Member Info for Stu255

*****
Unless previously converted, redeemed, or purchased and cancelled, the Bonds will be redeemed at par on 24 July 2022.

The Company will have the option to redeem all, but not some only, of the outstanding Bonds:

• at any time on or after 14 August 2020 at par plus accrued interest if the value of the Ordinary Shares underlying a Bond (calculated over a specified period) shall have been at least US$300,000; and

• at any time, if 85 per cent. or more of the aggregate Principal Amount of the Bonds originally issued shall have been previously converted, redeemed, or purchased and cancelled (the “Clean-up Call”).

Settlement and delivery of the Bonds is expected to take place on or about 24 July 2017 (the “Closing Date”).
*****

So from 14th August 2020... Hurricane can begin purchasing the bonds in the open market and cancelling them and thus reducing the forward interest, and therefore improving cash flow and b/e point. The bonds are currently offered at 60p. <- OBVIOUS balance sheet management here!

Also of interest...

*****
Upon conversion of the Bonds, the Company may elect to settle its obligations by way of delivery of ordinary shares, payment of a cash alternative amount (calculated by reference to the volume weighted average price of an Ordinary Share over of a specified period) or a combination of the two.
*****

In 2022, Hurricane doesn’t have to repay 100.00% of the bonds in cash, if they fall short (which they will not, because they will be purchasing and cancelling the bonds) they could eg just pay 80% cash and issue new shares to cover what remains.

Hurricane already have ~$110m in cash, so if they never make another penny of profit ever again, and do nothing to purchase and cancel their outstanding bonds... the maximum equity dilution is about $110m, or 50% dilution at the current share price, as they have the right to settle conversion obligations as a combination of cash and equity. MAXIMUM DOWNSIDE here is 2.50 pence.

Some of you will notice that HUR already has enough cash on hand to purchase and cancel the bonds at the current bond price.

The 14th August 2020 is the first day Hurricane can legally begin this operation, as per the bond closing prospectus.

Some people would see a fiduciary duty to do exactly that.

... and suddenly all future free cash flow is pure shareholder equity.

“Interesting tomorrow 14th Aug 2020 is the first day we can...”

We did it for the lulz.

ngms,

The -6 well isn't flat out. The choke on -6 isn't even half open and the ESP is switched off.
Over a year after first oil and it's nowhere near even coming off plateau on total fluids, it can draw these total fluid rates for a very long time to come.

The water cut is rising by 1% a month and is currently at 12%, if it continues rising at this rate it will be another 5 years before it is anywhere near economically marginal.

Whilst the water cut is rising oil production keeps increasing too (could they be connected? haha), but yet you are concerned about an imminent catastrophic decline to some non-commercial level? Lol. OK.

Lots of people knee-jerk panicked about the water and sold out the most productive well in the country, because they feared it might suddenly be worthless. But 6 months later it's still the UK's most productive well (production has actually increased!). And that's with the choke still half closed and the pumps turned off.

Great story for your grandkids that one! ^^

Let the financial accounts be the judge of who is right or wrong here.

The whole situation is just too funny, I sure there is some parable about candy and infants.

ngms,

These are strawman arguments.

1). If they produce 16,800 bopd you think that’s worthless?
2). Who cares about Lincoln? It’s not in the market cap.

All that really matters is can they produce >9,000bopd.
That looks like a piece of cake.

Because the stock market and the regulators use the SPE reserves model. They have to, because it’s the only accounting model that exists.

But using that conventional reserves model to assess the performance and bookable asset value of this unconventional reservoir leads to wild misinterpretations.

That is what has happened here, and that is what continues to happen.

This is the moment of maximum disconnect.

The conventional geology model make the venture look like a bust... but somehow the wells are still prolific... the cash flow is fierce... the value of that cash flow is undeniably more empirical than any bookable asset value based on some subterranean model.

The whole purpose of the geology model is to predict the cash flow. When they model cannot predict the cash flow it is the model that is wrong. The cash flow IS REALITY.

People are waiting for the cash flow to converge on the conventional geology model... IT...WILL...NOT.

The cash flow will continue to defy that particular model.

You can pretend the cash isn’t real. But cash IS real. If the oil industry and the U.K. Exchequer want that cash flow, they are going to have to find a working reserves model to finance the development of fractured basements.

My guess is that when any country suddenly stumbles on 10,000+ bopd oil wells, money talks and they find a way.

It’s basically unstoppable from this point, because the -6 well just keeps making fools of everyone.

I’m assuming the OWC will be shallower than 1380m.

I couldn’t care less if the accounting reserves were reduced to nil, so long as production continues and the cash keeps rolling in.

The term OWC makes no sense in the context of the operation of this reservoir with it’s huge vertical super permeable features. In reality there are multiple bodies of oil and water within the reservoir so using a single value for OWC makes no real world sense when there are multiple oil/water surfaces.

In the Hurricane portfolio of fractured basements OWC is largely an accounting parameter, it is used because the model for booking reserves is old and rigid and not really fit for purpose for a fractured basement.

If anything this just demonstrates how the reserves model is being over applied, it’s a potential headache for any future RBL (but I don’t care what happens that far in the future, I will be far ahead by then).

Production and cash flow are reality, reserves and geology models are mostly a best guess. Yes they are linked, but here they are much less linked than usual.

The EPS is 6 years for good reason! It will result in a mountain of cash and new models for these new types of reservoirs. Part of that process involves demonstrating the inadequacy of conventional models and creating the space for new unconventional modes.

The current flaming wreckage of a share price was kind of inevitable at the outset. It’s an intermittent phase.

ngms,

Non of that is inconsistent with what I posted previously.

A watercut increasing by 1% per month IS increasing quickly. The well will eventually water out one day.

But irrespective of that, by the time it waters out the well is likely to have produced over £200m of free cash flow.

The water cut on -6 is very unlikely to exponential grow until it smashes into 100.00%. Water cuts typically follow an S curve in a coning scenario, but this isn’t coning, it’s pulling a huge curtain of water up a fracture.

Some people have the capability to model dual porosity / dual permeability reservoir dynamics and those people are probably quite relaxed about this situation.

Former LTH’s are gifting this free cash flow to people like me. I am very grateful.

There is a lot more data in the public domain now than there was in January.

I suggest you plot the water cuts yourself. You can mark the choke settings and total fluid rates on your plot. It’s quite easy to see where this is heading over the next 5 years.

ngms27,

The water cut on the -6 well is rising by 1% per month.

This well is still profitable at about 70% watercut, it’s currently at 12%.

The idea that it could water out “at any time” is hyperbole.
It’s plausible, but it is far from the central expectation.

If the water cut continues rising at the rate it has.... the EPS is likely to see out its 6 year license.

You are appraising the company as if the market cap was £1bn.

Trice needed to deliver + £2-3bn of value or he would have a lot of egg on his face. He realised he couldn’t do that and so he left.

90% of that equity DID get wiped out.

Today the market cap is <£100m. If Beverly Smith can deliver £200m of value that’s a home run.

This is easily achievable by merely seeing out the EPS.

Your post belongs in January. Today it’s just not relevant.

MK111,

On the -6 well... In April this year the water cut was 7%, a full 4 months later in August the water cut is 12%. Yes it is creeping up but it is creeping slowly. I think this well will still be economic at ~70% which is probably about 5 years away, without intervention. This might not prove to be accurate but it's a sensible base case.

It's rising about 1% per month. The idea that it could suddenly completely water out at any moment is pretty stupid.
I would bet at even odds that 6 months from now the watercut on -6 is still below 20%.

Why? because that is how fast it is rising. About 1% per month.

But also... it is crucially important to remember that they have also been pulling harder and harder on this well over those past 4 months as production has steadily increased from 10,300 to 12,000 bopd. As they open up the choke more and more they create a bigger pressure differential over the height of the fractures and this pulls water further up the fracture.

So is the rising watercut down to geological limitations or is it down to increasingly aggressive operating parameters?
Answer: Who cares. It's really not at much risk of suddenly watering out at any moment and Hurricane are making tonnes of money in the meantime. It's easy to buy in and sit on it.

The idea it could suddenly water out at any moment is or even within 6 months is a pretty naive and sensational view to take. Which hasn't stopped lots of people adopting that view.

I'm glad lots of people think that. It's depressed the price to this level.

"Give it six months and they might well be close to that."

There is a chance that could happen (maybe 5-10%), but in reality it's more likely to take years.
The market has priced it to fail anyway, it's oversold due to the shock of it, that's why the opportunity is available.

Looks very likely to over deliver market expectations over the next three years.
Probably less risky than owning shopping malls in the current economic conditions.

Hurricane are making plenty of profit this year, and that's what counts in the end.

Irrespective of whether the accountable petroleum reserves are 62MM, 20MM or even if they declared 0MM, the discounted cash flow profile of Hurricane over the next 5 years of the EPS is well beyond the current market cap of HUR.

Plenty of mid sized oil companies have more than enough spare revolving debt facilities to refinance the HUR bond.

At these prices Hurricane is just cheap 2020 and 2021/22 cash flow hanging around waiting to be picked up.
You could pitch it on cold financials and on an all shares basis it stacks up well.

Surely someone must be looking at it in this climate. Or is this the one that got away?
Even I can see the neat financial fit to maybe a dozen or more operators.

It is so ripe.

Just waiting for that 200 day moving average and the share price to converge on a workable premium, before all hell breaks loose.

Kaboom,

It seems to me that you are not at all familiar with the concept of “price”.

Everyone is expecting a substantial write down.
Maybe 50-70%? But the share price is already way ahead of the news.

5p = / = 50p

If the write down is 50% the share price will rise.

MCB55,

Fully absorbing the company and transferring the assets is just one option for a buyer.

Another option is to operate Hurricane as a subsidiary.
There are plenty of legal options, and plenty of past examples.

But if HUR is generating $50-80m of free cash flow in 2020 and 2021 and even beyond, it is a potential silver bullet for quite a few otherwise underwater year end financial statements.

Good CFO’s will be drawing up board papers that include such options.

"And those well logs are as close to empirical evidence as one can get."

I suggest the 1,000's of barrels of water sloshing about in the separator is more empirical than all the well logs put together.

For the same reason I think we should scrap the commitment wells and extend the EPS.
The EPS should be run until all questions on WoS fractured basins are answered.

It is in everyone's interest to continue this exercise.

It's technically prudent to do so and is just a happy coincidence that the EPS is cash flow positive whilst the commitment wells are cash flow negative.

I also don't think an OWC model makes much sense in a fractured basement where you have huge vertical features with 1,000's times the permeability of the surrounding rock.

The concept of coning is also misapplied, it's not a cone it's a huge vertical sheet of water in a super permeable feature. The water will drop away down the fracture feature much faster than coning in a sandstone.

I think this makes it very difficult to decipher reserves for accounting purposes using conventional methods, but these wells are prolific and the cash flow is very real.

Wells are still thundering away after 13 months.

Increasingly, fractured basements are not something that is easy to ignore. This is merely what a learning curve looks like.

You are all missing the point.

HUR won't be snapped up for the geology, or the portfolio of prospects, it will be snapped up because of their cash at hand and because they have strong cash flow in 2020 and 2021.

Lots of oil companies are cash flow negative right now.
Even Shell and BP are cash flow negative in their last quarter.

Lots of oil companies are not interested in adding more production when production is barely making a profit. That is why hardly anyone is drilling right now.

Everyone is trying to strip out cost, so that their business can survive.

But another age old oilfield move, is to take out the cash rich guys. You buy their cash with your shares.

e.g. OilMajor issues 5% extra shares and offers Major shares in exchange for HUR shares.
HUR debt is then absorbed into the much larger debt of the Major where it is easily refinanced, because the Major is well diversified.

Geology was important last year... now it's all about cash.

One very important thing about the share price being this low is that daily traded volume is huge compared to when HUR was 60p.

At the moment 200 million HUR shares are traded each week. There are a huge number of shares now that were purchased for sub 10p.

If this continues another week or two (which of course it will). Then it’s going to be extremely difficult to block an offer of 10-12p, so bidding might start at 7p.

But the 200MA is still up at 18p so wait for that to drop further, but everything is converging on an all share transaction and I think the commitment wells are the only sticking point.

These will disappear and the Hurricane portfolio will find itself into a much larger balance sheet.

What’s the 200 day MA?

18.5... still a bit too far from the share price.

But it is coming down hard.

I would say if/when the 200 MDA gets into the 12-15p range it will be very difficult to stop a serious offer.

If it gets below 10p...

There’s just too much free cash flow here, and too many other bigger oil companies gasping for cash. I expect to see someone try and buy Hurricane’s cash with their shares.

It’s inevitable.

I thought the volume of puts purchased was more revealing than the strike price.

Buying 1.8m puts for H2 suggests they are confident of producing at least 2-3m barrels in H2.

Trying to look at this objectively as an acquisition opportunity.

HUR is a neat opportunity to get a pile of cash and some 2020 cash flow in exchange for shares in the acquirer.

A buy cash with shares acquisition.

During a downturn larger E&P companies that are not vertically integrated often buy cash with shares.

The only obstacle really is the license 20/21 commitments.

The convertible bond is a non-issue when merged into a larger balance sheet. It just gets tossed on the debt pile and refinanced at maturity.

There are several good CFO’s out there who could solve most/all of their 2020/21 cash flow headaches with an all shares swoop on HUR.

Budget season too.

If those commitment wells are avoided, which it increasingly looks like they will be...

I think there is more than 50% chance HUR will be swallowed up before December 31st, which is when most oil companies financial year ends.