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APA Group (ASX: APA) and Empire have today executed an MOU to explore
opportunities for the development of Beetaloo mid-stream infrastructure
including gas and liquids gathering, processing and pipelines
• Empire and APA will promote a ‘common user’ model for development of
Beetaloo Sub-basin infrastructure to drive economic outcomes
• APA’s Northern Strategy envisages expansion of its Amadeus Gas Pipeline
connecting to Darwin
• APA’s Eastern Strategy includes development of a new Beetaloo gas pipeline
connecting to eastern markets via APA’s continuous gas distribution network

The Fund notes that Hurricane is evaluating options to bolster production from the Lancaster field, as well as pathways towards development of the substantial Lincoln discovery asset. The Fund believes that in addition to the existing P6 well, substantial quantities of oil can be recovered from the Hurricane portfolio.

In September 2021, the Fund wrote to the board of Hurricane to request under Article 92, that a committee (comprising of the non-executive directors) be established with the mandate to investigate what happened as regards the previous board's proposed financial reconstruction and to engage external advisers (should that be needed) for that purpose. The committee would then make a recommendation to the board.

Since September 2020 (when the convertible bond was trading at a 70 per cent. discount), Crystal Amber has urged Hurricane to use a significant proportion of its cash to buy in bonds. The High Court of Justice stated that "the possibility of buying back bonds in the market is, on the face of it, an attractive one, given that the Bonds have been trading at a substantial discount to face value". The Fund estimates that had the buyback been carried out in November 2020 and if two thirds of bond holders had sold at a 55 per cent premium to the prevailing market price, approximately $94 million of capital and interest could have been saved. Together with the $17 million spent on a restructuring plan that both Crystal Amber and more importantly the High Court found to be inappropriate, the Fund estimates that the Company has suffered losses of approximately $111 million, equivalent to more than 4p a share. The Fund believes that an investigation should determine grounds for redress and recoverability of this amount.

The Fund also notes the potential for shareholders to benefit from Hurricane's taxation position. At 31 December 2020, Hurricane had ring-fenced trading losses of $468.7 million and supplementary charge losses and investment allowances of $707.8 million. In addition, capital allowance pools of $383.5 million were available to be used against ring-fenced trading profits. The Fund has asked Hurricane to assess the financial implications of these tax losses and allowances in the event of a corporate transaction. The Fund believes that the quantum may be very substantial.

Over the last year, the Fund has increased its shareholding in Hurricane from 11.6 per cent to more than 27 per cent. 12 months ago, the price of Brent Crude was $37.50 a barrel. It is now $85 a barrel. With production now running at more than 3.5 million barrels per annum, the Fund believes that Hurricane's prospects have been transformed.

end

Hurricane

Hurricane is an oil exploration and production company targeting naturally fractured basement reservoirs in the West of Shetland. The Fund has been an investor in Hurricane since 2013 and has to date realised profits of GBP43 million.

Following the High Court's refusal to sanction the previous Hurricane board's attempt to force through a highly dilutive debt for equity swap, in August 2021, after a further request from Crystal Amber, Hurricane finally launched a tender offer for up to 50% of its outstanding bonds. Allocating up to $80 million of its cash, initially the tender was priced at up to 72 cents, but this was increased to 78 cents. Ultimately, Hurricane purchased just over one third of the bonds in issue, reducing Hurricane's capital and interest obligations by approximately $22 million. This represents an important and material saving. Without the Fund's successful intervention at the High Court, the Fund believes this would not have happened.

Production information from Hurricane is that for September 2021, its P6 well produced an average of 10,642 barrels per day. This compares well with the company's production forecasts (released in May 2021) estimating production for the month at 9,400 barrels per day. Production for June, July and August were also ahead of forecast. The Fund estimates that simply beating production forecasts is now generating approximately $36 million per annum in additional revenue.

For the six months to 30 June 2021, Hurricane generated $75.9 million of operating cash flow with a cash production cost of $24.8 per barrel. At anticipated production levels, the Fund estimates that by 30 June 2022, 2.6 million barrels will be produced, generating more than $200 million in revenue. Based on Hurricane's management production forecasts, the Fund estimates that the remaining bonds due for repayment in July 2022 will be redeemed at par and at that time, net cash will be around $40 million. Thereafter, by March 2024, the P6 well should yield a further 4.9 million barrels and generate revenues of $350 million. Based on historic margins, this should generate around $175 million of operating cash flow to Hurricane.

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