HUR.L Regulatory News (HUR)

19 March 2020

Hurricane Energy plc

("Hurricane", the "Company", or the "Group")

Full Year Results 2019

Hurricane Energy plc, the UK based oil and gas company focused on hydrocarbon resources in naturally fractured basement reservoirs, provides its unaudited full year results for the period ended 31 December 2019.

Dr Robert Trice, Chief Executive of Hurricane, commented:

"The COVID-19 pandemic is having a profound impact on human health and the global economy. Unprecedented restrictions on travel and association have created a challenging, rapidly changing and unpredictable environment for society, and for Hurricane. The oil price has suffered a dramatic fall from these factors, exacerbated by increased supply from OPEC and Russia, and consequently oil company share prices have declined significantly.

"We recognise the depressed share price has been frustrating for our investors, especially at a time when operationally the Company is delivering very positive results from the Lancaster Early Production System (Lancaster EPS). Against this difficult backdrop, today we announce our full year results for 2019, Hurricane's first year with production. The Lancaster EPS is the first phase of development of our substantial Rona Ridge assets. Achieving first oil marks the culmination of many years of appraisal and development activity. Doing so safely, on schedule, and on budget is a remarkable achievement and a huge credit to our operating and development teams and our Tier 1 contractors.

"Whilst the financial security gained from production is crucial, the ultimate goal of the Lancaster EPS is to improve our understanding of the reservoir in order to de-risk the resource and aid the planning of future phases of development on the Rona Ridge. Our primary objective of data acquisition has been an unqualified success. High productivity and high facility uptime of the Aoka Mizu FPSO has meant that we have been able to undertake extensive tests to investigate interference behaviour between the two producing wells, whilst remaining above production guidance. These tests have included the evaluation of individual and combined well behaviour at different production rates. As a result, we are better informed regarding the reservoir and well performance. There are some initial key observations that can now be made, and we will provide a more detailed update at our Capital Markets Day presentation on 25 March 2020.

"Having signed the Greater Warwick Area (GWA) farm-out in September 2018, our partnership with Spirit Energy commenced with a three-well drilling and testing programme in 2019. Whilst achieving operational objectives and being completed on budget, the two Warwick well results were disappointing and unlike Lancaster, although the Lincoln Crestal well produced oil at a rate of 9,800 barrels of oil per day. A further set-back to the GWA partnership's aspirations relates to the fact that the joint venture has so far been unable to obtain the necessary consents for us to tie back the 2019 Lincoln Crestal well to the Aoka Mizu. The combination of these challenges at GWA had a materially negative effect on the share price.

"The 2019 GWA wells formed part of the fully-carried first phase of the programme with Spirit Energy, which also included the purchase of long-lead items and engineering work for a future well tie-back to the Aoka Mizu, gas export related modifications and debottlenecking. None of this work could have taken place in 2019 without the transaction with Spirit Energy, and we are delighted to have delivered this first phase at no capital cost to Hurricane.

"Whilst otherwise poised to move forward with the next phase of the work programme with Spirit Energy, in light of constraints on achieving regulatory consent to tie back the 2019 Lincoln Crestal well to the Aoka Mizu, and disappointing well results on Warwick, we remain in discussions with our partner on the timing and nature of next steps for the GWA, which also now faces additional headwinds from the macroeconomic environment. Nonetheless, we are in a strong financial position; we enjoy low operating costs at the Lancaster EPS, and continue to generate positive operating cash flow, even at today's low oil prices. Our intention is to ensure that we will be optimally positioned to take the next steps on the GWA and/or Lancaster when the business impact of COVID-19 dissipates and macroeconomics permit; and we are mindful of the need for capital discipline at this challenging time."

2019 Full year results summary

Financial results (unaudited)

· Revenue for the period of $170.3 million (2018: nil)

· Statutory profit after tax of $58.7 million (2018: loss after tax of $60.9 million)

· Underlying profit before tax* of $30.0 million (2018: underlying loss before tax of $16.7 million)

· Unrestricted cash position of $156.6 million at 31 December 2019 (31 December 2018: $83.0 million)

Operational developments - Lancaster Early Production System

· Lancaster Early Production System first oil achieved on 4 June 2019, following introduction of hydrocarbons on 11 May 2019

· Lancaster produced at an average of approximately 12,900 barrels of oil per day from introduction of hydrocarbons to end of 2019, at an average cash production cost* of $21.8 per barrel

· Hurricane sold over 2.9 million barrels of oil across seven cargoes in 2019

· Overall system availability on the Lancaster Early Production System has exceeded 90%

· Initial key observations from data collected are:

o Well performance is better than initially expected with individual wells sustaining production rates of over 10,000 barrels of oil per day

o A 10-metre water zone in the 205/21a-7Z well has been identified which is interpreted as perched water. Whilst water cut has increased over time, such behaviour is consistent with the perched water model. To date, water cut has not impacted on production guidance

o The wells exhibit a high degree of interference between each other

o As production continues the wells are experiencing increasing pressure support from the reservoir

Operational developments - Greater Warwick Area

· Three well 2019 drilling campaign carried out in partnership with Spirit Energy using the Transocean Leader semi-submersible rig, delivered on budget

· Hurricane fully carried under terms of 2018 farm-in by Spirit Energy

· 'Lincoln Crestal' well (205/26b-14)

o Drilled to a total depth of 1,780 metres TVDSS, including a 720 metre horizontal section of fractured basement reservoir and successfully flow tested

o Maximum stable flow rate of c. 9,800 stb/d on electrical submersible pumps; average rate of 4,682 stb/d under natural conditions

o Lincoln confirmed to contain light, 43° API oil

o Well to be plugged and abandoned by 22 June 2020, since the GWA partners have been unable to obtain an extension to the terms of the suspension consent or to obtain the other consents required to tie the well back to the Aoka Mizu FPSO

· 'Warwick Deep' well (205/26b-13Z)

o Drilled to a total depth of 1,964 metre TVDSS, including a 712 metre horizontal section of fractured basement reservoir

o Current analysis indicates that the well intersected a poorly connected section of the fracture network with produced fluids being attributed to a single fracture or series of connected fractures behaving as a single feature. The well did not flow at commercial rates, producing water (943 barrels), comprising drilling fluid and formation water. Oil and gas were also noted but of insufficient volumes to provide any measure of flow rate. Given these results, the well was plugged and abandoned.

o Gas chromatography analysis indicates the presence of light oil within the basement section. Laboratory measurements of a centrifuged sample of oil from a recovered 1 litre DST oil sample bottle is supportive of the gas chromatography analysis, indicating a light oil with a minimum API of 40°.

· 'Warwick West' well (204/30b-4)

o Drilled to a total depth of 1,879 metres TVDSS, intersecting a 931 metre horizontal section of fractured basement reservoir

o DST obtained a stable, sustainable rate of 1,300 stb/d on natural flow, after a number of flowing periods at variable rates. This rate is not considered commercial and so the well was plugged and abandoned

o Initial analysis indicates a light, 43° API oil

Outlook

· The combination of low oil prices and COVID-19 have created an unprecedented economic environment

o However, at our guided production rate of 18,000 barrels of oil per day (which includes a 90% uptime assumption) cash operating costs are expected to be approximately $17 per barrel

o Hurricane has been working with its offshore rig, FPSO and aviation contractors to put measures in place to prevent COVID-19 having an impact offshore and limit broader impacts on production operations

· Hurricane holds significant cash balances ($164.3 million of unrestricted cash as at 18 March 2020) which is forecast to be sufficient to meet obligations and committed costs as they fall due

o Hurricane is reviewing its forward capital work programme beyond existing commitments, in light of the macroeconomic environment

* Throughout this release, '*' indicates a non-IFRS measure, which management believe are useful in providing additional information on performance and trends. Definitions and reconciliations to the nearest equivalent IFRS measure are provided in Appendix B at the end of the unaudited financial results below.

Contacts: 

About Hurricane

Hurricane was established to discover, appraise and develop hydrocarbon resources associated with naturally fractured basement reservoirs. The Company's acreage is concentrated on the Rona Ridge, in the West of Shetland region of the UK Continental Shelf.

The Lancaster field (100% owned by Hurricane) is the UK's first producing fractured basement field. Hurricane is pursuing a phased development of Lancaster, starting with an Early Production System consisting of two wells tied-back to the Aoka Mizu FPSO. Hydrocarbons were introduced to the FPSO system on 11 May 2019 and the first oil milestone was achieved on 4 June 2019.

In September 2018, Spirit Energy farmed-in to 50% of the Lincoln and Warwick assets, committing to a phased work programme targeting sanction of an initial stage of full field development.

Inside Information

This announcement contains inside information as stipulated under the market abuse regulation (EU no. 596/2014). Upon the publication of this announcement via regulatory information service this inside information is now considered to be in the public domain.

Competent Person

The technical information in this release has been reviewed by Dr Robert Trice, who is a qualified person for the purposes of the AIM Guidance Note for Mining, Oil and Gas Companies. Dr Robert Trice, Chief Executive Officer of Hurricane Energy plc, is a geologist and geoscientist with a PhD in geology and has over 30 years' experience in the oil and gas industry.

Standard

Resource estimates contained in this announcement have been prepared in accordance with the Petroleum Resource Management System guidelines endorsed by the Society of Petroleum Engineers, World Petroleum Congress, American Association of Petroleum Geologists and Society of Petroleum Evaluation Engineers.

Company Review

Hurricane Energy delivered first production from the Lancaster Field in 2019, a significant landmark after 15 years of patient investment to explore and develop the first fractured basement reservoir in northwest Europe. Not only is the Lancaster Early Production System ("Lancaster EPS") a play-opening development, but the Hurricane team completed the project on time and on budget with an excellent health and safety record - a truly milestone achievement for the Company.

Lancaster EPS

The Lancaster EPS is at the core of the Company's strategy, and two highly productive wells are now generating the reservoir data required to clarify the characteristics of this unique fractured basement play, while also generating sufficient cash to fund next steps without further calls on shareholders.

An average of 12,900 barrels of oil per day were produced in 2019 following introduction of hydrocarbons in May, an excellent performance, above expectations for this ramp up period. Since year-end, production has been gradually increased to the target of 20,000 barrels per day.

While well productivities are very encouraging and above expectations, there have been some unanticipated aspects including the presence of a previously unidentified water zone within the productive interval of the 205/21a-7z well. However, this is a pioneering and unprecedented new development, and understandably we have much to learn about the production characteristics of this complex reservoir rock. The Lancaster EPS has been designed with the express objective of obtaining a wealth of reservoir data over an extended period of time, to allow us to draw key conclusions from which to define the potential scale of full field development. More information on the technical results of the EPS will be announced at the Company's capital markets day on 25 March 2020.

Greater Warwick Area

The three well 2019 drilling campaign, in joint venture with Spirit Energy Limited ("Spirit Energy"), was also completed on schedule and on budget, another notable achievement by the Hurricane operations team. Well results were mixed, with the Lincoln Crestal well producing at over 9,000 barrels of oil per day, but the other two wells having significantly poorer outcomes. We have materially increased our understanding of this part of the Rona Ridge, which appears to have less well-developed reservoir qualities compared to Lancaster.

As a result, together with Spirit Energy, we are re-assessing the next stage of activity in the Greater Warwick Area ("GWA") compared to original plans at the time of the farm-in, and have adjusted the joint venture cost allocation arrangements accordingly. We have not yet agreed a forward programme and budget for the GWA, although we have been ordering some long-lead items and carrying out the engineering work to be able to tie back a GWA well to the Aoka Mizu FPSO, but this remains subject to joint venture approval and regulatory consent.

Organisational Resources

The increased demands of a joint venture drilling campaign, alongside concurrent production operations at Lancaster, has resulted in a significant step-up in the scope and intensity of activities at Hurricane. The Group's organisational structure has therefore been carefully expanded in Eashing and Aberdeen to the extent necessary to manage these operational needs. Staff headcount increased from 41 to 52 over the year.

Financial Results

Sales revenues of $170.3 million were recorded for the year, at an average realised price of $59.3 per barrel. Operating costs have been in line with pre-start-up expectations. The Lancaster EPS capital programme was completed within budget, and the carry arrangements with Spirit Energy covered essentially all costs for GWA drilling. Operating costs have been in line with pre-start-up expectations. The overall result was a highly satisfactory financial outcome, with operating cash flow of $112.2 million and unrestricted cash of $156.6 million at year end.

Capital Investment

Hurricane has attractive further drilling opportunities both to expand near-term production and reduce uncertainty over the scale of long-term resources that might be exploited in a full field development. However, the operating environment West of Shetland is relatively capital intensive, so the spending required to exploit these opportunities in full is significant, and the time required from commitment to completion is quite long. Decisions about the optimum timing to potentially proceed with these opportunities will take this into account.

Capital Allocation: Risk Management and Priorities

Medium-term production forecasts for the Lancaster EPS will remain subject to a degree of uncertainty until longer term reservoir performance has been evaluated. We have also recently been reminded that we operate in a highly volatile oil price environment, with the Brent oil price down dramatically from an average of about $65 per barrel during 2019 to a low of less than $30 per barrel in March 2020. The impact of the coronavirus pandemic on economic activity and hence future oil prices is extremely difficult to predict, and, while every effort is being made with our contractors to minimise risk, the ability to operate offshore with normal levels of efficiency could also be affected.

Considerable caution over the scale and pace of future capital spending commitments is therefore appropriate at the present time. Amplifying the need for a cautious approach, capital markets' appetite for oil and gas investment has drastically reduced in the past 12 months and may worsen further or stay at these levels for the foreseeable future given the macroeconomic environment. We must therefore aim for financial self-sufficiency and make plans to satisfy Convertible Bond repayment obligations crystallising in 2022.

The Board will therefore prioritise existing cash and the allocation of cash flow from operations towards creating a strong balance sheet with an ample cash cushion to absorb downside risks and meet future financial liabilities, before working towards delivering a suitable combination of shareholder returns, and a strictly controlled capital spending programme at the appropriate time in the future. Capital spending will be focussed on licence obligations and drilling options to maximise shareholder value uplift at minimum cost.

Our shareholders have contributed substantial risk capital to bring Hurricane to first oil, and it is a Company priority to deliver a return for their patience and commitment. Future investment decisions will take into account share price performance and the need to preserve and increase value for shareholders.

Corporate Governance and the Board

The Hurricane Board has evolved considerably in the past 12 months. We welcomed two additional independent non-executive directors, both bringing significant oil and gas industry experience. Sandy Shaw, appointed to the Board in January 2019, has extensive and highly relevant legal, commercial and transaction experience. Beverley Smith, appointed in December 2019, is a chartered geologist with significant technical, strategic and management expertise. Post year-end, Alistair Stobie resigned as a director and Chief Financial Officer.

We have taken further steps towards meeting best standards of corporate governance, and in this year's annual report we will outline how we now satisfy the principal provisions of the UK Corporate Governance Code for Premium Listed companies. This is no longer a bottleneck to moving to the Main Board of the London Stock Exchange, which the Board continues to consider.

Supplementing our annual report this year will be a detailed ESG report. Much of what it describes is a reflection of the way Hurricane has operated for years - safety and the environment have always been at the forefront of our attention internally. We are pleased to describe this in more detail, extend reporting on areas of increased societal and investor concern, and to formalise our disclosures within the GRI framework. This level of reporting will help us to demonstrate our accountability as the industry aims to reduce negative impacts and support the energy transition.

Financial Review

The first half of the year included a momentous shift for the Group with the first recognition of revenue. The Aoka Mizu FPSO was hooked up and first oil from the Lancaster EPS was announced on 4 June 2019. During 2019 over 3 million barrels were produced and seven cargoes sold, realising $170.3 million in revenue and providing $112.2 million in operating cashflow. The EPS start-up was completed on time and importantly the total capital expenditure incurred was within the original budget.

Alongside the progress on the Lancaster field, activity continued on the GWA with the drilling of three wells, which were completed on budget. The majority of the GWA activity was paid for in full by the Group's joint venture partner, Spirit Energy, as per the terms of the farm-out agreement. The first well, Warwick Deep, was not a commercial success, producing a mixture of drilling brine, water, and small amounts of oil and gas. The well was therefore plugged and abandoned, but not before valuable data had been collected from logging and attempting to test the well. The rig then moved on to drill the Lincoln Crestal well, which successfully tested at commercial flow rates. The third well, Warwick West, produced oil at lower rates. Hurricane and Spirit Energy are now using the data from the campaign to help define the optimal appraisal strategy for the GWA.

The Group's profit after tax for the year was $58.7 million (2018: loss after tax of $60.9 million). This included the non-cash impacts of a $34.57 million fair value gain on the Convertible Bond embedded derivative, $54.2 million credit relating to deferred tax and $66.5 million impairment of the Whirlwind asset following relinquishment of the licence at the OGA's request. Underlying profit before tax* (which excludes the embedded derivative fair value movement and asset impairments) was $30.0 million (2018: $16.7 million underlying loss before tax).

Even at low oil prices, the Lancaster EPS is now in a position to generate free cash which can be utilised to deliver the Group's longer-term strategy.

Revenue

Revenue for the year was $170.3 million with an average price of $59.3/bbl realised across seven cargoes.

Cost of Sales

Total cost of sales was $118.5 million, including $62.6 million of depreciation charges (calculated on a unit-of-production basis). Cash production costs* (which exclude depreciation and accounting movements in inventory but include the fixed lease charges for the FPSO) were $66.0 million, equivalent to $21.8 per barrel produced.

Of the cash production costs, lease payments for the Aoka Mizu FPSO were $21.1 million. $15.3 million of these were the revenue-linked incentive tariff. As the incentive tariff is linked to revenue a reduction in oil price results in a direct reduction in production costs thereby partially reducing the oil price risk to the Group.

This resulted in a gross profit for the year of $51.8 million.

Other Profit and Loss

General and administrative costs decreased from $12.7 million to $0.4 million primarily due to a $3.2 million non-cash credit relating to the Group's share-based payment schemes (compared with a charge of $4.7 million in 2018) due to a change in the expected vesting date and performance assumptions of those schemes. The remaining general and administrative costs also decreased due to increased recharges to joint operation partners and certain staff and administrative costs now included within cost of sales.

Net finance costs were $21.5 million (2018: $4.0 million). The majority of this related to the interest charge on the Convertible Bond ($16.4 million) which, following first oil, could no longer be capitalised. In addition, in the period interest on lease liabilities were recognised for the first time ($5.0 million), following the adoption of IFRS 16 on 1 January, and the commencement of the FPSO lease from first oil. These interest costs were partially offset by foreign exchange gains and interest income received.

This resulted in an underlying profit before tax* for the year of $30.0 million (2018: underlying loss before tax of $16.7 million).

Exploration Write-off

The extension of the Group's P1368 licence, agreed with the OGA in December 2019, included the condition to relinquish the Whirlwind and Strathmore sub-areas. As a result, an impairment charge of $66.5 million was recognised in the year, all relating to Whirlwind. The carrying value of Strathmore was previously written off in 2017.

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 information for further details.

Any gains or 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 $34.57 million (2018: fair value loss of $42.4 million).

Cashflow

In 2019, the Group's main sources of cash received were:

· Proceeds from crude oil sales of $170.3 million

· Tax refund relating to R&D tax credits of $6.2 million

· New shares issued under warrants and rights of $7.8 million

In 2019, the Group's primary uses of funds were:

· Remaining development expenditure on the Lancaster EPS of $52.9 million

· Operating costs for the Lancaster EPS, including $16.1 million of lease payments for the Aoka Mizu FPSO

· Convertible Bond coupon payments of $17.3 million

As at 31 December 2019, the Group had an unrestricted cash position of $156.6 million (31 December 2018: $83.0 million).

The Group generated operating cashflow of $112.2 million driven by the sale of seven cargoes of crude from the Lancaster EPS following first oil in June 2019. Factoring arrangements agreed with BP and banks meant we were able to benefit by receiving cash proceeds from liftings within days of title transfer, rather than the typical 30- to 60-day payment terms.

Average sales price realised per barrel was $59.3. Cash production costs* were $21.8 per barrel, generating an operating cash flow equivalent of $37.5 per barrel during 2019.

In May 2019, Crystal Amber exercised warrants to subscribe for 23,333,333 Ordinary Shares at £0.20 per share. Kerogen Capital subsequently exercised a related right to subscribe for 6,257,501 Ordinary Shares also at £0.20 per share. Total proceeds received by the Group from the issue of these shares were $7.8 million. Other cash received in the period was in respect of a tax claim under the Research and Development tax relief scheme for the 2016 and 2017 financial years; $6.2 million was received in April 2019.

Cash expenditure in the period related to the final elements of capital expenditure bringing the Lancaster EPS to first oil including expenditure previously deferred from 2018, the costs of sales (including lease repayments) and G&A associated with the Group's operating costs, and the payments of the coupon on the Convertible Bond. With effect from October 2019, interest payments on the Convertible Bond have been paid out of unrestricted funds rather than from a dedicated restricted escrow account. Cash outflows relating to GWA represented the Group's share of its costs of the joint operation, and the timing impact of expenditure incurred by the Group as operator before recovery of costs from Spirit Energy.

Following start-up of production from the EPS, the Group is required to set aside a certain amount of cash generated from oil sales to cover some of the termination costs of the FPSO lease should it wish to exit the charter outside of the contractually agreed periods. At 31 December 2019, this amounted to $11.7 million and was classified as restricted cash.

At the end of 2018, as agreed with the OGA, £16.8 million of cash was held in trust to cover the post-tax cost of decommissioning the Lancaster EPS and was accounted for as a non-current restricted liquid investment and recognised within non-current assets. In February 2019, the Group replaced this cash security held in trust with a decommissioning bond of the same value. Under the terms of the agreement with the bond provider, the original funds were able to be released back to the Group in tranches once specific production milestones were met. These milestones were all achieved by September 2019, and thus the full £16.8 million ($21.7 million) was released back to unrestricted cash in the year.

Tax

The Group recognised a total tax credit for the year of $60.5 million. This comprised a $6.3 million credit under the R&D tax relief scheme noted above, and a $54.2 million deferred tax credit.

Due to the nature of the Group's business, it has accumulated significant tax losses since incorporation. The Group has $487.9 million of ring-fenced trading losses 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. Following commencement of production from the Lancaster EPS, positive cash flows from operations, data analysed to date and estimates of future taxable profits, a deferred tax asset of $54.3 million has been recognised in respect of some of these trading losses and a corresponding tax credit recognised in the Income Statement.

The Group had pre-trading expenditure of $122.2 million which was carried forward at 31 December 2019. Tax relief will be available on this amount as the Group's remaining licences reach the development stage.

Exploration and Evaluation, and Oil and Gas Assets

During the year, the Group incurred the remaining expenditure in relation to the Lancaster EPS and the Lancaster field as commissioning entered its final phases and first oil was achieved. Total additions to these assets during the period amounted to $26.2 million, including $9.1 million of capitalised interest, included within oil and gas assets (although cash expenditure on oil and gas assets in the year was higher as the Group settled certain deferred invoices due to one of our Tier 1 contractors which were previously capitalised in 2018).

Following the commencement of production, the Group's charter of the Aoka Mizu FPSO began. Under IFRS 16 this lease was initially recognised on the balance sheet as a right-of-use asset of $101.3 million (within oil and gas assets) and a lease liability of $96.4 million. The P&L expense for the FPSO is recognised within depreciation and finance costs: the lease asset is depreciated on a unit-of-production basis in line with the other EPS assets (and capitalised into crude oil inventory), and the lease liability accrues interest and reduces as the fixed lease payments are made. Because of this, the lease interest costs will be higher in the earlier years of the contract as compared to the end. See notes 2.3 and 5.2 of the financial information for further details.

The Group also recognised minimal capital additions to intangible exploration and evaluation assets on the balance sheet, due to the carry element of the farm-in deal relating to Phase 1 of the GWA programme. Other exploration and evaluation expenditure was in relation to the other assets in the Group's portfolio.

Brexit

Management has continued to monitor the impact, and consider future consequences, of the United Kingdom's withdrawal from the European Union, which took effect from 31 January 2020. Some goods and services obtained from EU-based suppliers may incur customs-related delays or tariffs after the end of the transition period, but the risk of delays will be mitigated by advanced purchase of materials where they are required for critical activities. The overall proportion of EU-sourced suppliers is not significant, therefore the impact of any increase in tariffs is not expected to be material. Any weakening of Sterling against other currencies would benefit the Group's reported results (as revenue is received in US Dollars and a significant proportion of operating costs are in Sterling). However, given that the Group's licences and activities are entirely based within the UK, and all crude oil sales currently made to a UK customer, management do not consider the risks relating to Brexit to be significant.

COVID-19

Hurricane has been closely monitoring the ongoing COVID-19 pandemic as part of its duty of care to its workforce and given the potential risk to operations arising from availability issues relating to key offshore or onshore personnel. Hurricane follows OGUK's Industry Travel Policy for Offshore Installations, and has been working with its offshore rig, FPSO and aviation contractors to put measures in place to prevent the spread of the virus. It has also implemented a temporary business travel ban for its employees and contractors. Furthermore, all onshore employees have the necessary equipment and access allowing them to work at home if required, to mitigate the impact of the current and anticipated government response to the outbreak. However, the potential for operational disruption, in addition to the lower oil price environment, will have an impact on the level of operating cashflow and may have an impact on the Hurricane's forecast capital programme. This has been considered as part of the assessment of going concern and the Group's longer-term prospects below.

Going Concern and Assessment of Longer-term Prospects

The Group ended the year with $171.4 million of cash and cash equivalents, of which $156.6 million was unrestricted. Unrestricted cash and cash equivalents at 18 March 2020 was $164.3 million. The Group's most significant long-term liabilities are the Convertible Bond in issue of $230 million with a coupon of 7.5% payable quarterly in arrears, which matures in July 2022, and committed lease liabilities in respect of the Aoka Mizu FPSO.

The directors have performed a robust assessment of the going concern assumption, including a review of the budget for the year ending December 2020 and onwards, committed capital expenditure, regret costs and longer-term strategic forecasts and plans, including consideration of the principal risks faced by the Group. This analysis has considered whether cash inflows from operation of the Lancaster asset together with cash balances held, plus amounts due from Spirit Energy of $47.5 million in respect of the joint venture funding, are forecast to be sufficient to allow the Group to meet its outstanding trade and other payables of $72.1 million that existed at 31 December 2019, lease payments (primarily for the Aoka Mizu FPSO) and other operating costs, coupon payments on the Convertible Bond debt, and capital expenditure contracted for but not recognised as a liability.

As part of this assessment, the directors considered a number of scenarios which included downside sensitivities in relation to production rates, operational uptime, oil price, operational costs and foreign exchange rates. Following the sharp decline in oil prices in March 2020, the base case oil prices utilised for the going concern assessment were $30 per barrel until the end of the third quarter of 2020, rising to $40 per barrel in the fourth quarter, and $50 per barrel flat from January 2021 onwards. A price scenario was also considered using a flat $30 per barrel assumption through the coming 12 months. Aggregated downside scenarios were also considered, taking into consideration mitigating actions within management's control.

The directors note that should oil prices fall below those assumed above, or productions rates fall below the level forecast, the Group would be able to take mitigating action by postponing or cancelling certain capital projects which are currently forecast but not yet sanctioned. In addition, the directors note the emerging risk of COVID-19 at the time of reaching their conclusion on going concern, where the impacts on global oil demand, Lancaster facility uptime and wider society are currently unclear. However, given the large level of cash resources held by the Group, and limited levels of committed expenditure in the coming 12 months, the directors consider that Hurricane is well placed to withstand a severe downside scenario which could be caused by COVID-19.

Following this review, the directors are satisfied that, taking into consideration reasonably foreseeable downside sensitivities, the Group has adequate resources to continue to operate and meet is liabilities as they fall due for the foreseeable future, a period considered to be at least 12 months from this financial information. For this reason, they continue to adopt the going concern basis for preparing the financial information.

The longer-term prospects of the Group are driven by its strategy and business model whilst factoring in the Group's principal risks and uncertainties.

Assessment of the business is performed over a number of different time periods for differing reasons, which include an annual budget cycle (with reforecasts made as appropriate during the year) and a long-term corporate model which incorporates the latest annual budget, and provides forecast cashflow detail on a field-by-field basis along with cashflows incurred and generated at a corporate level.

Critical to the longer-term prospects of the Group is the successful, safe and sustained operation of the Lancaster EPS. Not only will this generate significant revenue in order to finance future exploration and development, but also provide reservoir knowledge to materially de-risk the producibility and maximise the value of our Rona Ridge assets. This may include a farm-out or sale of certain assets and licences, developing a suitable gas export or disposal strategy and selecting the next phases of field development to maximise use of the capacity of the Aoka Mizu.

The directors have determined that the appropriate period to assess the long-term viability of the business is three years, reflecting the dynamic and flexible nature of the Group.

This period incorporates:

• a further three years of production and data from the Lancaster EPS;

• licence commitment drilling on the GWA;

• licence commitment drilling on the GLA; and

• the maturity of the Convertible Bond in July 2022

Notwithstanding the three-year period, the directors will continue to monitor the performance and prospects of the business over all relevant time periods.

The range of downside scenarios tested was carefully considered by the directors, factoring in the potential impact, probability of occurrence and effectiveness of the mitigating actions, where appropriate; and was updated to take into account the emerging risk of COVID-19 and its impact on oil supply and demand, uptime assumptions and potential wider impact. The review also considered the minimum daily production rate from the Lancaster EPS that would be required at a given oil price that would allow the Group to cover its operating costs, overheads and debt repayments. The downside scenarios applied to the corporate model, in isolation and in combination, were:

• an oil price assumption of $30 per barrel (flat) until the end of the third quarter of 2020, rising to $40 per barrel in the fourth quarter, and $50 per barrel (flat) from January 2021 onwards; and

• a reduction in the average production rate on the EPS as compared to the planned rate by 25%;

The results of the review demonstrated that the Group would have sufficient liquidity to meet its ongoing liabilities whilst also allowing it to invest in certain capital projects. Subject to being able to refinance the Bond, should that action be required, the board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of assessment; as under certain downside scenarios, and assuming no other mitigating actions were taken (for example cancelling, postponing or reducing the scope of some capital projects) it is forecast that the Group would not have sufficient cash available to fully redeem the Convertible Bond which falls due in July 2022 without raising additional equity or refinancing the Bond, should the Bonds not convert into Ordinary Shares.

The reviews assumed that further development, exploration and appraisal activity would only be undertaken if fully funded from existing or operational cashflow, or carried by a joint venture partner. The Group's ability to develop its assets beyond the Lancaster EPS is dependent on the performance of the Lancaster EPS continuing to provide cash flow that is surplus to the Group's other requirements, additional farm-outs, or future fundraising activity.

Group Statement of Comprehensive Income

for the year ended 31 December 2019 (unaudited)

The presentation, description and classification of certain comparative lines have been restated - see note 1.5.

All results arise from continuing operations.

Group Balance Sheet

As at 31 December 2019 (unaudited)

Registered company number: 05245689

Group Statement of Changes in Equity

for the year ended 31 December 2019 (unaudited)

Group Cash Flow Statement

for the year ended 31 December 2019 (unaudited)

The presentation, description and classification of certain comparative lines have been restated - see note 1.5.

Notes

Section 1. General information and basis of preparation

Hurricane Energy plc is a public company, limited by shares, incorporated and domiciled in the United Kingdom and registered in England and Wales under the Companies Act 2006 (registered company number 05245689). The nature of the Group's operations and its principal activity is exploration, development and production of oil and gas reserves principally on the UK Continental Shelf.

The address of Hurricane Energy plc's registered office is The Wharf, Abbey Mill Business Park, Lower Eashing, Godalming, Surrey, GU7 2QN. Hurricane Energy plc's shares are listed on the AIM market of the London Stock Exchange.

1.1 Basis of preparation and consolidation

The financial information, which comprises the consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of changes in equity, consolidated cash flow statement and related notes, does not constitute statutory financial statements for the year ended 31 December 2019 or 2018. The financial information for the year ended 31 December 2018 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors reported on those accounts: their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement made under Section 498 of the Companies Act 2006. The audit of the statutory accounts for the year ended 31 December 2019 is not yet complete. These accounts will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies following the company's annual general meeting.

This financial information has been prepared under the historical cost convention (except for derivative financial instruments which have been measured at fair value) in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS), and in accordance with the requirements of the AIM Rules.

The Consolidated Income Statement and related notes represent results from continuing operations, there being no discontinued operations in the years presented.

The financial information incorporates the results of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year. Control is achieved when the Company:

· has the power over the investee;

· is exposed, or has rights, to variable returns from its involvement with the investee; and

· has the ability to use its power to affect its returns.

All intragroup transactions, balances, income and expenses are eliminated on consolidation.

The Group's joint arrangement with Spirit Energy Limited (Spirit Energy) is accounted for as a joint operation (where the parties have rights to the assets and obligations for the liabilities of that arrangement). As such, in relation to its interests in the joint operation, the Group recognises its assets, liabilities, revenues and expenses of the joint operation, including its share of any jointly held or incurred assets, liabilities, revenues and expenses. These have been incorporated in the financial information under the relevant headings. Details of this joint operation are set out in note 2.6.

In the opinion of the directors, the operations of the Group comprise one segment of business, being oil and gas exploration, development and production together with related activities in only one geographical area, the UK Continental Shelf.

1.2 Going Concern

The financial information has been prepared in accordance with the going concern basis of accounting. The use of this basis of accounting takes into consideration the Group's current and forecast financing position, additional details of which are provided in the Company Review and Financial Review above.

1.3 Significant events and changes in the period

The commencement of the Lancaster EPS start-up phase in May 2019, provisional acceptance of the Aoka Mizu FPSO in June 2019 and the sale by the Group, for the first time, of crude oil cargoes have had the following impacts on the Group's financial position and performance in the period:

· commencement of the Aoka Mizu FPSO bareboat charter and recognition as a right-of-use asset and lease liability under IFRS 16 'Leases' (notes 2.3 and 5.2);

· recognition of crude oil inventory (note 2.2);

· recognition of revenue (note 2.1) and cost of sales (note 2.2);

· commencement of oil and gas assets depreciation under the unit-of-production basis (note 2.3);

· cessation of Convertible Bond interest capitalisation (note 3.2);

· reclassification of certain items in the income statement, balance sheet and statement of cash flows (note 1.5); and

· recognition of deferred tax assets (note 6.2).

The Group also recognised an impairment charge of $67 million relating to its Whirlwind exploration and evaluation intangible asset (note 2.4) following the relinquishment of that licence subarea. For further discussion about the Group's performance and financial position, see the Company Review and Financial Review above.

1.4 Foreign currencies and translation

This consolidated financial information is presented in US Dollars, which is the Company's functional and presentation currency, and rounded to the nearest thousand unless otherwise stated. The functional currency is the currency of the primary economic environment in which the Group operates; as a significant proportion of expenditure and all of its current revenue is priced in US Dollars. All entities within the Group, except for dormant entities, have a US Dollar functional currency.

Transactions in foreign currencies are recorded at the rates of exchange ruling at the transaction dates. Monetary assets and liabilities are translated into US Dollars at the exchange rate ruling at the balance sheet date, with a corresponding charge or credit to the income statement.

The principal rates of exchange used were:

Upon disposal or liquidation of a subsidiary, any cumulative exchange differences recognised in equity as a result of previous changes in the functional currency of that subsidiary are recycled to the income statement.

1.5 Restatement and reclassification of comparative information

Following a review of its Financial Statements, the commencement of crude oil production and the recognition for the first time of revenue and cost of sales, the Group has elected to change the presentation and classification of the statement of comprehensive income and statement of cash flows. Comparative information has been restated accordingly. There has been no change to the reported loss after tax for the year ended 31 December 2018.

Foreign exchange gains or losses and fair value gains or losses on derivatives (excluding movements in the Convertible Bond embedded derivative) are now presented within finance income or finance costs. 'Other operating expenses' has been renamed to 'General and administrative expenses'.

Other fixed assets (being property, plant and equipment not classified as oil and gas assets) are now presented on the balance sheet within the line 'Other fixed assets and long-term receivables'.

Movements in joint operation payables and receivables are now presented within cash flows from investing activities (previously cash flows from operating activities) as they primarily relate to exploration and evaluation activities. For the year ended 31 December 2018, this change resulted in an increase in the investing cash outflow arising from expenditure on intangible exploration and evaluation assets of $1,746,000 and an increase in the operating cash inflow arising from movements in receivables of the same amount. Movements in inventory are now presented within cash flows from operating activities where relating to crude oil, fuel and chemicals, and within cash flows from investing activities where relating to spares and supplies. For the year ended 31 December 2018, this change resulted in an increase in the operating cash outflow arising from movements in inventories of $360,000, and a decrease in the investing cash outflow arising from movement in inventories of the same amount.

1.6 New and amended standards adopted by the Group

IFRS 16 'Leases' became effective for the Group from 1 January 2019. The core principle of IFRS 16 is to provide a single lessee accounting model, requiring lessees to recognise a right-of-use asset and lease liability for all leases unless the term is less than 12 months, or the underlying asset has a low value. As a result of applying IFRS 16, the Group has recognised right-of-use assets and lease liabilities on the balance sheet, representing rights to use the underlying leased assets and obligations to make lease payments.

The Group has applied IFRS 16 retrospectively from 1 January 2019 but has elected not to restate comparatives (as permitted under the standard's transitional provisions). The cumulative effect of initial application has instead been recognised within retained earnings as at 1 January 2019.

Upon adoption, the Group has used the practical expedients of applying a single discount rate to a portfolio of leases with similar characteristics; relying on previous assessments of whether a lease is onerous; excluding initial direct costs from the right-of-use asset measurement; and using hindsight to determine the lease term.

The right-of-use asset for the lease of the Group's head office was measured on a retrospective basis. Other right-of-use assets were measured at an amount equal to the lease liability, adjusted for any onerous provisions, accruals or prepayments as at 31 December 2018.

A reconciliation of the operating lease commitments disclosed at 31 December 2018 to the total lease liabilities recognised upon initial application of IFRS 16 is presented below:

The Group's accounting policy for leases, and its previous accounting policy under IAS 17, is shown in note 5.2.

The Group has also applied other new accounting standards, amendments and interpretations for the first time, but their adoption has not had any material impact on the disclosures or on the amounts reported in this financial information, nor are they expected to significantly affect future periods:

· Prepayment Features with Negative Compensation (Amendments to IFRS 9);

· Long-term Interests in Associates and Joint Ventures (Amendments to IAS 28);

· Annual Improvements to IFRS 2015-2017 Cycle;

· Plan Amendment, Curtailment or Settlement (Amendments to IAS 19); and

· IFRIC 23 'Uncertainty over Income Tax Treatments'.

The Group has also elected to early adopt the amendments to IAS 1 and IAS 8 'Definition of Material'. Under the amended definitions, information is determined as material if omitting, misstating or obscuring such information could reasonably be expected to influence decisions that the primary users of general-purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.

1.7 New and amended standards not yet adopted

A number of new and amended accounting standards and interpretations have been published that are not mandatory for the Group's accounts ended 31 December 2019, nor have they been early adopted. These standards and interpretations are not expected to have a material impact on the Group's consolidated Financial Statements:

· Amendments to References to Conceptual Framework in IFRS Standards (effective from 1 January 2020);

· Amendments to IFRS 3 'Definition of a Business' (effective from 1 January 2020);

· Amendments to IFRS 10 and IAS 28 - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (effective date not yet confirmed); and

· IFRS 17 'Insurance Contracts' (effective from 1 January 2022).

1.8 Critical accounting judgements and key sources of estimation uncertainty

In the application of the Group's accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only the period, or in the period of the revision and future periods if the revision affects both current and future periods.

The following are critical judgements, apart from those involving estimations (which are dealt with separately below), that the directors have made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in this financial information:

· recoverability of intangible exploration and evaluation assets (note 2);

· recoverability of Lancaster field assets (note 2);

· lease term of the Aoka Mizu FPSO (notes 2 and 5.2); and

· recognition of deferred tax assets (note 6).

The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date that may have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year, are:

· estimation of hydrocarbon reserves and resources (note 2);

· valuation of Convertible Bond embedded derivative (note 5.1); and

· estimation of future taxable profits against which to recognise deferred tax assets (note 6).

Section 2. Oil and gas operations

2.1 Revenue

All revenue is derived from contracts with customers and is comprised of only one category and geographical location, being the sale of crude oil from the Lancaster EPS. All sales were made to one external customer, being BP Oil International Limited.

2.2 Cost of sales and inventory

Cost of sales

Inventory

The amount of crude oil inventory recognised as an expense in the period was $93.5 million.

2.3 Oil and gas assets

Included within the cost of owned oil and gas assets is $42.8 million of capitalised borrowing costs (31 December 2018: $33.7 million), and $92.1 million (31 December 2018: $89.6 million) of assets not currently subject to depreciation (as they relate to non-producing parts of the Lancaster field).

Oil and gas assets held under leases comprise the Aoka Mizu FPSO bareboat charter, which commenced during the year (see note 5.2).

The total amount of depreciation charged to oil and gas assets and other fixed assets was $63.2 million.

2.4 Intangible exploration and evaluation assets

Intangible exploration and evaluation assets comprise the Group's share of the cost of licence interests and exploration and evaluation expenditure within its licensed acreage in the West of Shetland area. The directors have fully considered and reviewed the potential value of licence interests, including carried forward exploration and evaluation expenditure. The directors have considered the Group's tenure to its licence interests, its plan for further exploration and evaluation activities in relation to these and the likely opportunities for realising the value of the Group's licences, either by farm-out or by development of the assets.

On 12 December 2019, the Group executed a deed of variation with the Oil and Gas Authority (OGA), granting a five-year extension to its P1368 licence (which covered the Lincoln, Lancaster, Whirlwind and Strathmore subareas) to December 2024. As part of this extension agreed with the OGA, the Whirlwind and Strathmore subareas have been relinquished resulting in a write-off of $66.5 million, all relating to Whirlwind. The carrying value of intangible exploration and evaluation assets relating to Strathmore was previously fully impaired in 2017.

Although the Initial Term of the licences that hold the Warwick and Halifax assets are due to expire in August 2020 and November 2020 respectively, the directors expect these licences to be renewed into their Second Terms, having met the required work programmes for both licences within the Initial Terms.

The directors have concluded that no impairment triggers have arisen in relation to any of its other exploration and evaluation expenditure in the current period.

2.5 Decommissioning provisions

The provision for decommissioning relates to the costs required to decommission the suspended wells previously drilled on the Lincoln, Lancaster, Whirlwind and Halifax exploration assets, the costs required to decommission the Lancaster EPS installations and the costs required to clean, remove and restore the Aoka Mizu FPSO at the end of the charter term.

The decommissioning costs are expected to be incurred during 2020 (for the Lincoln, Whirlwind and Halifax exploration wells) and towards the end of 2025 (for the Lancaster EPS, Aoka Mizu FPSO and Lancaster exploration well). Estimated costs have been discounted at a rate at 0.64% per annum (2018: 1.1%).

New provisions in the current year primarily relate to the Lancaster EPS and Aoka Mizu FPSO, and the Lincoln Crestal well which, as at 31 December 2019, is required by the OGA to be plugged and abandoned during 2020. Changes in estimates in the year arose from a decrease in the assumed discount rate, changes in key assumptions including rig rates, and changes in the expected timing for decommissioning the Halifax and Whirlwind suspended wells which are now expected to complete in 2020 (previously 2025).

Of the total net new provisions and changes in estimates in the year, $8.4 million have been recorded as additions to property plant and equipment - oil and gas assets, $4.2 million as net additions to intangible exploration and evaluation assets and $5.1 million recognised as receivables due from the Group's joint operation partner.

The abandonment and decommissioning of the Warwick Deep and Warwick West wells was fully paid for by the Group's joint operation partner and was completed during 2019.

2.6 Joint operations

In September 2018 the Group entered into a joint operation with Spirit Energy to share costs and risks associated with the Greater Warwick Area (GWA) in exchange for granting Spirit Energy a 50% interest in the Group's Lincoln (P1368 South) and Warwick (P2294) licences. The phased work programme includes a planned tie-back of a GWA well to the Aoka Mizu FPSO, together with host modifications to the vessel and a gas export tie-in to the West of Shetland Pipeline System. This work was split across Phase 1 (Hurricane fully carried up to a gross cost of $180.6 million) and Phase 2 (Hurricane 50% carried up to a gross cost of $187.5 million), with Phase 2 to commence after a final investment decision on a GWA tie-back to the Aoka Mizu FPSO. As Phase 2 had not yet commenced, all costs incurred from inception to 31 December 2019 in excess of the $180.6 million carry ($4.8 million) were funded on a 50:50 basis. Subsequent to the year end, a revised cost allocation was agreed - see note 7.4.

No upfront cash consideration was received or paid by the Group upon entering into the joint operation. The Group currently acts as operator of the joint operation and will continue to do so until full field development workstreams commence.

Activities on the joint operation during the year primarily comprised the Phase 1 work programme, and as such the net cash cost to the Group was minimal.

Amounts due from and to the joint operation partner are shown in notes 4.2 and 4.3 respectively.

Further details on the activities and progress of the joint operation are described in the Company Review.

2.7 Commitments

As at the balance sheet date, the Group had the following outstanding contractual and other commitments:

Commitments shown above are net of amounts expected to be carried by the Group's joint operation partner, except for leases not yet commenced.

Section 3. Income Statement

3.1 Earnings per share

The impact of the VCP and PSP awards (note 3.4) was antidilutive in 2019 because market-based conditions for both schemes had not been met at the balance sheet date, and the impact of other employee share options (note 3.4) was antidilutive in 2019 as the adjusted exercise prices were in excess of the average market price of Ordinary Shares during the relevant periods.

The effect of warrants, share awards and options outstanding in 2018 was antidilutive as the Group incurred a loss. The impact of the conversion feature included within the Convertible Bond in 2018 was also antidilutive.

3.2 Finance income and costs

The presentation and classification of items within finance income and finance costs has been restated - see note 1.5.

3.3 Staff costs

Staff costs are shown gross before recharges to joint operation partners.

3.4 Share-based payment expense

The Group operates a number of share-based payment plans, including several Performance Share Plans (PSPs), the Value Creation Plan (VCP), the Company's HMRC-approved SIP and share option awards. The Group recognised a total credit of $3.2 million in respect of share-based payments in 2019 (2018: charge of $4.7 million), primarily as a result of change in non-market based performance assumptions and a longer assumed vesting period for the VCP and some PSPs (see below).

Details of the agreements that have had a material impact on the Group's results are set out below.

3.4.1 PSP awards

Under the Hurricane Energy 2013 PSP certain employees, including executive directors, were granted conditional rights to receive Ordinary Shares at nil cost. The share awards vest based on the Group meeting certain Milestones over the next two years.

During 2019, 4,957,128 conditional rights to receive Ordinary Shares at nil cost were granted to eligible new employees under the Hurricane Energy 2017 PSP. The fair value of the awards was calculated using a simulation model. 3,375,000 of these awards vest based on the same conditions as the VCP, with the remainder of the awards granted during the year subject to further market-based conditions (but still only vesting should the VCP vest). The Group has revised its assessment of those PSPs which have non-market-based performance conditions, and now assumes a vesting period which runs to expiry of the VCP's five-year term, which is November 2021 (the previous assumption was that the awards would vest upon a maturity event in January 2021), and assumed a decrease in the maximum payout that could be achieved for each award.

At 31 December 2019, 1,582,128 of the PSP awards outstanding (31 December 2018: nil) have an adjustment mechanism applied on vesting whereby the number of shares awarded can increase by up to 100% in relation to the increase in share price over the vesting period.

3.4.2 Share options

There are two tranches of share options that remain outstanding at 31 December 2019. Both tranches vested either on or before IPO. All other share options and long-term incentive plan awards were replaced by the PSP. As at 31 December 2019 the number of options that remained outstanding was 780,000 (2018: 780,000). The weighted average exercise price for these options was £0.55 (2018: £0.55). All outstanding options are exercisable. The options outstanding at 31 December 2019 had a weighted average remaining contractual life of one year (2018: one year).

The first tranche of 301,500 share options was granted in January 2011 at an exercise price of £1.00. 21,500 of these share options lapsed in 2017, with the remaining 280,000 lapsing in December 2020. The second tranche of 500,000 share options was granted in July 2019 at an exercise price of £0.30. These options lapse in December 2020.

3.4.3 Value Creation Plan

In November 2016 the Group introduced the VCP for employees and executive directors, involving the issue of 840 Growth Shares in Hurricane Group Limited (a Group subsidiary).

The fair value of the VCP as at the grant date was calculated as $24.5 million, of which $9.3 million had been charged to the grant date under the terms of the PSP awards which it replaced. The fair value was calculated using a simulation model with the following key assumptions: (i) share price volatility of 68%; (ii) risk-free rate of 0.62%; (iii) dividend yield of 0%; (iv) life of five years; and (v) share price at grant date of £0.34. The Group has revised its assessment of the non-market-based performance conditions attached to the awards, and now assumes a vesting period which runs to expiry of the VCP's five-year term, which is November 2021 (the previous assumption was that the awards would vest upon a maturity event in January 2021), and assumed a decrease in the maximum payout that could be achieved for each award.

Those employees or directors who entered the VCP were required to forfeit any PSPs held at that time.

Section 4. Cash, working capital and financial instruments

4.1 Cash and cash equivalents and liquid investments

Included within restricted cash and cash equivalents at 31 December 2019 is $11.7 million set aside in relation to the Aoka Mizu FPSO bareboat charter. Under the terms of the contract, the Group is required to ring-fence an amount to ensure it could meet its liability to pay an early termination fee to the lessor.

Other current restricted cash and cash equivalents at 31 December 2019 represent amounts held in escrow related to the Lancaster EPS project. Current restricted cash and cash equivalents at 31 December 2018 also included amounts relating to coupon payments under the terms of the Convertible Bond.

At 31 December 2019 and 2018, all the non-current restricted cash and cash equivalents were held in escrow for future costs associated with the Group's decommissioning obligations.

At 31 December 2018, non-current liquid investments represent restricted amounts held in trust under a decommissioning security agreement for the Lancaster EPS, which was transferred to current unrestricted cash during 2019 after achieving certain required levels of production.

The carrying amounts of cash and cash equivalents and liquid investments are considered to be materially equivalent to their fair values.

4.2 Trade and other receivables

The carrying amounts of trade and other receivables are considered to be materially equivalent to their fair values and are unsecured. Joint operation receivables represent expenses incurred by the Group as operator of the joint operation which will be recovered from the Group's joint operation partner. Amounts billed to the joint operation partner accrue interest at LIBOR and are generally due for settlement within ten days.

4.3 Trade and other payables

The carrying amounts of trade and other payables are considered to be materially equivalent to their fair values and are unsecured. Trade and other payables are non-interest bearing and generally payable within 30 days.

Trade and other payables and accruals include the Group's share of joint operation payables, including amounts that the Group settles on behalf of joint operation partners. Accruals includes expenditure relating to joint operations incurred by the Group as operator which have yet to be billed to joint operation partners. Amounts due to the joint operation partner represent cash calls the Group has made as operator in advance of balances relating to the joint operation falling due.

4.4 Financial risk management

The Group monitors and manages the financial risks relating to its operations on a continuous basis. These include market risk, liquidity risk and credit risk.

The Group does not enter into or trade financial instruments, including derivatives, for speculative purposes. Other than the financial instruments referred to below, the Group's significant financial instruments are cash and cash equivalents (note 4.1), trade payables (note 4.3), trade receivables (note 4.2) and borrowings (note 5.1).

The Group considers the carrying value of all its financial assets and liabilities to be materially the same as their fair value with the exception of the Convertible Bond. The Convertible Bond's carrying value at the balance sheet date was split between the host debt contract at amortised cost with a carrying value of $206.6 million and the embedded derivative with a fair value of $36.3 million. As at the balance sheet date, the fair value of the entire instrument based on the exchange traded value (categorised as Level 1 of the fair value hierarchy) was $272.2 million (2018: $297.6 million).

4.4.1 Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises foreign exchange, interest rate and other commodity price risk.

Foreign currency risk

Foreign currency risk is the risk that fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

The Group undertakes transactions denominated in currencies other than its functional currency (which is the US Dollar). For transactions denominated in Pounds Sterling, the Group manages this risk by holding Sterling against actual or expected Sterling commitments to act as an economic hedge against exchange rate movements. From time to time, the Group enters into foreign exchange swaps to hedge specific future payments in other currencies; no such swaps were entered into or matured in the current year. The Group has not designated any financial instruments as hedging instruments or hedged items.

The Group's cash and cash equivalents and liquid investments are mainly held in US Dollars and Pounds Sterling. At 31 December 2019, 83% of the Group's cash and cash equivalents and liquid investments were held in US Dollars (2018: 28%).

A 10% increase in the strength of Sterling against the US Dollar would cause an estimated increase of $1.8 million (2018: $5.6 million increase) on the profit after tax of the Group for the year ended 31 December 2019, with a 10% weakening causing an equal and opposite decrease. The impact on equity is the same as the impact on profit after tax. The exposure to other foreign currency exchange movements is not material.

This sensitivity analysis includes foreign currency denominated monetary items and assumes all other variables remain unchanged. Whilst the effect of any movement in exchange rates upon revaluing foreign currency denominated monetary items is charged or credited to the income statement, the economic effect of holding Pounds Sterling against actual or expected commitments in Pounds Sterling is an economic hedge against exchange rate movements.

Interest rate risk

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

The Group is exposed to interest rate movements through its cash and cash equivalents and liquid investments which earn interest at variable interest rates.

For the year ended 31 December 2019, a 1% increase in interest rates would have increased the Group's profit after tax by approximately $1.6 million, and a 0.5% decrease would have reduced the Group's profit after tax by approximately $0.8 million; assuming that the amount of cash and cash equivalents at the balance sheet date had been in place for the whole year. The impact on equity would be the same as the impact on profit after tax.

Other price risk - commodity price risk

Commodity risk primarily arises from the production and sale of crude oil from the Lancaster EPS, as the price realised from the sale of crude oil is determined primarily by reference to quoted market prices at or around the time of lifting. The Group does not currently actively manage commodity price risk through entering into fixed price contracts or other hedging activities; however, this risk is partially mitigated by a proportion of cost of sales (variable lease payments) being linked to the price of crude oil sold.

The Group enters into other commodity contracts (such as fuel and chemical purchases) in the normal course of business, which are not derivatives, and are recognised at cost when the transactions occur.

4.4.2 Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or other financial assets.

Financial liabilities of the Group comprise trade payables (note 4.3), lease liabilities (note 5.2) and the Convertible Bond (note 5.1). The maturity analysis of financial liabilities is shown in note 5.3.

The Group manages its liquidity risk by maintaining adequate cash and cash equivalents to cover its liabilities as and when they fall due. Consideration of the Group's current and forecast financing position is provided in more detail within the going concern section of the Directors' Report.

4.4.3 Credit risk

Credit risk is the risk that the Group will suffer a financial loss as a result of another party failing to discharge an obligation and arises from cash and other liquid investments deposited with banks and financial institutions, receivables from the sale of crude oil, and receivables outstanding from its joint operation partner.

For deposits lodged at banks and financial institutions, only those parties with at least investment grade credit ratings assigned by an international credit rating agency are accepted. Similarly, where the group enters into factoring arrangements to accelerate the receipt of cash from sales of crude oil, only banks with at least investment grade credit ratings are used.

The carrying value of cash and cash equivalents and trade and other receivables represents the Group's maximum exposure to credit risk at year end. The Group has no material financial assets that are past due.

Section 5. Capital and debt

5.1 Convertible Bond

In July 2017 the Group raised $230 million (gross) from the successful placement of the Convertible Bond. The Convertible Bond was issued at par and carries a coupon of 7.5% payable quarterly in arrears. The Convertible Bond is convertible into fully paid Ordinary Shares with the initial conversion price set at $0.52, representing a 25% premium above the placing price of the concurrent equity placement, being £0.32 (converted into US Dollars at USD/GBP 1.30). The number of potential Ordinary Shares that could be issued if all the bonds were converted is 442,307,692 (assuming conversion at the initial conversion price of $0.52). The impact of these potential Ordinary Shares on diluted earnings per share is shown in note 3.1. Unless previously converted, redeemed or purchased and cancelled, the Convertible Bond will be redeemed at par on 24 July 2022. The Convertible Bond contains a covenant relating to a restriction on incurrence of indebtedness. This restriction shall not apply in respect of:

· any indebtedness in respect of the Convertible Bond (Bond Debt);

· any other indebtedness where the aggregate principal amount of such other indebtedness, when combined with the aggregate principal amount of all other indebtedness of the Group from time to time (excluding the Bond Debt), would not cause the total indebtedness of the Group on a consolidated basis to exceed $45 million (or the equivalent thereof in other currencies at then current rates of exchange); and

· any permitted indebtedness, being:

o any liability in respect of any lease or hire purchase contract which would, in accordance with IFRS, be treated as a finance or capital lease, with respect to the bareboat charter of the Aoka Mizu FPSO;

o amounts borrowed, or any guarantee or indemnity given with respect to any security, where required by the Oil and Gas Authority or any other applicable regulator, in relation to suspended wells, decommissioning or other related regulatory obligations of the Group; and

o any amount raised under any transaction, having the commercial effect of borrowing, in respect of the deferral of payment of invoices due to Technip UK Limited (or any of its affiliated companies) in connection with the agreement for the provision of subsea umbilical risers and flowlines and subsea production systems for the Company's operations in the Lancaster field.

The conversion feature of the bonds is classified as an embedded derivative as the bonds can be settled by the Group in cash and hence does not meet the 'fixed for fixed' criteria outlined in IAS 32 for recognition as an equity instrument. It has therefore been measured at fair value through profit and loss. The amount recognised at inception in respect of the host debt contract was determined by deducting the fair value of the conversion option at inception (the embedded derivative) from the fair value of the consideration received for the Convertible Bond. The debt component is then recognised at amortised cost, using the effective interest method, until extinguished upon conversion or at maturity. The effective interest rate applicable to the debt component is 13.5%.

The amounts recognised related to the Convertible Bond, being all liabilities arising from financing activities, are as follows:

The embedded derivative component of the Convertible Bond has been assessed to be a Level 3 financial liability, as the fair values are determined by a valuation technique that uses one key input that is not based on observable market data, being equivalent bond yield. The equivalent bond yield was estimated by taking an average yield of non-convertible bonds in issue from similar oil and gas E&P companies, adjusting for the size, duration and remaining time to maturity of the Convertible Bond. This bond yield was then used to estimate the value of the debt component, taking into account the remaining cash coupon payments, the maturity date of July 2022 and the repayment amount of $230 million. The fair value of the embedded derivative was then calculated by deducting the estimated fair value of the debt component from the quoted market value of the Convertible Bond.

The fair value calculation at 31 December 2019 used an equivalent bond yield rate assumption of 7.2% and the quoted market value of the Convertible Bond as a whole of $272.2 million. The sensitivity of a reasonably possible increase or decrease of those inputs to the Group's profit after tax for the period ended 31 December 2019 is summarised below, assuming all other variables were held constant:

In the prior year, the valuation technique was based on a simulation model, using estimated share price volatility and the price of one Hurricane Energy plc Ordinary Share as the key inputs. Volatility was calculated as a blended average of the trading history of the Group's own shares and shares in a relevant peer group for a period of six months prior to the measurement date. The fair value calculation at 31 December 2018 used a share price volatility assumption of 30.1% and the price of one Hurricane Energy plc Ordinary Share as at the year end of £0.442.

5.2 Leases

Lease liabilities

In May 2019, the Group's bareboat charter of the Aoka Mizu FPSO commenced. Under the contract, the Group makes fixed payments (which are included within the lease liability measurement) and variable payments, which are based on a percentage of the quantity and price of crude oil sold. These variable payments are excluded from the measurement of the lease liability, and instead are recognised as an expense in the period in which sales are made. After taking into account reasonably certain extension option periods, the Group has assessed the lease term to be six years, in line with the Lancaster EPS Field Development Plan. Should the Group give notice to terminate the lease other than by not exercising extension option periods, significant early termination penalties would apply.

Upon commencement of the charter, the Group recognised $96.4 million as a lease liability and $101.2 million as a right-of-use asset (including the estimated costs of removing and restoring the FPSO at the end of the charter term).

The charges to the income statement in respect of leases during the year included the following:

The total cash outflow for leases for the year was $16.6 million.

The expense relating to low-value leases recognised in the income statement was not material. The expense relating to short-term leases (mainly drilling rigs) was fully carried by the Group's joint operation partner.

The operating lease expense in the prior year (accounted for under IAS 17) was $381,000, all of which was included within general and administrative expenses.

5.3 Maturity analysis of financial liabilities

The maturity analysis of contractual undiscounted cash flows for non-derivative financial liabilities is as follows:

Not included within the tables above is the Convertible Bond principal of $230 million which, unless previously converted into Ordinary Shares, redeemed or cancelled, is due to be redeemed on 24 July 2022 (see note 5.1).

At 31 December 2019, $42.5 million was due from the Group's joint operation partner to settle trade payables and accruals relating to the joint operation (see note 4.2).

5.4 Share capital

The Company has one class of Ordinary Share, which has a par value of £0.001. The Company does not have an authorised share capital.

In May 2019, Crystal Amber exercised warrants allowing it to subscribe for 23,333,333 Ordinary Shares at £0.20 per share. Kerogen Capital subsequently exercised a related right to subscribe for 6,527,501 Ordinary Shares at £0.20 per share. The gross proceeds received from these warrants and rights was $7,782,000. No transaction costs were incurred by the Group relating to the issue of these shares. Following the full exercise of these warrants and rights, there are no outstanding warrants or rights relating to the Company's Ordinary Shares.

5.5 Share option reserve

The share option reserve arises as a result of the expense recognised in the income statement to account for the cost of share-based employee compensation arrangements (see note 3.4).

5.6 Own shares reserve

The own shares reserve represents the cost of Ordinary Shares in Hurricane Energy plc purchased and held by the Group's SIP Trust to satisfy the Group's SIP administered by Global Shares Trustee Company Limited.

In 2019 the SIP acquired 815,582 new Ordinary Shares in the Company of £0.001 nominal value (2018: 341,301) at a price of 45.86 pence per share (2018: 39 pence per share), all of which were allocated to participants. At 31 December 2019 there were 2,711,245 Ordinary Shares held in the SIP Trust (2018: 1,936,624), with 2,680,508 allocated to participants (2018: all allocated).

5.7 Foreign exchange reserve

The foreign exchange reserve arose from the change in the Company's functional and presentation currency from Pounds Sterling to US Dollars on 1 January 2017. In 2018 a Group subsidiary entered voluntary liquidation. The foreign exchange reserve balance of that subsidiary ($1.8 million) was recycled to profit and loss as, upon appointment of the liquidator, the entity was deemed to be fully disposed.

5.8 Capital risk management

The Group's objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders. The Group is not subject to any externally imposed capital requirements.

Capital managed by the Group at 31 December 2019 consists of cash and cash equivalents, borrowings and equity attributable to equity holders of the parent. The capital structure is reviewed by management through regular internal and financial reporting and forecasting. As at 31 December 2019 equity attributable to equity holders of the parent is $691.1 million (2018: $629.4 million), whilst cash and cash equivalents and liquid investments amount to $171.4 million (2018: $123.2 million).

Section 6. Taxation

6.1 Tax credit for the year

In 2018 the Group made a claim under the SME research and development tax relief scheme in respect of the 2016 and 2017 financial years and has surrendered the resulting losses for a payable tax credit. $6.2 million was received in respect of this in April 2019, classified within cash flows from investing activities as the original expenditure giving rise to the credit was reported within investing activities.

6.2 Deferred tax

6.3 Factors which may affect future tax charges

The Group has 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. All of these losses have been recognised as a deferred tax asset of $54.3 million as at 31 December 2019. The deferred tax assets relate to different types of tax loss, each being calculated at a different rate, the highest being that applicable to UK ring-fence profits of 30%.

It is estimated that a reduction in the assumed long-term oil price used in the forecast taxable profit amount by $15 per barrel (to a flat price of $40 per barrel) would decrease the deferred tax asset recognised by $26 million, and a reduction to $35 per barrel (flat) or below would reduce the deferred tax asset to nil. The oil price assumption used in management's downside price scenario in assessing the Group's ability to continue as a going concern (which is $30 per barrel until the end of the third quarter of 2020, rising to $40 per barrel in the fourth quarter, and $50 per barrel flat from January 2021 onwards) supports the recognition of the deferred tax assets in full.

In addition to the above, the Group has pre-trading expenditure of $122.2 million which is carried forward at 31 December 2019 and tax relief will be available should FDP approval be obtained on the remaining licences.

Section 7. Other disclosures

7.1 Auditor's remuneration

The following is an analysis of the gross fees paid to the Group's auditor, Deloitte LLP:

7.2 Other non-current assets

Other fixed assets held under leases (right-of-use assets) comprise office property leases. $2.8 million was recognised on the balance sheet at 1 January 2019 on transition to IFRS 16 in relation to these leases (see note 1.6). There were no additions or disposals to this class of right-of-use asset during the year.

Owned other fixed assets include the cost of leasehold improvements, fixtures, office equipment and computer hardware.

7.3 Related parties

The remuneration of the directors, who are considered the Group's key management personnel, is as follows:

The above transactions include $84,000 paid to Kerogen Capital (2018: $73,000), which is a related party of the Company because of the size of its shareholding and the provision of key management personnel services to the Company. No amounts were outstanding at either period end.

In May 2019, Kerogen Investments No. 18 Limited, a company controlled by Kerogen Capital (which is a related party of the Company due to the size of its shareholding and the provision of key management personnel services to the Company), executed a subscription right for 6,527,501 Ordinary Shares in the Company at £0.20 per share (see note 5.4).

There is no ultimate controlling party of the Group.

7.4 Subsequent events

7.4.1 SIP award

On 20 January 2020, Global Shares Trustee Company Limited, trustee of the HMRC-approved Hurricane Energy plc SIP, awarded 1,674,240 Ordinary Shares to participants in the SIP at a price of 25.63 pence per share. The SIP award has been satisfied by the issue of 1,643,503 new Ordinary Shares issued to the SIP Trustee at a subscription price of £0.001 per share (being the nominal value of the shares).

7.4.2 Revised GWA cost allocation agreement

On 6 March 2020, Hurricane announced a new agreed cost allocation framework in respect of the 2018 farm-in with Spirit Energy. Under the amended terms the joint operation will build-out the equipment and materials required to tie-back a single well from the GWA to the Aoka Mizu FPSO on a 50:50 basis with an additional net cost to Hurricane of c.$20.5 million. On completion, these items will be held in storage until the GWA Joint Venture sanctions the tie-back of a well to the Aoka Mizu FPSO, with the required regulatory consents to do so.

· Hurricane can elect to continue to build-out long-lead items related to the tie-in of the Aoka Mizu FPSO to WOSPS on a sole basis, at a cost of approximately $28.0 million.

· While Hurricane has no current plans to proceed with the WOSPS installation, in the event that a decision is taken in future to proceed, subject to the required approvals and consents:

o Hurricane would bear 100% of the associated costs currently estimated to be in the region of $62.0 million; and

o Hurricane would reimburse Spirit Energy for related gas export past costs up to 31 January 2020 (excluding carry) of approximately $18.0 million, only where installation occurs prior to the partners approval of Phase 2.

· If at any time Phase 2 is approved and a GWA tie-back to the Aoka Mizu FPSO proceeds, Hurricane will benefit from the original terms of the 2018 farm-in through retrospective application of the carry in the proportions originally agreed.

7.4.3 Oil price movements

In March 2020, oil prices declined sharply due to supply and demand factors, which include the impact of the COVID-19 pandemic and increases in Saudi Arabian production. Should oil prices continue to decline further and/or remain at these current lower levels for an extended period of time, this would reduce the level of operating cashflow generated by the Group from its producing assets and could lead to a potential impairment of assets. The impact of reducing operating cash flow generation has been considered as part of the Group's going concern assessment as discussed in the Financial Review above. The lower oil price environment may also have an impact on the Group's forecast capital programme; either potentially delaying certain projects due to lack of available free cash or cancelling entirely as they are no longer forecast to be viable.

Appendix A: Glossary