#312343
Postby dspp » May 26th, 2020, 2:32 pm
Over the course of the last 12-months the HUR share price has reduced from 60p to 6p following bad drilling results in Lincoln/Warwick, Kerogen selling a load at 46p in July 2019, and water influx into Lancaster. My understanding is that the convertibles are now trading at 75%.
On each occasion I have looked at the results and taken the view that the post-news share price continued to represent a fair risk/reward balance. So that with the benefit of advance warning of the news I would have sold, but that following the news and the price reductions it remained appropriate to hold. On each occasion I have felt that the remaining value represented a reasonable bet for that part of my portfolio allocated for high risk.
These are very large geological structures, which clearly have some good quality mobile oil in them. Depending on exactly how much there is, and what fraction of it could be produced, then the potential reserves upside is very large indeed. Provided of course it is accessed in a reasonable timescale. That is why the success case reward justifies the risk that is inherent in fields of this nature.
I personally have had technical concerns that differed from the company’s view, most especially with the water, but also about other aspects such as distribution of fracture volumes. These greatly affect the probability and size of the success case vs the failure case. Nonetheless I also appreciate that the company has full visibility of detailed information, and so have always given them the benefit of the doubt. That is part of why I have not traded out, as I felt that the company is being very clear and so must have very firm evidence. Nevertheless I have taken the time over the years to set out my developing concerns so that I understand the risk that I am taking, and en passant anyone reading my posts would have seen that.
I ordinarily prefer to think the best of people. So although I have long also had my own concerns about the way in which the company releases information I have not previously taken that aspect into account when forming a risk/reward view. Some typical information patterns have worried me. The first is where they have repeatedly been silent about the contents of information sets which are relevant and material, and/or competing hypotheses. The second is where they have released information only to follow up very soon after with contradictory information. Examples of the former are that they still have not put out the temperature signatures in the Lancaster wells, the Lancaster wells’ horizontal profiles & related geology, or the bond default terms, or the analyses that the company suggests would refute coning upwards through faults from a compartment base aquifer OWC, or the updated Lancaster well PIs. Examples of the latter are the 7z flow instability information that was released last Friday, only days after the company sanctioned release of the post-CMD company-sponsored Edison broker report. A third pattern is their reluctance to put company people into an environment where they can be tested by proper questioning, instead they prefer to control both the timing and the content of information release, and sometimes the audience is pretty tame and market release is not uniform (in this day and age, not releasing live Q&A is unacceptable).
As I say I have not taken these informational concerns into account until now. If I were to have done so, then that would have been me saying to myself that I do not trust the HUR senior management team. And if I do not trust them, then why be invested at all. Yet I also have known that explorationists, especially ones who are not afraid to challenge orthodoxy, can become target-fixated and not take a balanced view of the merits of alternative hypotheses and risks. It has been a concern of mine that this is going on inside HUR, and that effective peer review and governance is lacking at the top. Yes, they may now superficially tick the LSE main market governance boxes, but they certainly don’t demonstrate it when it comes to the core matter : is the reservoir hypothesis correct or incorrect and are we dealing fairly with all our shareholders regarding the evolving informational story ? It is being very satisfactorily demonstrated at the more mundane operational level, but not in some other key respects.
Over the weekend I came to the view that I could no longer trust the company as much as I need to. I have now seen too many RNS’s that have clearly had the red pen wielded to chop out the more unwelcome bits. I have now seen too many presentations that are missing key slides, or reports missing key pages or consideration of alternative hypotheses. And quite clearly the CFO felt the same way, and was no longer prepared to be the fall boy, hence leaving 27 Feb 2020 when the share price was 14p. He, like most of us, could see that finding funds to repay the convertible bonds was going to be a very difficult thing to do. Perhaps he had seen the red pen take too much of a 90/10 rose-tinted view, and too little of a 50/50 view, for the information to be trusted and he no longer wanted to be the fallboy.
Therefore I sold out of HUR this morning at 7p. For me it is a loss, but it was my high risk pot, and it largely arose as a result of making good calls on some other oil shares a few years ago, and is eased by another high risk call going well. I had been on the verge of selling last week at 12p but reviewed the Edison report which I felt was somewhat optimistic, but within a believable range, and so concluded that the risk/reward balance was still acceptable. I rather suspect Edison now feel somewhat burned – but in their case the fee will ease things – indeed there are some caveats in the Edison report (and other broker reports) that indicate they are protecting themselves. For me I will watch with interest but from the sidelines for the time being – it is a fascinating play technically, and there will be lots of interesting technical stuff. I wish everybody who is a long term holder and who is going to remain so the best of luck.
My personal learning points are 1) although I don’t like trading, sometimes I need to do it, so best get better at it; 2) I must factor management quality in more than I have done in the past, especially if there are cultural and/or messianic worries; 3) never be afraid to take profits. Given that my other big high risk share is TSLA that is quite a tough challenge, however 4) I’m up 3x over there, and 5) it is a sufficiently large and distributed business that it cannot control the message so as to manage away or suppress key information.
Good luck all, regards, dspp