The latest Investing Matters Podcast episode featuring Jeremy Skillington, CEO of Poolbeg Pharma has just been released. Listen here.
And you haven't heard a plan for 40k barrels per day. How many wells? Which field? Who pays? Tie-backs? WOSP? All you've heard is an aspiration that was knocked off track by GWA results and you simply assume it will happen!
LW. I guessed that. But you're making a whole host of assumptions about what HUR will and won't do. Given the company do not even have a 2020 drilling plan it's too much of a leap for me to simply assume everything goes right and production hits 40k in 2022. Over-optimism with the GWA has been part of the problem.
CS. You know my view of reservoir risk and how IMHO it is simply based on HURs model as published in the CPR. Most people on here profess to believe almost religiously everything that HUR says - but not in this case where you prefer unspecified and unexplainable market forces!!
Anyway, that me done for today. I'll go back to where I started - it's good to have debate the positive and negative rather than simply mindlessly ramp, de-ramp......or defend your position no matter what.
LW
Edison forecast 11.3 cents EPS for 2021 or about 8.5p. I personally suspect slightly lower, but I like to be conservative. So the question is - why is it undervalued? Your answer seems to be ‘market mechanics’, mine is ‘reservoir risk’. I guess in time we’ll know if either of us is right.
Worked
Full year results will be available next month. In-house broker forecasts are for a EBITDA of $87 last year and $245 this year. I suspect this year will be lower - very POO dependent.
As to why the current share price, my view is different from LW. Without repeating arguments, there are concerns about how sustainable the reservoir is because it's novel for the UK. The price has probably under shot fair value IMHO, due to sentiment - but in those cases the bottom is always difficult to judge.
Only 7 of the last 33 years have seen an inflation-adjusted average POO of over $70 and the majority of those were early in the last decade. There is the potential for lots of volatility, but I think you're wrong to assume the current price is necessarily depressed when compared to historical norms.
At the macro-economic level, were a very long way into the current bull market for equities and I see as many downside as upside risks.
https://www.macrotrends.net/1369/crude-oil-price-history-chart
The 2019 wells were funded by Spirit. The 3 wells previously planned for GWA in 2020 were 50/50. Slide 16 of the Q2 presentation looks clear on this.
No firm idea how the potential P&A and OGA well will be funded - best guess is 50/50 but that has to be confirmed
Taverham
The cash was expected to be used in accordance with the Q3 presentation which from memory was 3 more drills on the GWA plus tie-back of Lincoln well plus long lead items for FID. It’s now changed and there are requirements for OGA mandated wells to test the OWC, no tie-back of Lincoln in 2020, possible P&A activity, and potentially drilling a further potential producer on Lancaster. I assume we’ll get clarity very soon as the CMD is too late.
Edison’s latest figure predicts $70m op cash flow last year and $230m this year. Hurs forecasts are a little lower. Moreover the Edison forecasts assume a $70 POO which seems unlikely. Edisons estimate of Capex over the same period was only$70m or so, however that will now change.
I personally would like to see HUR concentrate on Lancaster. If they can do the minimum to hold onto GWA really cheaply then fine, but if not we should park it quickly. More producers on Lancaster (shallow ones, not deeper on the structure!), increased production, increased reserves, de-bottlenecking the FPSO and WOSP. Everything else is a distraction.
My concern is how much they need to set aside for LWs ‘rainy day’. Without a sense of what the state of play is with Spirit it’s hard to estimate. And the bonds are a factor that cannot simply be ignored, despite some of the protestations on here. So it’s going to be a balancing act and one that will be a good indicator of confidence (likely ahead of the CMD).
LW
I suppose my underlying point here is that this used to be a good forum to understand HUR, test ideas and get pointers to new sources of information. I personally feel I’ve benefited from diverse sources of knowledge whether that is from ADUK, DSPP or RicFle. Of course, I don’t always agree with them but at least they forced me to think through ideas.
That’s not happening now. Look at the post regarding a £1bn loss of MCap over 12 weeks. It’s not true yet at least 5 people believe it and have recommended it. How does that help anyone’s investment decision? It has lost circa £1bn but over 9 months - a time period encompassing both the GWA campaign and the water cut concerns.
For the record, I think HUR is now under-valued and offers a reasonable risk vs reward proposal. I think for reasons I’ve written that the fall from 50p+ is entirely justified. But I also think that the 20k per day output is most likely sustainable, despite the water risk and therefore underpins a P/E ratio. However, I’m keen to understand where the bottom is, what the potential upside is and as I’ve said (since July) I believe the CMD is key. RT left lots of hanging questions at the last event and how he answers them this time will determine much.
BTFATH1
It appears you are the ramping counterpart of TSD! Funny how you don’t cause the same outrage!
It’s probably worth noting AS comments on bonds at lasts years results presentation on 28 Mar 19:
in respect of our convertible and other debt financing, we don't expect to be out in the debt market this year. That makes -- will make little sense in respect of our future spending plans. The convertible is due 2022, but there are some features that may allow us to extinguish it in advance of that if the prices are right. Clearly, we want to have as clean a balance sheet as we possibly can as we approach 2021 when we start taking FIDs on full field developments.
That says to me that the plan was to force conversion this year. However, given the current SP conversion seems unlikely and I would be surprised if HUR were to choose to repay early. I can’t recall any statement that says (GWA)FID is delayed but my expectation is that it will be given events.
Drillspark
I take that to mean you don’t agree with me but can’t articulate a sensible argument as to why. I haven’t checked your history but I’m pretty sure most of your posts have never added anything that might help people understand their investment.
LW
I do accept that 'one swallow does not make a summer' so therefore one deep well can never be conclusive proof that Hur's multiple reservoirs will not flow from deep. But it is a risk, and if they wish to disprove it then it comes at significant cost. You either do not agree that flow from deep is important to the SP valuation despite Hurricanes own model in the independently reviewed CPR agreeing that it is. I think most investors recognise the risk and it has affected the SP.
Would you care to explain the 'market mechanics' that you believe are the cause? To be honest, other than the normal nervousness associated with a falling SP, then I don't see any evidence. I do get that large SP moves tend to cause over/under-shoot of fair value, and I think Hur is suffering from that. But that is not a cause, it's a symptom.
From the small print:
This report has been commissioned by Hurricane Energy and prepared and issued by Edison, in consideration of a fee payable by Hurricane Energy. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse.
So it’s not independent in my mind.
CS
I don’t think there is a lot of fundamental differences in our views. My point was that I believe the 2 risks I gave underpin the fall from 50p + to the current SP. Investors now need to make their own judgements on how representative WD is and whether the water is perched or not. If they’re positive- then the stock is under-valued.
BH. You ask whether I believe it’s perched or not. The company are telling us it is, and I’m prepared to believe that. The more relevant point to me is how extensive the perched water is - there’s a whole world of difference between the discrete bubbles HUR displayed at the last CMD and the previous ‘ jellyfish’ model.
Two reasons:
First, Warwick Deep did not flow. Along with similar evidence from other wells it implies oil may not flow from depth on the Rona Ridge as all the fields are considered analogous. The implications are spelt out in the Hurricane and RPS models published in the CPR - water breakthrough and significant (circa 75%) resource reductions. This is likely to affect how Spirit view their investment moving forward.
Second, early water production from the EPS was not expected. Assuming it is perched (best case) then it will significantly complicate FFD planning, adding cost and risk. Until it is understood a sale or further farm out will be difficult to achieve.
Most of the rest is noise from unscrupulous traders trying to sow fear or over-extended investors who claim to be in for the long-term but spend every minute watching the SP.
Without the ability to short the chances of raising funds with convertible bonds would have been significantly less. That could have meant no funding or greater dilution.
however large the water cut may be, it hasn't affected the amount of actual oil HUR has been able to produce.
I don’t think that’s true. Had the average water cut been 0 rather than just over 10% in Q4 then I’m pretty sure the production figure would have been correspondingly higher!
Typically the company can only force conversion to equity if the SP is higher than the conversion price. If the SP is lower then the holders are entitled to cash.
Obviously there can be negotiations to extend or to convert at a lower price.
That's £700k minimum not £700m. Not an issue.....
Precisely. Their lack of confidence to forecast risks being contagious. The interviewer was very astute and made this point several times.