Year end results from Hurricane Energy (HUR) answer some questions I have raised, but leave others unanswered – it’s a bit of a curate’s egg at first glance. The company has provided clarity on some issues, not least of which in the current market is a going concern assessment against expected low oil levels, but left other questions unanswered and I remain of the view that this is overvalued at the current time. I raised a few questions previously, particularly about the water production from the Lancaster EPS 7Z well during the current quarter and what impact this had on the longer term production plans, why the CFO walked only weeks before these results were announced and what was the future for the GWA asset and the Spirit Farm in?...
The company has not provided any material information regarding the 7Z well water production rates, other than noting water production is consistent with it being perched water, rather than aquifer water and increased over the reporting period. Nothing material has been stated about production rates of water since the 7z well has been brought back online at the end of January. We are guided that the Capital Markets Day next week will reveal further and better technical information. I do take it as positive the company guidance for this year’s production being unchanged from previous expectations. I look forward to that further and better information – maybe it will put my concern to bed. We will see. The various statements regarding the Spirit farmin re-iterate the costs of the 3 well drilling campaign on the GWA asset were borne by Spirit, but I note in the detail that some $47.5 million remains as cash outstanding and not paid at the year end. It also confirms the Lincoln Crestal (LC) well, which at one stage was hoped to be tied back to the current FPSO, will be plugged and abandoned. We are told this results from an absence of consents to leave the well in its suspended form or tie the well back and put it into production. It is still not clear to me why this situation has arisen but on reflection over recent weeks, I rather think the statements made by CEO in an Energy Voice interview about the PI (productivity index) of this well has been a key matter. The PI is a measure of oil production rate (in barrels) per unit of pressure (in PSI) to make the oil flow. The Lancaster wells are in the 160 to 200 PI range, but Lincoln Crystal was only 18 -20 PI. The pressure drawdown to achieve the target 10,000 bpd production rate was hence c.10 times higher than Lancaster wells – this would risk early water breakthrough. Regardless in the current climate the more limited capex from a plug and abandonment strategy compared to further consideration of tie back costs has to the better outcome.
So that brings me to the last of my prior concerns – why did the CFO walk? I have noted the cash due from Spirit on the balance sheet as a current asset to the tune of $47.5 million. There are also current liabilities on the balance sheet of $5.4 million due to Spirit and accruals of $66 million of costs incurred by Hurricane as the operator. That looks to me like a net liability to Hurricane of some $24 million which will flow out as cash at some point in time. The rest of the accounts appear reasonable, noting the write-off of the Whirlwind asset which had been advised previously, and do not give me concern about how the company has performed financially over the last 12 months. What is glaring by its omission is any hedging programme. The company has been an oil producer since May 2019, and it has a forward capex plan. I can think of no other comparable oil company that has not put a hedging programme in place, at least to cover capex costs, to provide security against oil price decline. The prior CFO resigned on 27th February, which was after the oil price started to collapse. Perhaps this absence of hedging was the reason he walked off, or perhaps not – it’s immaterial now! Regardless this company is fully exposed to current and future oil prices. This is not a comfortable place to be with committed capex and current oil price. The company does have substantial cash, $157 million at the year end, and $164 million as of 18th March, but of course one has to allow for the net cash outflow from the unwinding of the GWA costs. The company has guided the cash costs, at target production rate of $17 per barrel. I can see the Brent oil price going lower before it moves back towards the going concern assumptions of $30 to Q3 2020 and on to $50 in 2021. In my view these assumptions look to be on the optimistic side of the range, but I would not criticise the company for using this basis. We simply do not know what the full impact of the Covid19 will be on both demand and supply.
There is limited time to accumulate cash to satisfy the bond debt, which may be rolled forward, but I am pleased to see the company is not assuming this will be possible. If oil prices remain low over the short and medium term, I can see cash generated being used to service the debt and pay for the commitment wells. The lack of success on GWA combined with any reasonable oil price view, the opportunity value of that asset at the current time is negligible. That leaves me viewing the current value based on the Lancaster EPS only, and I do not see much left over for shareholders. Even at a share price of 10p, market cap of £190 million, I see nothing at the current time to encourage me to invest, despite this company being one of the few on AIM which has moved from drilling to producer. The company has achieved a lot and is not in my view going bust (which cannot be said of many oil & gas companies on AIM) but I see only one way for this share to move over the foreseeable future. I am SHORT.
Filed under: Hurricane Energy, Bearcast, shares short, Carnival, Optibiotix, SpaceandPeople
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