Hurricane Energy (HUR)

[dspp]

What is it that you want to "fully understand" that isn't in Note 15? Or is there something that you want to "generally understand" in that Note that you don't currently?

I'm pretty certain you don't want a qualification in Financial Derivative maths around convertible bonds, and frankly it would be easier to direct you to a textbook than do so on this thread (it's long enough already!)

I am qualified and finance and derivatives but I’m not a quant, but that’s not the point, normally when there is a corporate bond the prospectus is available to read, but in this case I can’t find it. I do want to ‘fully’ understand it. For example, what claims or seniority does the bond have? If HUR is going to be squeezed, equity holders need to understand how and why it might happen, senior debt is the biggest threat to equity owners when things get tight. I’d prefer to understand this and move it to the ‘done’ tray and focus on watercut and CF tbh.

There is a section on the convertible bond on the companies website. Go to "Investors" then "Placing Documentation". I had assumed you had already looked there. If that is the case what additional documentation do you need to understand it? There may well not be a "prospectus" in the sense that you mean it as this was a Private Placement. The bond appears to be the only debt obligation the company has so I am confused by what you mean by "seniority". Debt is senior to equity, and this is the only debt, as far as I can tell (although there will be lease transactions, which are trading rather than finance leases I suspect - for equipment, for the boat to transfer oil to port etc.)

If it helps you at all the bond was brought by Cenkos Securities, and Stifel Nicolaus Europe Limited, as joint bookrunners, and the contact names and telephone numbers are there to be seen on the documents that are located on the company website as noted above.

(I am not deliberately being obtuse but to access the documents you have to agree terms and conditions etc. which are harmless but state you won't make information to certain legal jurisdictions, hence why I am not typing anything specifically on an internationally accessible public platform)

dealtn,

The website info is of limited use. Either it does not cover some aspects at all, or could be interpreted in more than one way.

The key issue we are wondering about is what happens in the event of HUR being unable to repay the principal in 2022, either because HUR did not have cash, or could not raise the cash. Assuming that the bondholders were to not cooperate in a rollover/extension, what is the recourse provided for in the bond documentation ?

regards, dspp

[drillordrop]

I am qualified and finance and derivatives but I’m not a quant, but that’s not the point, normally when there is a corporate bond the prospectus is available to read, but in this case I can’t find it. I do want to ‘fully’ understand it. For example, what claims or seniority does the bond have? If HUR is going to be squeezed, equity holders need to understand how and why it might happen, senior debt is the biggest threat to equity owners when things get tight. I’d prefer to understand this and move it to the ‘done’ tray and focus on watercut and CF tbh.

There is a section on the convertible bond on the companies website. Go to "Investors" then "Placing Documentation". I had assumed you had already looked there. If that is the case what additional documentation do you need to understand it? There may well not be a "prospectus" in the sense that you mean it as this was a Private Placement. The bond appears to be the only debt obligation the company has so I am confused by what you mean by "seniority". Debt is senior to equity, and this is the only debt, as far as I can tell (although there will be lease transactions, which are trading rather than finance leases I suspect - for equipment, for the boat to transfer oil to port etc.)

If it helps you at all the bond was brought by Cenkos Securities, and Stifel Nicolaus Europe Limited, as joint bookrunners, and the contact names and telephone numbers are there to be seen on the documents that are located on the company website as noted above.

(I am not deliberately being obtuse but to access the documents you have to agree terms and conditions etc. which are harmless but state you won't make information to certain legal jurisdictions, hence why I am not typing anything specifically on an internationally accessible public platform)

dealtn,

The website info is of limited use. Either it does not cover some aspects at all, or could be interpreted in more than one way.

The key issue we are wondering about is what happens in the event of HUR being unable to repay the principal in 2022, either because HUR did not have cash, or could not raise the cash. Assuming that the bondholders were to not cooperate in a rollover/extension, what is the recourse provided for in the bond documentation ?

regards, dspp

Hi, I would go slightly further and add that we would also want to understand (i) covenants (ii) other exotic aspects of the bond such as the embedded derivative.

Folks have said the derivative is too complex to worry about, but I can get a quant to explain it in normal language.

[dealtn]

The assumption must be that equity will be close to worthless if it gets to that stage.

More likely you will have a rollover financing of some sort before it gets to that though. You might well expect to see significant equity dilution as part of that via a debt for equity swap. At best you will see worse bond terms, so more cash flow used for financing debt than for (future) share holder reward.

Personally I would have mentally written off my investment if it gets to that stage.

I can confirm there is NO prospectus though, now having read the 55 page PDF proposed convertible bond offering document. It states that much very clearly (and the reasons why). If you, or anyone else wants "fully understand" I suggest at a minimum you do the same.

[dealtn]

Hi, I would go slightly further and add that we would also want to understand (i) covenants (ii) other exotic aspects of the bond such as the embedded derivative.

Folks have said the derivative is too complex to worry about, but I can get a quant to explain it in normal language.

The "embedded derivative" is simply the option the company has "sold" to the bond holders entitling them to have an equity stake should they wish to convert from a debt instrument investment.

Is it the terms of that conversion, the method of how that conversion transpires, or the accounting treatment (ahead of the conversion date), or something else that you would like guidance on, or help in finding in the offer document?

[pijoe1212]

i would return to an earlier question i had regarding the bonds.

what does "initial conversion price" mean (as stated in the RNS's regarding the bond issue)

the implication (at least to me!) is that conversion price can change by an undisclosed method..

views welcomed.

[drillordrop]

The assumption must be that equity will be close to worthless if it gets to that stage.

More likely you will have a rollover financing of some sort before it gets to that though. You might well expect to see significant equity dilution as part of that via a debt for equity swap. At best you will see worse bond terms, so more cash flow used for financing debt than for (future) share holder reward.

Personally I would have mentally written off my investment if it gets to that stage.

I can confirm there is NO prospectus though, now having read the 55 page PDF proposed convertible bond offering document. It states that much very clearly (and the reasons why). If you, or anyone else wants "fully understand" I suggest at a minimum you do the same.

The prospectus you are referring to was for the placing. There will be one for the bond, institutional money could not buy it without one.

[dealtn]

Hi, I would go slightly further and add that we would also want to understand (i) covenants (ii) other exotic aspects of the bond such as the embedded derivative.

Folks have said the derivative is too complex to worry about, but I can get a quant to explain it in normal language.

The covenants of the bond are to be found on the company website. Go to Investors, then Placing Documentation, then Shareholder Circular and Notice of General Meeting dated 4/7/17. This is a 42 page PDF file of Project Harrier which was the "Proposed Fundraising..." Fundraising being the joint equity placing and concurrent convertible bond offering.

The covenants are all under section 10 "The Convertible Bond Offering"

This was all voted on, and presumably passed without amendment.

[dealtn]

i would return to an earlier question i had regarding the bonds.

what does "initial conversion price" mean (as stated in the RNS's regarding the bond issue)

the implication (at least to me!) is that conversion price can change by an undisclosed method..

views welcomed.

Initial conversion price does suggest that the conversion might take place under a different calculation than "initially" agreed. It isn't "undisclosed" however. The term "initial" is used because subsequent to the convertible bond being issued, and before the conversion date, it is possible that additional capital restructurings might occur (such as rights issues etc.) This ensures that the effect on the share price of such additional capital raising/restructuring will also be reflected in the "conversion price" to protect holders of the convertible bond such that their conversion rights are preserved.

As I have stated elsewhere the full details are available on the company website. Go to Investors, then Placing Documentation, then open the PDF on 4/7/17 titled "Shareholder Circular and Notice of General Meeting". Scroll down to section 10, being "The Convertible Bond Offering", where it is explained.

[drillordrop]

Hi, I would go slightly further and add that we would also want to understand (i) covenants (ii) other exotic aspects of the bond such as the embedded derivative.

Folks have said the derivative is too complex to worry about, but I can get a quant to explain it in normal language.

The covenants of the bond are to be found on the company website. Go to Investors, then Placing Documentation, then Shareholder Circular and Notice of General Meeting dated 4/7/17. This is a 42 page PDF file of Project Harrier which was the "Proposed Fundraising..." Fundraising being the joint equity placing and concurrent convertible bond offering.

The covenants are all under section 10 "The Convertible Bond Offering"

This was all voted on, and presumably passed without amendment.

Ah, got it thank you. Okay, so sorry to keep nagging about this but I still think the prospectus for the bond should be public. The describe section 10 falls short of fully explaining to shareholders the nature of the instrument. Look, if I’m wrong and there are no additional risks not already disclosed I’ll make a £50 donation to TLF. But the embedded derivative sits on the balance sheet and that was not explained, so what else is there?

[dspp]

Hi, I would go slightly further and add that we would also want to understand (i) covenants (ii) other exotic aspects of the bond such as the embedded derivative.

Folks have said the derivative is too complex to worry about, but I can get a quant to explain it in normal language.

The covenants of the bond are to be found on the company website. Go to Investors, then Placing Documentation, then Shareholder Circular and Notice of General Meeting dated 4/7/17. This is a 42 page PDF file of Project Harrier which was the "Proposed Fundraising..." Fundraising being the joint equity placing and concurrent convertible bond offering.

The covenants are all under section 10 "The Convertible Bond Offering"

This was all voted on, and presumably passed without amendment.

Ah, got it thank you. Okay, so sorry to keep nagging about this but I still think the prospectus for the bond should be public. The describe section 10 falls short of fully explaining to shareholders the nature of the instrument. Look, if I’m wrong and there are no additional risks not already disclosed I’ll make a £50 donation to TLF. But the embedded derivative sits on the balance sheet and that was not explained, so what else is there?

This (04 Jul 2017 Shareholder Circular and Notice of General Meeting) at https://www.hurricaneenergy.com/investo ... umentation is not the prospectus itself, but is a fuller summary. I've read section 10 - thanks dealtn.

It contains what I would guess (?!) are notes indicating there are provisions regarding change of control, delisting, default & indebtedness, which I expect are written to protect the bondholders. But they don't give the details of these provisions, only indicates that they exist and are contained in the Ts & Cs of the Convertible Bonds themselves.

Whilst I appreciate that the most likely situation where these provisions might come into play is one where the business is nigh-on worthless, nevertheless it would be nice to read them in detail to think about the implications and the extent to which there is manoeuvring room. How does one go about getting that detail, and is there any reason why the cannot be posted publically by HUR ?

(as you can see, this part of the game is not in my normal playground)

In the meantime, given the max indebtedness provisions, I expect HUR will be tending to save the moneypennies as conservatively as possible over the next few years, especially if flow rates are looking at all problematic. Which, of course, they are on LinWar so far, and there is considerable worry re the #7z on Lan as watercut up tends to result in oil flow rate reducing at some point. Am I being unduly pessimistic regarding the likely views of the finance team in this respect ?

regards, dspp

[ammonite]

All this talk of bonds misses the point. Only the Wc is important ; if the wells work the bonds are irrelevant.

And if the wells don't work, we're f44ked, and the bonds are still irrelevant.

[dspp]

All this talk of bonds misses the point. Only the Wc is important ; if the wells work the bonds are irrelevant.

And if the wells don't work, we're f44ked, and the bonds are still irrelevant.

It might not be quite that starkly binary. There might be room to squeeze through the middle if the wells aren't quite working perfectly / but haven't dropped off too much, and where more time is required to figure out just how best to develop the reservoir. In such an event the extent to which bondholders could push equity swiftly under a bus becomes relevant.

regards, dspp

[drillordrop]

All this talk of bonds misses the point. Only the Wc is important ; if the wells work the bonds are irrelevant.

And if the wells don't work, we're f44ked, and the bonds are still irrelevant.

It might not be quite that starkly binary. There might be room to squeeze through the middle if the wells aren't quite working perfectly / but haven't dropped off too much, and where more time is required to figure out just how best to develop the reservoir. In such an event the extent to which bondholders could push equity swiftly under a bus becomes relevant.

regards, dspp

I agree that it will most likely be a binary outcome as mentioned, if the wells water-out it goes to zero. But it would be handy to know beforehand if there are any conditions or events the bond has set that would trigger an event that automatically wipes-out equity. It may well be that there are none, but I also want to understand the embedded derivative. They only explain it a little bit.

[dealtn]

All this talk of bonds misses the point. Only the Wc is important ; if the wells work the bonds are irrelevant.

And if the wells don't work, we're f44ked, and the bonds are still irrelevant.

It might not be quite that starkly binary. There might be room to squeeze through the middle if the wells aren't quite working perfectly / but haven't dropped off too much, and where more time is required to figure out just how best to develop the reservoir. In such an event the extent to which bondholders could push equity swiftly under a bus becomes relevant.

regards, dspp

I agree that it will most likely be a binary outcome as mentioned, if the wells water-out it goes to zero. But it would be handy to know beforehand if there are any conditions or events the bond has set that would trigger an event that automatically wipes-out equity. It may well be that there are none, but I also want to understand the embedded derivative. They only explain it a little bit.

What exactly do you want to understand about the "embedded derivative"? I have tried asking before!

[dspp]

It might not be quite that starkly binary. There might be room to squeeze through the middle if the wells aren't quite working perfectly / but haven't dropped off too much, and where more time is required to figure out just how best to develop the reservoir. In such an event the extent to which bondholders could push equity swiftly under a bus becomes relevant.

regards, dspp

I agree that it will most likely be a binary outcome as mentioned, if the wells water-out it goes to zero. But it would be handy to know beforehand if there are any conditions or events the bond has set that would trigger an event that automatically wipes-out equity. It may well be that there are none, but I also want to understand the embedded derivative. They only explain it a little bit.

What exactly do you want to understand about the "embedded derivative"? I have tried asking before!

dealtn,

I'm not too fussed by the embedded derivatives.

I am however interested in the provisions regarding change of control, delisting, default & indebtedness.

Can you assist with those ?

regards, dspp

[dealtn]

I am however interested in the provisions regarding change of control, delisting, default & indebtedness.

Can you assist with those ?

regards, dspp

I wouldn't say I have any core experience in such matters to be honest

[ammonite]

"ammonite wrote:
All this talk of bonds misses the point. Only the Wc is important ; if the wells work the bonds are irrelevant.

And if the wells don't work, we're f44ked, and the bonds are still irrelevant."

dspp wrote
"It might not be quite that starkly binary. There might be room to squeeze through the middle if the wells aren't quite working perfectly / but haven't dropped off too much, and where more time is required to figure out just how best to develop the reservoir. In such an event the extent to which bondholders could push equity swiftly under a bus becomes relevant."

MB. But I would suggest that talk of bonds which mature in 2022 is irrelevant atm.

WC is the issue that needs to be settled. Without wishing to disrespect those posting doubts here, (who mostly have a much greater technical knowledge than I) I would suggest that company statements up to the last RNS (only 11 days ago!) and the lack of any notifiable changes since, should weigh heavily against those doubts.
Posters here are drawing on known analogues which may not be as analogous as they think ; HUR have access to far more actual, up to the minute data on Lancaster, and are under obligation to update shareholders if that data departs from guidance, which they have not done.

With WC weighing so heavily on the SP at the moment, piling in at this stage with talk of bonds with a maturity 29 months away smacks of scaremongering, unintentional tho it may be.

[pijoe1212]

"ammonite wrote:
All this talk of bonds misses the point. Only the Wc is important ; if the wells work the bonds are irrelevant.

And if the wells don't work, we're f44ked, and the bonds are still irrelevant."

dspp wrote
"It might not be quite that starkly binary. There might be room to squeeze through the middle if the wells aren't quite working perfectly / but haven't dropped off too much, and where more time is required to figure out just how best to develop the reservoir. In such an event the extent to which bondholders could push equity swiftly under a bus becomes relevant."

MB. But I would suggest that talk of bonds which mature in 2022 is irrelevant atm.

WC is the issue that needs to be settled. Without wishing to disrespect those posting doubts here, (who mostly have a much greater technical knowledge than I) I would suggest that company statements up to the last RNS (only 11 days ago!) and the lack of any notifiable changes since, should weigh heavily against those doubts.
Posters here are drawing on known analogues which may not be as analogous as they think ; HUR have access to far more actual, up to the minute data on Lancaster, and are under obligation to update shareholders if that data departs from guidance, which they have not done.

With WC weighing so heavily on the SP at the moment, piling in at this stage with talk of bonds with a maturity 29 months away smacks of scaremongering, unintentional tho it may be.

you are missing the key point. the wet (7z) well was not flowed between mid dec and end of jan..the company had nothing to declare as they had no further info on this key well!

[ammonite]

pjoe
Yes, but it is now 18 Feb. It should have been flowing for 3 weeks now, the wording was that both wells would be flowed together "before the end of" January.

[dspp]

pjoe
Yes, but it is now 18 Feb. It should have been flowing for 3 weeks now, the wording was that both wells would be flowed together "before the end of" January.

ammonite,

If you read all the company literature and statements carefully you will see that they are highly qualified, such that pretty much anything could be going on and we would not necessarily know. Whilst I prefer to be generous with my assumptions, it is undeniable that HUR are being - understandably - reticent with information release. In such a situation we must therefore think through as much as we can, looking as far ahead as reasonably possible, so as to understand the possible scenarios in advance of the evidence coming to light.

I think (correct me if I am wrong) but there will only be a few more solid pieces of information before the CMD :

- late Feb 2020 : #9 tanker offload (but no volume data unless it goes to Rotterdam, or unless someone can ferret out something)
- 1 Mar 2020 : next month's worth of OGA data (hard data, but field-wide and not well-specific)
- 19 Mar 2020 : full year results of 2019 (so unlikely to be any updates in that)
- late Mar 2020 : maybe #10 tanker offload (actually I think this is quite likely as I think they are trying to be small lifts during the winter months to keep ullage available for weather events)
- 25 Mar 2020 : CMD and ordinarily an announcement or presentation or something similar gets put out simultaneously

So .... we have to try and extract the maximum information content from each of those if we are sensible.

By the way, HUR are being coy about the aspects of the bonds that concern us when we adopt our forwards-looking worried faces. HUR's response this morning to my enquiry a few days ago about the bond prospectus is, "All of the publicly available information relating to Hurricane’s convertible bond is available on their website, either on the convertible bond page (https://www.hurricaneenergy.com/investo ... tible-bond) or contained within the shareholder circular (https://www.hurricaneenergy.com/investo ... umentation)." i.e. "you shareholders can remain in the dark". That attitude is all fine and dandy, until the day HUR want shareholders to be helpful.

CMD will be interesting. Personally I expect to be quite busy on something else that week so I am rather suspecting that by the time I get to look at whatever they say, the shareprice will have fully responded and it will be too late for me to do anything except form a view in the rear view mirror.

regards, dspp