The markets have recently been so poor that even a monkey could have picked 10 shares to short and made money. Hurricane Energy (HUR) has not recently suffered as badly as many in the oil and gas sector – this a company I have commented on on a regular basis in recent months as the operational story has evolved, calling it a hold pending further and better information regarding water cut in the Lancaster field wells and forward plans. Now an RNS telling us the CFO has walked, together with a few other risk issues has triggered me to now call this a SELL...
The CFO has resigned by mutual agreement, only 3 weeks before year end finals RNS is due (19th March). I would speculate draft audited accounts are likely to have been presented to the board for sign-off very recently. I just don’t buy the CFO has decided it’s best to depart at this time. In my view he was pushed. But why? The company has advised it will incur balance sheet write-offs for relinquished assets, that’s hardly the CFO’s fault. The share price has fallen very sharply over the last few months, but I would suggest that is due to the Lancaster EPS field water cut issues and the poor results from the Greater Warwick Area drilling, which of course was funded by Spirit Energy. I cannot see the CFO having responsibility over and above others for those issues. So what’s the real story? I do not know, but I mark this as a further risk issue to the investment case.
All oil companies are exposed to oil price risk. Where the company has large debts, the equity value is geared to the oil price. The oil price is down, which reduces the NPV of the EPS expected oil flows. Hurricane has some $230 million of bond debt due for repayment in August 2022, and I think ensuring the cash is accumulated will become an increasing driver to the forward plan. But I cannot see that explaining why the CFO has walked. I can only assume there may well be a further issue I cannot see, and that worries me. Social media sometimes provides an insight into detail before the question is recognised by the market, even if much social media commentary, especially on the LSE asylum, is total and utter dross. But within that noise can be nuggets of good info. I picked up comments that the latest EPS oil offload earlier this week was not large and was likely to be around 350,000 barrels of oil. That may or may not be accurate – I have no way of checking to absolute fact, but the commentators stating this have proven, largely, reliable in the past. Even the company has publicly acknowledged these commentators, and referred to “lunatic ship watchers” in interviews! I am drawn to accepting it until proven otherwise. The prior offload was on 22nd Jan. Assuming the FPSO storage tanks had the same start and end point (which may not be the case), that looks to me like a production rate of around 10,000 to 12,000 bopd in late Jan and through February. That does not align with guidance provided on 29th Jan that the company intended to flow the wells in February at a combined rate of 20,000 bopd per day. Perhaps the production rate was higher, and the FPSO for some reason has been left with considerable produced oil remaining on-board for some reason. While that is possible I think it unlikely, if only because weather windows for offload are few and far between with the current weather pattern.
I may be wrong and reading far more into these issues than I should and all many be fine operationally, but with oil price down and general market conditions and the as yet unanswered questions about water cut and future plans for the Greater Warwick Area, I would err of the side of caution. With a Market cap of £290 million at a share price of 14.9p, I can see clear potential for a re-rate lower, and hence formally call this a sell. I would also note some very good advice Mark Slater conveyed at last year’s Investor Show. Retail investors have a key advantage over institutions – the ability to take a decision to buy or sell and implement it quickly. In other words position size enables fast reaction. If the information in the year end results RNS due on the 19th March and the Capital Markets Day on the 25th March provides good news, I can see my stance reversing quickly.
Filed under: Hurricane Energy, Arron Banks, Iofina, Chris Bailey, Ben Turney, Nostra Terra, Braemar
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