period was $149.9 million (including the effects of foreign exchange rate changes), the majority of which was related to investment in the ongoing development of the Lancaster EPS, with net cash outflow from operating activities of $2.7 million

Operational and corporate developments/outlook

· Lancaster EPS first oil guidance maintained at H1 2019

· Significant Lancaster EPS development hurdles achieved, including:

o Delivery of TMS and SURF

o Completion of the two production wells

o Conclusion of the offshore installation programme which included installation of TMS and SURF

o Final stages of Aoka Mizu life extension and upgrade works reached in Dubai, with sea trials to commence by the end of September and sailaway anticipated shortly thereafter

· Spirit Energy farm-in to GWA completed

o Agreed five-phase work programme targeting development with 500 million barrels of reserves, significantly accelerating development of the GWA

o Up to $387 million in carry

o Hurricane fully carried on first phase of up to $180.6 million, including the drilling of three wells on the GWA in 2019

· Transocean Leader rig contracted for the three 2019 GWA wells, to begin in Q1

[NigWit]

Whilst I generally welcome today’s results I’m left with two concerns.

Firstly, I think the company has kicked the can down the road regarding listing on another market. They set up the governance committee almost a year ago and are still procrastinating. I hope certain large share holders remain engaged on this to make sure it happens because the comments on this read to me like a non-progress report and are far from positive, except maybe to the most rose-tinted spectacle wearers.

I’d also like to see a more equal distribution of sexes at top level. It’s unacceptable in this day and age that a company as large as Hurricane Energy has no women board members.

Secondly, has anyone performed a detailed calculation of the remaining costs of the EPS and total overhead until FOIL to establish how long before the cash runs out and how much will remain at FOIL? This seems to me to be the most relevant test of today’s RNS announcement. We don’t want any more dilution if there are unforeseen contingencies. I ask since, if the amount of cash spent in H1 is repeated in H2, and I am not suggesting that it will be because I don’t know, then things are tight.

[Clitheroekid]

It’s unacceptable in this day and age that a company as large as Hurricane Energy has no women board members.

Why? If a company is recruiting women to the board just to fill some sort of quota it's pure tokenism and a sign of weak and hypocritical management. I would also imagine that any woman that was hired simply for PR purposes would feel - quite rightly - incredibly patronised.

All such appointments should be solely on merit and suitability for the post, not on the grounds of sex, race, disability etc. Once you bring parameters like that into the equation who decides what weight to give them and how they should be applied in any given case? Are you saying that a female candidate who was objectively inferior to a male candidate should nevertheless be selected purely because she's a female?

Tokenistic recruiting like that should be left to the public sector, who are, rightly or wrongly, expected to carry out social experiments at our expense. Private companies should be left to recruit the best people for the job.

[NigWit]

https://www.theguardian.com/business/20 ... ays-report

Not that I’m usually a Guardian reader but, as you’ll see, Hurricane’s lack of females has been noted adversely. I’d prefer them to recruit a diverse leadership team from the whole talent pool and not just half of it because I believe that it’s important to discourage the groupthink that’s inevitable when all individuals are similar.

Anyway, it’s inconceivable that all the best people are old, white and male (like me) so it should be a concern.

———-

Perhaps more importantly. It’s all very well to say that the company won’t run out of money but what else would we expect them to say at this stage? I’d like to see a breakdown showing how the money has been spent, what remains to be paid for and how long before cash dries up. It would not need to be overly detailed, just a bit clearer than today’s announcement. Funnily enough I think I’d be more likely to trust it coming from a woman too.

[FabianBjornseth]

https://www.theguardian.com/business/2018/may/27/half-of-uk-big-energy-firms-still-have-all-male-boards-says-report

Not that I’m usually a Guardian reader but, as you’ll see, Hurricane’s lack of females has been noted adversely. I’d prefer them to recruit a diverse leadership team from the whole talent pool and not just half of it because I believe that it’s important to discourage the groupthink that’s inevitable when all individuals are similar.

Anyway, it’s inconceivable that all the best people are old, white and male (like me) so it should be a concern.

I don't want this to escalate into a long debate on gender politics, I just want to say that I share your views on this. For me, it is not a sign great sign that the selection process has been unbiased when they all fit in the same demographic. I'm afraid of value might be missed by not searching wide enough.

[pijoe1212]

i am just trying to see how this site works! evening Nigwit etal..

so just start with part 1 in response to DSPP's posts?
DSPP
Thks for posting that assessment. I realise it is a development of prior posts. What it shows is a rational assessment of value at future dates. I am more interested in understanding the current mcap. Without question so long as the EPS works (on a technical level of pressures / interference etc which is way beyond my reservoir engineering understanding) then the future value if far higher than current value (and frankly at this stage £2 or £5 per share is simply not relevant!).
What I have always tried to understand is what does the market value at this point in time and why?
You have identified a current “value” at 78p but the market says c. 55p. Prior to the Spirit deal it was c. 48p’ish (I would discount the spike upto 54p as this was generated by Daily Mail comments in my view).
So a few points:
- SP moved from c. 48p range to c. 54p. That is an adder of some £148M (or at $1.3 /£ some $192M).. close to the $180M phase 1 carry. Mcap at 48p was $1.53bn
- I note you use a $5/ bl EPS value, but also declare a 10 yr EPS timeline. I would rather use a NPV EPS value as the basis of assessment. The CPR “high” price deck uses a $70 2018 oil escalated thereafter (about 8% per annum’ish). In simple terms I would suggest mid year 2018 oil at $75 (i.e. “high deck” plus 7%). The CPR states a value of $736 NPV10 2P (I work all my numbers to 2P). So allow for the +7% on the “high deck” – gives $787M. On a 10 year basis I make NPV10 some $600M more (approx.!). So I make that some $1.48bn.
So there must be a disconnect between your assessment and reality (I would note very clearly all investors should be looking for disconnects – called buying low and selling high!).
Perhaps a few reasons / explanations theories:
1. The market is only valuing the EPS 10 yr NPV10. The numbers fit that..but that cannot be the case if one accepts the Spirit deal added to the Mcap..
2. One could of course do the correlation of oil price to 10 yr EPS NPV10 and find to not a bad fit!
3. I would suggest one explanation could be as follows:
“The market” has assessed the EPS and concluded the risks are only normal O&G project risks (of engineering / timing / detail). As you and I and many others have stated the watering out risk for the EPS is low (still real but low). The market has also assessed the down side NPV10 is a 10 yr EPS. In other words that nothing will happen with the other assets and they are worthless but a 10 yr lanc EPS has value. But that does not make sense ..if the Lanc EPS works then why (as min base case) not EPS’s work on the other assets?

So I would suggest ..

[dspp]

pjoe,

Welcome to TLF.

I am not around here a great deal at present as I am very busy at work, in a variety of time zones.

You are quite correct that there is a disconnect between the simplistic values I have shown, and the actual value in the market. These disconnects are persistent, but have reversed in sign from time to time which is a point that should be noted. There are a great many ways of calculating values, some simplistic and some complex. Everybody in the market is making that calculation one way or another, if only by watching what the bellboy is buying. If you are a trader you might use different valuation models than (say) a LTBH type of shareholder. So first you need to decide how much of your pot is backing which strategy, then you need to use the appropriate valuation methodology for that bit of the pot, then you need to execute by going long or short or whatever. Personally I am very busy in my real job so cannot take a short term view. Therefore all I am doing is taking a longer term view and saying that there is enough upside to keep me happy for now. Nothing more complex than that, at least in the sums I show in public. If I was on the inside, believe me I would be showing my homework internally on rather more complex sums (or more likely, getting others to do the sums for me).

Feel free to substitute your own values or preferences, or your own methods. That is exactly what the market is doing. None of us are right, except in retrospect. I am very happy to look at other people's calculations. I think your explanations of the disconnect are all correct, plus some others. It only really matters which is the best explanation if you are trying to game your trading activity against newsflow. Personally I cannot do that because I am likely to be in the air or in a meeting for the critical 12-hours or whatever. There are others around here who are better placed to take a short term perspective than me, and they likely have more at risk than I do. There are some very heavy hitters here, but they don't chatter much.

Personally I think the Spirit deal dialled risk down a lot, at the cost of dialling down the upside value a bit (and dialling up the downside value of course).

Project technical risk is not yet over. Subsurface reservoir engineering risk is still to be explored, and that is the main point of the EPS project. I watch with interest.

Regards, dspp