Crystal Amber Fund results23 Sep 2020 14:41
Part 1)
Hurricane is an oil exploration and production company targeting naturally fractured basement reservoirs in the West of Shetland. The Fund's previous annual reports include background information on this investment.
This was a very challenging year for Hurricane: its Lancaster Early Production System ("EPS") failed to deliver the targeted 20k barrels a day due to an increased water cut. The regulator rejected Hurricane's application to tie back an additional production well to its EPS vessel, which would have been funded by its JV partner Spirit Energy. As a condition to extending its licences, the regulator requested that it should drill two sub-vertical commitment wells over the next two years. Shareholders lost confidence in management as a result of perceived missed expectations and perplexing regulatory signals. The weak oil price environment, exacerbated by COVID-19, reduced operating cash flows and compounded negative investor sentiment. Despite its $106 million cash balance, investors continue to question the ability of Hurricane to meet regulatory commitments, undertake necessary remediation and appraisal work and address the maturity of its $230 million convertible bond by July 2022.
In June 2020, the CEO resigned. The company set up a technical committee to re-examine the full range of possible geological and reservoir models for the Lancaster field which reached initial conclusions in September. These suggest that the oil - water contacts at Lancaster, Lincoln and Halifax are significantly shallower than previously determined. Estimated recoverable reserves, assuming no remedial action, have been reduced from 37.3 million barrels to 16 million, of which 6.6 million have already been produced.
The Fund is pleased with the appointment of the new CEO, Antony Maris, who brings relevant experience in developing and operating fractured basement reservoirs.
In the second half of 2020, production is expected to continue from a single well at a range of 12,800 to 14,200 barrels per day. A number of remediation options are available to increase the EPS' production. However, in the current oil price environment and with a reduced production outlook, cash generation is expected to be insufficient to both fund additional well stock and to repay the bond. Nevertheless, as the convertible bond now trades at less than half its repayment value, there is currently an opportunity for Hurricane to utilise some of its $106 million cash to buy in some bonds in order to materially reduce its indebtedness.
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