Following the AGM, over on LSE Biffadog has posted (
http://www.lse.co.uk/ShareChat.asp?ShareTicker=HUR at 10:08 today 08 06 19) a confirmation of "no offers" back then, which puts a bullet in a few old tales. (thank you Biffa) It also confirms my buyers strike hypothesis that I put out a long time ago.
I've been mulling over the likely share price trajectory, which is not the same as the valuation trajectory, and thought I would throw out a few points for wider comment.The post length probably won't fit on LSE so may as well be here on TLF.
Looking forwards, irrespective of what the valuations are (and as you know I have sketched a simplistic val'n pathway on this thread that I update as new information comes in*) there is not as obvious a reason to expect the price pathway to respond in the same manner as the valuation. There can be very prolonged differences between the two.
Long term 'agile' investors are already in. A lot of long term 'inagile' investors can't go in until HUR goes to main market (they have investment mandates that prevent them touching AIM shares), so any delay in moving to LSE main market (or elsewhere) is disappointing. So the upcoming CMD show-and-tell is all very well, but may be a lot of leg being shown to people with no real interest in commitment.
Dividend-driven investors will - I expect - be disappointed for many years to come. HUR should be retaining any & all cashflows to retire the bonds; and to pay for Lin-War staged FFD (over & above the Spirit carry); and to be prepared to go-it-alone on a staged Lan-Hal FFD.
Short term hot money only flows in (and out) of HUR on news flow, and/or expectations of a profitable rerating. Because it is only ever short term it does not 'lift' the shareprice that much. Especially when - for their entirely understandable internal reasons - CA are perennial sellers into any rise. Remaining on LSE AIM is not ideal in this respect as it means HUR is very exposed to hot money volatility.
Given all this, and given the knowledge in the market of all this, one should expect almost everybody to be motivated to hang back.
Very simplistically HUR is
currently valued by the market (i.e. priced) at about £1bn mkt cap on the reserves (tiny) + resources (vast) story. Assuming success, by end-year 2019 the EPS production means one should add in £200m/year of free cash flow which is approx what the EPS will deliver, then use a PE of 10 (which is what RDSB is on), the sum is £200m x 10 = £2bn price uplift ascribable to the cashflow; and then the max rerate would be to £1bn reserves/resources +£2bn cashflow =£3bn mkt cap. But FCF is not dividends, and HUR has risks that RDSB does not, so a 5x multiplier would be more appropriate. So on that basis at the end of this year (Q4 2019) one would ordinarily expect £2bn mkt cap, i.e. approx £1/share
price. Compare that with my £1.47.share fully diluted Q4 19
valuation to appreciate the discount of price to value. This is what I would expect to be the market's reaction assuming success with the three LinWar appraisal wells, and assuming no nasty surprises in the first 6m of EPS operation. Even in the high case the Warwick Deep well - which may be giving results pre CMD - may show enough to cause a 2C resources upgrade, but is unlikely to cause a 2P reserves upgrade as reserves are driven by the debottlenecked AM EPS constraint of 40kbopd (unless the GOR is low enough to squeeze a bit more out of the flare constraint pre-gas-line-tie-in), and so ought not to cause a huge shot term revaluation.
If you look at my last valuations update (15 09 18) here (* see =
viewtopic.php?f=16&t=796&start=140#p166573) you can see in table 1 a history/future price/value correlation. Eyeballing that it suggests a 'normal' price:value ratio of 2:3, i.e. a one third discount would not be unusual, narrowing towards mild overvaluation when folk get carried away. You can see the short-term share trading opportunities inherent in such a situation.
Turning to the future it is normal that on very large fields like these are hoped to be, the farm-in company seeks to force the farm-out company (e.g. HUR) to remain at the table. This is so that the farm-out company continues to shoulder risk and help out with development costs going forwards. It also helps defend against farmout companies deliberately selling out of a dud. However the farmout company typically doesn't have a great deal of cash and so negotiates a free carry in lieu of cash. This is exactly the structure of the HUR/Spirit deal on LinWar.
However if the farm-out company has a very depressed valuation then a full-on acquisition becomes more likely. Essentially the greed of the farm-in company overcomes their fear of the dud, and their treasury department's nervousness about releasing development cash. So in the HUR case if - as the FFD moment for either of the pairs approaches - which is when the relevant derisking information is on the table - the HUR shareprice is low then an opportunistic takeover bid might get mounted. If the cashflow in HUR is not strong enough then an opportunistically priced farm-in might get structured (which is what the Spirit farm-in was, and this reflected the reality in this respect). And if the cashflow in HUR is strong enough, then either no farmin approach will be made at all (another buyers strike), or too low a priced one would be declined, and so HUR needs to keep the go-it-alone pathway on the table for LanHal.
Another piece of information that has come to the table in the last few months is that Kerogen do not have infinite resources availaable for HUR, or their risk appetite is finite, i.e. they sold a few to mop up their convertibles. This indicates that if HUR need (want) more cash over (for LanHal FFD, which will be costly even if staged, as the OGA won't want it to be delayed until LinWar FFD oil is flowing) then they will need to reach out to the wider market and/or wider shareholder pool. And of course calibrate the ambition of each stage of the FFDs accordingly. It also means the approx 22% that Kerogen hold in HUR is considerable, but not perfect, protection against an opportunistic takeover. By now it is clear that CA are not that great a protection in this respect.
Bottom line: a lot of patience is still required, even in the success case. And an interesting eye to keep on the share price - we want it to walk the middle path, not the high or the low one. At least until an interruption happens when we want a buyers fight. Unfortunately the majors don't ordinarily fight with each other, so best value will be obtained if HUR goes and shows some leg at people other than the usual suspects at the right moment.
regards, dspp
