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"£80m free cash flow? I don't think so."
They have been selling oil for money.
"Hi Stu255,
I say we send you back to school to re-learn maths because that "4p free cash" is just ridiculous."
Haha, per share obviously.
The single biggest thing holding the price back at the moment is that most of the people watching HUR are stuck in the old way of thinking about HUR, i.e. what is required to get from 60p to 100p and 100p to 200p.
To get from 60p to 100p a few things needed to happen, to get from 100p to 200p lots of things needed to happen.
Those things look far away right now, and this is the main thing at the forefront in peoples mind.
HUR spent a long time building the big expansion narrative and that narrative is still in the minds of the vast majority of people here. That big expansion story is like an object lodged in your brain.
But when priced below 10p none of that stuff matters.
At 6p HUR is not primarily a geology play. It is not even a field development play. Right now, nothing new needs to happen in the world for HUR to produce 2x their market cap in oil sales over the next couple of years.
They ship about $20m of oil every month or so. About $5m of that is profit, and they don't have to pay tax for a long time because of their huge tax credits. HUR will probably generate $50-60m free cash this year and the MCAP today is £100m.
At the current price, the free cash flow yield is something like 40 - 60%.
Hurricane are already making good money but at £100m market cap it is stupidly good money, they have very low debt relative to their peers, huge tax credits, they are shipping lots of oil to market, the oil price is decent, they are hedged.
What has happened to HUR in the stock market is that all the geology froth has blown away and the pendulum has swung right back. Most AIM investors have seen this dozens of times before, so are naturally very wary, it looks very familiar. But usually when this price chart happens on AIM all that is left is a husk of debt and overdue invoices.
With HUR, the stock bubble popped and inside of it all was a very profitable oil company. This is really unusual.
It is so unusual in fact, that everyone seems to be blind to it. Assuming there will be some kind of equity raise, when in fact the company is easily self financing and even generating substantial free cash.
I guess when priced at 60p nobody cares about 4p free cash flow? But priced at 6p and I think we can all agree that 4p free cash flow is very rare. They are making so much free cash right now, HUR could buyback todays market cap in cash with just a couple of years of operation.
At what share price does HUR consider it good business to buyback equity?
Cocopops,
That doesn't make any sense. The market makers net volume is zero.
They do not intentionally hold shares overnight. That is not their business model. They trade the spread and they do it in small volumes.
Are the MM's sitting on huge volumes of HUR shares?
Are the MM's sitting on naked short positions?
Do you know who IS selling into every rise? The convertible bondholders.
The market makers don't have a continuous supply of newly minted HUR shares to sell, whereas the convertible bonds are exactly that. The bond coupons are effectively paid in new equity. The bond holders then sell this equity whenever the market has sufficient volume (whenever the market rises), because bond holders want bands and cash and do not want equity.
MM conspiracies are a nonsense. Go and read some literature on market microstructure and find out how the markets actually work.
How can the MM's push the price down through all the bids without ending up with a huge net short position and an artificially low price with no liquidity on the ask for them to exit against? Try it yourself and see what happens.
Do MM's have magical powers?
Anyone can act as a defacto MM if you just pay £7.50 for L2 access. Why isn't everyone manipulating every share price and making lots of free money? It's simply not a thing.
If you really think it is possible, then why are you investing long when you can go and trade like an MM and set any share at any price you desire.
"I reckon there is increasing risk that equity will get wiped out by CB. Too many uncertainties about the water cut and subsurface modelling, hence why the company couldn't provide pruroduction guidelines at the moment. If you recall, HUR were not expecting high water cuts for the EPS."
It's not possible for a profitable company to be wiped out by convertibles.
Also... a profitable company doesn't need to issue convertibles. They can issue regular bonds from here on.
So the convertibles will be retired from the capital structure when they mature in 2022.
HUR has survived the convertibles by becoming profitable.
Convertibles protect bondholders from volatile asset values but have the side effect of depressing the share price whilst they are exercised.
But now looking at just how much cash HUR has, and how much money they are making now, and looking at just how depressed the share price is... HUR should go into the market with a buyback program.
They should be buying their own equity at these prices.
Where else in the North Sea can you buy 1 bopd for £7,000 ?
The secret to valuing any oil company is this...
1). Geology is subjective
2). Finance is objective.
HUR is comfortably making $80m free cash flow in the current oil price / economic environment. That's 4p / share.
What are the new board going to do with that?
Are they going to spend it on exploration?
Spend it on further development?
Give it back to investors?
If they give it all back that would be a 60% yield.
They obviously aren't going to give it all back, but this just shows how the share price today is reflecting the depressed mood about the geology porn (old HUR) and not the stellar financials (new HUR).
Acquisitions in the North Sea (looking back at those earlier this year) typically price oil producing assets at about £30,000 per bopd, give or take 30%.
That would be around 25p for HUR (at existing production levels).
Seeing it trade at 6p? That image will be branded inside your eyelids for a few years to come.
"Stu, HUR finances it's loan interest from operating cash flow not some death spiral equity raising. I do though agree share buybacks would be helpful in putting a floor under the SP and prevent market manipulation."
https://www.hurricaneenergy.com/application/files/7815/8739/4641/Hurricane_Energy_plc_Annual_Report_and_Group_Financial_Statements_2019.pdf
Convertible Bond fair value movement
The accounting for the Convertible Bond (issued in July 2017) required the recognition of an embedded derivative liability related to the equity conversion option. The fair value of the embedded derivative is based on the market value of the quoted Bond at the balance sheet date and equivalent yields on other bonds of a comparable size and maturity. The higher the market value of the Bond (which typically tracks the Company’s share price), the more the fair value of the derivative liability increases. Any increase in the liability creates a corresponding non-cash charge in the income statement. See note 5.1 to the Financial Statements for further details.
The losses recognised do not have any impact on the Group’s cash position, amounts payable in respect of the Convertible Bond, or on its tax position. On either conversion or repayment of the Bond, the recognised derivative liability will be released to the Income Statement.
The fair value gain recognised during the year in relation to the embedded derivative was $34.7 million (2018: fair value loss of $42.4 million).
The bond matures in July 2022, there are 2 years worth of these payments left.
They are a structural headwind to the listing price. Bondholders immediately convert their coupon to equity and sell on the public market.
The company should seek to offset the impact with a buyback program. Just look at the market cap for evidence of the impact these convertibles have.
Yeah, that's what I always used to do.
I would trade the technicals and use the boards to try and understand the general mentality.
OilCo's often have a herd, who all plan to sell on the same event (even if the event is good). The boards are a good way to spot that. Often with oilco's you get a volatility expansion that opens high and closes the gap over the rest of the day.
This one is a bit weird though, as HUR are not an exploration minnow any more. They are actually cash flow positive now.
The chart looks like an exploration minnow that made a big discovery and never got it developed... except HUR did get it developed and are now sitting on a comfy war chest and making more money hand over fist.
Because their wells are so prolific (yes they are), HUR have found themselves in the enviable position of having almost no debt (compare to Premier and Tullow sitting on $1.9bn and $2.7bn of debt respectively).
So HUR is a bit of a strange one.
It's just the convertibles that are the fly in the ointment, but again that will resolve shortly because HUR now have significant free cash flow.
Really what needs to happen next is that HUR stop issuing new shares via convertibles, or if they cannot do that, they need to start buy backs as a means of offsetting the market impact of the convertible issuance.
The fact that the market cap is less than cash on hand, even when the company is making strong sales(!) is all the evidence required that the convertibles have been a major headwind and are now a suppressant on the equity value.
Addressing this corporate finance issue is significantly more important than any operational issue.
The seller is the convertible bond financier.
They don't care about the price. The lower the price the more shares are issued by HUR to finance the debt.
It's a bit of a silly practice for a profitable company. I assume it will stop soon with the new management in place.
I don't think Trice really understood corporate finance.
Using 10-15% of corporate earnings to finance buy backs would offset the endless trickle of convertibles that drag the price down. Would probably snap the SP back to 40p or so as it would cancel out the headwind.
No.
Every trade must have 1 buyer and also 1 seller. Every trade.
The market is nothing more than an exchange.
The market doesn't make shares, it doesn't manufacture money. It is only an exchange.
"Welcome Stu....Mr Xcite Energy basher from the past !!"
Yes, that is I.
This board is full of hyperbole and crazy conspiracy theories about wizards controlling the market.
Everyone here seems to be completely distracted with pages and pages of nonsense.
Lots of over analysis of things that are irrelevant.
It's very easy to make a case for Hurricane at this price even with the most conservative assumptions. The biggest enemy here is your own hyperactivity and impatience.
Long term oil price = $40
Current output = 17,000 bopd
Asset b/e = $17
Company b/e = $26
Company operating income = 17,000 bopd * ($40 - $26) = $86.9m
Cash at hand = $156m (Dec 2019)
Ring-fenced trading losses of $487.9 million at 31 December 2019 and other allowances and supplementary charge losses of $761.0 million, which have no expiry date and would be available for offset against future trading profits.
Market cap = $154m.... Haha!
Yet for some unknown reason, investors feel the need to concern themselves with future growth.
Who cares what happens with future wells or future assets? Look at the price right now. Look at the assets right now.
All of the future stuff is priced to $0.00 (you can just ignore future growth for now, it's not required)
Even the ongoing free cashflow is priced at $0.00
In July 2020 (right now) HUR.L is currently generating free cash flow of about 4 pence per share.
You can buy these shares right now for 6 pence.
Only an idiot would worry the viability of adjacent assets or future wells.
At this price... Who cares about any of that?
At 30p, yes discuss future assets... but at 6p?
Just back the truck up and then switch the computer off for 6 months.