HUR.L Regulatory News (HUR)

30 September 2022

Hurricane Energy plc

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

Half-year Results 2022

Hurricane Energy plc, the UK based oil and gas company, provides its 2022 interim report and unaudited half-year results for the six-month period ended 30 June 2022.

Highlights

Financial results

· Revenues of $159.5 million from three liftings of Lancaster crude (H1 2021: $124.5 million from four liftings)

· Cash production costs† of $35.4/bbl (H1 2021: $24.8/bbl) in line with expectations

· Generated $110.1 million of operating cash flow (H1 2021: $75.9 million), equivalent to $67.5/bbl (H1 2021: $37.9/bbl)

· Profit after tax for the period of $67.0 million (H1 2021: $42.8 million)

· Net cash† at 30 June 2022 of $48.4 million (31 December 2021 net debt: $27 million) - repaid $78.5 million Convertible Bonds plus $1.5 million of accrued interest after the period end to become debt free

· Net free cash† of $126.9 million at 30 June 2022 (31 December 2021: $51.5 million) ($76.6 million as at 31 August 2022 following repayment of the Convertible Bonds and the July lifting)

· Restricted cash of $60.8 million at 30 June 2022 relating to decommissioning obligations and FPSO charter (31 December 2021: $45.7 million) - Restricted cash is in addition to Net free cash

† Non-IFRS measures. See Appendix for definition and reconciliation to nearest equivalent statutory IFRS measures

Operations

· Excellent operational performance at the Aoka Mizu FPSO with an average Lancaster field production uptime of 98% in H1 2022 (H1 2021: 96%)

· Lancaster EPS production averaged 9,000 bopd for H1 2022 (H1 2021: 11,100 bopd) in line with expectations

· Annual planned maintenance shutdown successfully carried out in September, with next lifting scheduled for early October 2022

Corporate

· Philip Wolfe appointed Chair in March 2022, replacing John Wright who remains as a Non-Executive Director

· Juan Morera appointed to the Board as a Non-Executive Director in March 2022, representing Crystal Amber, Hurricane's largest shareholder

· Linda Beal appointed to the Board as an Independent Non-Executive Director in May 2022, taking on the role of Audit and Risk Committee Chair

· Robin Allan appointed to the Board as an Independent Non-Executive Director in July 2022, taking on the role of ESG Committee Chair

Outlook

· Hurricane passed a key milestone with its repayment of the outstanding Convertible Bonds post-period end in July 2022, and is focused on building a positive long-term future for the benefit of all stakeholders

· Management will identify and pursue opportunities for the most effective capital allocation of its funds

Antony Maris, Chief Executive Officer of Hurricane, commented:

"Repaying our Convertible Bonds and becoming debt-free has enabled us to consider multiple trajectories for Hurricane's future. At the same time as ensuring continuing production from Lancaster, we have been working diligently on many workstreams, all with the aim of creating additional value for our shareholders. 

In terms of Lancaster, continuing our close collaboration with our FPSO operator, we have been able to deliver superb uptime performance, leading to the production of more oil in the period. Our team can be justifiably proud of the fact that we bettered our targets set for the shutdown and unplanned downtime without at any time compromising the safety of our operations. 

Looking to Lancaster's future, we have expended considerable effort and some funds into maintaining the ability to deliver a new well in the Lancaster Field, termed P8, in order to meet our "maximum economic recovery" obligations to the UK Government. Given our emissions challenges, we have worked closely with the UK's offshore regulator, the North Sea Transition Authority ("NSTA"), to plot a way forward for Lancaster. It is disappointing that despite the enormous efforts of our team, and extensive interactions over many months, the NSTA is unable to provide comfort to the Company with regard to the likelihood of it being granted the necessary consents related to flaring for Hurricane to make further commitments to investment in Lancaster.

In parallel, however, we have been pursuing alternative capital allocation opportunities outside of our existing asset base - a task which is challenging owing to the current market volatility - and one that we can now focus on completely.

With our strong balance sheet, no debt, and our decommissioning liabilities being fully funded, I believe Hurricane, with our committed and capable team, is well placed to be able to create additional value for our shareholders."

Contacts:

About Hurricane

Visit Hurricane's website at www.hurricaneenergy.com

Inside Information

This announcement is released by Hurricane Energy plc and contains inside information under Regulation (EU) 596/2014 on market abuse, as it forms part of domestic law by virtue of the European Union (Withdrawal) Act 2018 (the UK MAR). For the purpose of the UK MAR, this announcement is made by Antony Maris, Chief Executive Officer at Hurricane Energy plc.

Competent Person

The technical information in this release has been reviewed by Antony Maris, Chief Executive Officer, who is a qualified person for the purposes of the AIM Guidance Note for Mining, Oil and Gas Companies. Mr Maris is a petroleum engineer with 35 years' experience in the oil and gas industry. He has a B.Sc. (Eng.) Petroleum Engineering (Hons) from the Imperial College of Science and Technology (University of London) Royal School of Mines A.R.S.M. and an MBA from Kingston Business School.

Standard

Reserves and resource estimates for the Lancaster field 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.

Chief Executive Officer's Review

Introduction

The first half of 2022 has been an extraordinarily volatile period for our sector due to surging commodity prices, exacerbated by the terrible events in Ukraine. The resulting high oil price, combined with outstanding operational performance at the Company's Lancaster field, has significantly strengthened Hurricane's finances, and led post-period end to the full repayment in July 2022 of the outstanding Convertible Bonds. This represented a major milestone for our Company.

During the year, the importance of domestic energy security has been highlighted by Russia's invasion of Ukraine and by the subsequent concerns over energy supplies across Europe. Companies such as Hurricane have an important continuing contribution to make to meeting the UK's domestic energy requirements.

Hurricane is now a company underpinned by firm financial foundations, without debt and with significant cash in hand; as such, the Board is now able to devote more time to addressing the future of Hurricane, prioritising the best investment opportunities that could add significant value for shareholders.

Operational Review

Greater Lancaster Area (GLA)

The period saw a very strong operational performance by the Aoka Mizu FPSO at the Company's Lancaster field.

The field has performed well and within guidance, delivering 9,000 barrels of oil per day in the first half of 2022. The anticipated natural decline coupled with increased water cut, offset by high uptime, informed production levels, and these factors are expected to play their part in field performance during the second half of 2022 and beyond. Based on current forecasts we expect production for 2022 to be towards the upper end of our guidance range.

During the period there were three cargo liftings totalling 1.6 million barrels and delivering revenues of $159.5 million.

Over a two-day period in May the Company conducted several flow performance tests on the P7Z well that involved temporarily reducing the flow rate from the P6 well. The data obtained will be useful in refining production forecasts for P6.

In September the planned annual maintenance shutdown was carried out on the Aoka Mizu with production being successfully restarted ahead of the planned timeframe. As at 28 September 2022, production was c. 8,700 bopd with a water cut of 46%. The current production rate and water cut are impacted from the post shutdown flush production. We expect that production will settle at its pre-shutdown level of c. 8,300 bopd (and c. 48% water cut) and then continue its natural decline.

Alongside ongoing production operations, the Company has been progressing the possibility of drilling an additional production well, the P8 well.  Although first discussed with the Regulators in 2021, in early 2022 when the Company recognised that not only would it clear its debt but also have sufficient funds to both fully cover the cost of a new well in Lancaster and also its other operational requirements, we engaged with the Regulators concerning the unique challenges Hurricane faces.

The originally approved development plan included flaring as the approved gas disposal mechanism and, under the NSTA approval of the amendment to this plan, allowed for production below the bubble point. Hurricane is subject to rolling and declining three-monthly production, flare and vent consents under this amendment.

The Company has worked hard to reduce its emissions and, as reported at the 2021 Full Year Results, had significant success in achieving reductions through the combined hard work and efforts of our team and Bluewater. Hurricane is fully cognisant of the increased scrutiny and oversight in this area and is continuing to look at ways of further reducing our overall environmental footprint in 2022 and beyond, where it is economically and commercially viable to do so. However, being fully aware of the challenge concerning flare volumes and the impact that any additional production would have, the Company has worked tirelessly with both OPRED and the NSTA to address the environmental impact of new investment.

With OPRED we have sought to demonstrate that the new well has no significant environmental impact beyond the environmental approvals already given. Interaction has been extensive, and positive, and we believe that we have demonstrated that the P8 well would remain within the limits of the existing approvals. 

The work with the NSTA has been to show that the project proposal is in line with the regulations and meets the OGA Strategy's central obligations, and would allow for an increase in the production, flare and vent consents to be awarded when applied for. This would be just prior to the start-up of the new well.

We believe we have shown that the project is consistent with the requirements placed upon Hurricane to maximise economic recovery as part of the OGA Strategy's central obligation 2a. Whilst the project would lead to a short-term increase in emissions, we also believe we are fully aligned with the OGA Strategy's central obligation 2b, which is to assist the Secretary of State in meeting the country's Net Zero targets.

Interaction on this latter point has been detailed, and rightly both challenging and highly scrutinised. The situation Hurricane faces is that the retrofitting of a new gas export or disposal system to the existing development is technically challenging, with a high capex requirement. The expected recovery of gas from an additional well, including the benefit of the extended life of the field, is such that the economics of the investment are significantly below the threshold considered appropriate for Hurricane to commit to such a project.

Thus, we have been working with the NSTA team in two specific areas. Firstly, to demonstrate that there is no technical and economically viable solution to mitigate the emissions that is reasonable in the circumstances. Secondly, in order to make the significant financial commitments to the equipment and services required to execute and deliver the P8 well in 2023, Hurricane has been seeking comfort that the NSTA would provide, when requested, the required increase in production, flare and vent consents for the new well, subject to:

a. OPRED confirming that the impact of the new well has no significant environmental impact beyond the current environmental approvals given; and

b. Demonstration that there is no technical and economically viable solution to mitigate the emissions that is reasonable in the circumstances.

Without such comfort from the NSTA the risk of proceeding with the drilling of the well, without knowing if production, flare and vent consent approvals are likely to be granted, is too high.

We are fully aware of the challenge the NSTA faces in terms of the interaction between the competing objectives of maximising economic recovery whilst reducing emissions. The Company therefore offered that all incremental emissions as a result of the new well (including those associated with the extension of the life of the field) would be covered by verifiable carbon offsetting.

The informal feedback from the NSTA during the six months of interaction was that, even where there is no technical and economically viable solution to mitigate the emissions that is reasonable in the circumstances, then the NSTA still may or may not grant the consents when requested even if positive support from OPRED was forthcoming. 

The project and the level of financial commitments are of major significance to the Company. Therefore, to seek clarity this issue was raised with the most senior levels within the NSTA. Having now considered this, the NSTA finally confirmed on 29 September 2022 that, in response to our requests, it does not give such comfort.

Whilst the Company believes the proposed P8 project would be within the regulatory guidance, the Board has concluded that in the face of regulatory opposition, the additional financial commitments to offshore equipment suppliers and the associated financial risk of proceeding with P8 is too great.

Therefore, with great reluctance and regret, the Board has decided that no further investment is possible in relation to an additional well on the Lancaster Field. This decision will not result in any accounting impairment or any adjustment to our current reserves estimates.

Greater Warwick Area (GWA) & Halifax Licence

In April, the GWA Joint Venture ("JV") announced that it had reassessed its understanding of the Greater Warwick area, evaluating both the basement and the Mesozoic potential of the JV's licences, and considered all options for further appraisal and routes to possible development.

In June, Hurricane reported that it had determined that further appraisal and development costs to reach an economic development on the Warwick discovery within the remaining licence term was not feasible for the Company. Further to discussions with the Company's JV partner, Spirit Energy, the GWA JV therefore decided to relinquish the P2294 licence area. This was in addition to the previously announced decision to relinquish the Lincoln P1368(S) licence sub area.

The carrying value of the P2294 asset in the Company's accounts of c.$4.9 million, has therefore been impaired. This impairment is an accounting charge only and will not have any cash impact.

In addition, in September 2022 the Company determined that the costs required to further evaluate the Halifax licence (P2308) and the low likelihood of a successful economic development means that the right next step is to relinquish the licence. As with the GWA licences, there is no reasonable expectation that the P2308 licence could generate any near-term cash realisation, and therefore voluntarily relinquishing the licence at this time allows the Company to focus its time and financial resources on alternative and more attractive opportunities. All previously capitalised costs relating to Halifax have already been impaired and therefore no further impairments are required.

The decisions regarding the GWA and Halifax licences followed the deployment of the rigorous screening criteria that Hurricane brings to all opportunities in terms of determining the most appropriate allocation of capital to deliver the best value for shareholders.

New Business Opportunities

As has been previously reported, in addition to considering investing further in the Lancaster Field, the Company has been actively pursuing potential opportunities outside the Company's current asset base.

Focusing on the UKCS, the Company has and continues to evaluate a number of farm in opportunities, acquisitions and mergers. Hurricane's management and staff have extensive experience in both oil and gas, through all stages of the asset life-cycle, and therefore the scope covers a range of new oil and gas investment opportunities. We will continue to look for both asset and corporate level opportunities that will help diversify our asset base, deliver value to shareholders, and strengthen the Company for the future.

Despite the volatility in prices, and the uncertainties these create, Hurricane believes that its strong balance sheet, technical and operational expertise, and proven track record of capital project delivery offer a strong competitive advantage among its peer group.

Financial

During the first half of 2022, the Company generated revenues of $159.5 million.

Post period end, Hurricane repaid in full its outstanding $78,515,000 7.50 per cent Convertible Bonds (the "Bonds") plus $1.5 million of accrued interest by the maturity date of 24 July 2022. Accordingly, the Bonds were delisted from The International Stock Exchange and cancelled.

The repayment leaves the Company debt free, with significant cash on hand, further cash due in the near term from further liftings from the FPSO, and ongoing cash generative production from the Lancaster field.

As of 30 June 2022, the Company had net free cash of $126.9 million. Following the repayment of the outstanding Bonds and the July lifting, the Company held net free cash of $76.6 million as at 31 August 2022.

Cost control was an important aspect of our work in the first half of 2022 with opex at Lancaster stable and close management of costs a central part of our work on the field and the wider business as a whole.

Energy Profits Levy

On the 26 May 2022, the UK Government announced the introduction of the Energy Profits Levy ("EPL"). Our industry works within the framework of long investment cycles and highly volatile commodity markets. Fiscal stability is key in supporting the investment decision-making to meet the UK's energy transition targets and the introduction of the EPL is unhelpful in that regard. However, as a potential investor in future UK oil and gas assets, we also stand to benefit from the Investment Allowances included as part of the EPL.

The headline rate was an increase in tax of 25%, with no ability to utilise existing carried forward losses. The legalisation for the EPL has now been enacted and the Company has reviewed the implications and the potential impact on the business. For 2022, the Company is forecasting that its EPL liability will be less than $5 million. This amount is lower than originally expected largely due to the impact of our capital allowances available in the period as well as the effect of the Investment Allowance that is included within the EPL legislation.

Corporate

We have strengthened and diversified our Board.

In March Philip Wolfe stepped up to take on the role of Chair, and Juan Morera joined as a Non Executive Director as a representative of our major shareholder, Crystal Amber.

In May, we were pleased to announce that Linda Beal had joined as an Independent Non Executive Director. Her extensive experience as a tax partner at both PwC and Grant Thornton advising international E&P clients, coupled with her recent career serving as a director of listed small cap natural resources businesses, brings an immediate and meaningful contribution to the work of our Board. Her in-depth financial knowledge and governance expertise will be of great benefit as Audit and Risk Committee Chair.

After the period end, in July, we also welcomed Robin Allan as an Independent Non Executive Director. His wide experience at executive level with Premier Oil, including as Director, North Sea and Exploration, and his role as Chairman of BRINDEX, the Association of British Independent Exploration Companies, will serve the Company well as it makes important financial and strategic decisions for the next stage of its growth.

Outlook

With the ongoing success of our technical and operations teams, especially in beating the target for scheduled maintenance, the Company anticipates that, barring any unforeseen issues, production from Lancaster will be towards the upper end of our production target of 7,500 - 8,600 bopd during 2022. On this basis, if the price of oil is up to $90/bbl for the remaining cargoes in 2022, we forecast our year end net free cash being up to $110 million.

Our staff and management, together with our contractors, have done a great job over the period and I would like to thank them for their excellent performance and contribution to the Company's current strong position.

While water cut will continue to increase and pressure to decline, the field is expected to remain highly cash generative into 2024 at current commodity prices. Retaining these funds for further investment and acquisition for the future will be key but always measured against delivery of value to stakeholders.

The decision not to proceed with P8 is very disappointing. While the current extreme volatility of oil and gas prices makes it harder to plan for the future, we are confident that we can deliver additional value for our shareholders. Whether this is in further investment in new opportunities in the UK oil and gas sector, or beyond, Hurricane is well placed for a successful future.

Antony Maris

Chief Executive Officer

29 September 2022

† Non-IFRS measures. See Appendix B for definition and reconciliation to nearest equivalent statutory IFRS measures.

Financial Review

Highlights

* Rounded to nearest 100 bopd

† Non-IFRS measures. See Appendix B for definition and reconciliation to nearest equivalent statutory IFRS measures.

During the first half of 2022, over 1.6 million barrels of Lancaster crude were sold across three cargoes, generating $159.5 million in revenue. The Group generated positive cash flow from operations of $110.1 million, thanks to high oil prices and the production efficiency of the Lancaster EPS.

Revenue

Revenue for the period was $159.5 million, with an average price realised of $99.6/bbl across three cargoes, versus an average Dated Brent price for the period of $108/bbl. Under the sales and marketing agreement with BP, the sale of Lancaster crude is priced at either the first five or last five days of the month of lifting (at buyer's option) and as such the applicable Dated Brent price is, on average, lower than the spot price at date of sale.

The average discount to Brent realised for H1 2022 was $2.2/bbl (H1 2021: $3.0/bbl; FY 2021: $2.7/bbl) (representing the discount or premium offered by the refinery purchasing the crude, BP's marketing fee, and the freight costs incurred by BP in transporting crude to its ultimate destination). All cargoes sold to date have been on time, within specification and contractual terms, and as such Hurricane has a good reputation of being a reliable producer.

Cost of sales

Cost of sales were $78.5 million, including $36.9 million of DD&A. Cash production costs (which exclude DD&A and accounting movements in inventory, but include the fixed lease charges for the Aoka Mizu) were $57.7 million, equivalent to $35.4/bbl versus $28.2/bbl for the full year 2021. The increase in cash production costs, on a per-barrel basis, is driven by lower average production rates and higher realised sales prices (increasing the revenue-linked incentive tariff payable). Excluding the revenue-linked incentive tariff, cash production costs increased from $22.8/bbl full year 2021 to $27.5/bbl in H1 2022. As production from the P6 well continues to decline naturally over time, cash production costs per barrel will increase given the largely fixed operational cost base. Cash production costs are currently forecast to be c. $34/bbl for the full year 2022 (excluding the incentive tariff).

Non-cash adjustments to oil and gas and exploration and evaluation assets

On 25 March 2022, Hurricane announced that it has signed a contract with Bluewater, for an extension to the Bareboat Charter beyond the previous expiry date of 4 June 2022. The extension is expected to cover the remaining economic life of the Lancaster field given the significant economic incentive for both sides based on the current forward price curve and production profiles. In accordance with IFRS 16 the liability has been remeasured by discounting the revised lease payments covering the economic life of field. This resulted in an increase to the lease liability of $54.5 million and corresponding increase to the associated right-of-use asset cost of $54.5 million

General and administrative expenses

General and administrative costs ("G&A") for the six months ended 30 June 2022 were $3.1 million (H1 2021: $21.2 million). After removing non-cash charges (DD&A and share-based payment expense) and amounts recharged to cost of sales and capitalised into fixed assets, gross cash G&A for the period was $8.5 million (H1 2021: $26.7 million). The decrease in gross cash G&A was primarily driven by a decrease in non-staff costs due to the legal and professional fees incurred in the six months to 30 June 2021 in preparation for the proposed financial restructuring process of c.$14 million. Staff costs were $5.2 million (H1 2021: $8.4 million), with the decrease being driven by the reduction in headcount from an average of 60 employees in H1 2021 to the current average of 35 in H1 2022. A reconciliation of G&A costs is shown in note 3.3 to the Interim Financial Statements. We continue to pursue cost reduction opportunities in relation to our G&A base.

Underlying profit before tax

Underlying profit before tax for H1 2022 was $66.6 million compared to an underlying loss before tax of $1.2 million for H1 2021. The improvement in performance for the current period was driven by higher oil prices, reduced cost of sales due to a reduced volume of cargoes sold in the period (1,601 thousand barrels from three cargoes in H1 2022 vs 2,004 thousand barrels from four cargoes in H1 2021), and reduced G&A costs as detailed above.

Convertible Bond accounting

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 valued using an option pricing model, with the key inputs being the Company's share price and its share price volatility. Any increase in the liability creates a corresponding non-cash charge in the income statement, and vice versa. See note 5.1 to the Financial Statements for further details.

Bond repayment

On 25 July 2022, Hurricane announced that it had repaid in full its outstanding $78,515,000 7.50 per cent Convertible Bonds plus $1.5 million of accrued interest by the maturity date of 24 July 2022. The Bonds have now been delisted from The International Stock Exchange and cancelled.

Decommissioning estimates

A net decrease of $2.0 million to decommissioning estimates has been recognised due to a reassessment of expected costs. During the period, Hurricane agreed with the Regulator to place an additional £5.7 million ($7.7 million) of funds into trust, in order to provide security for the estimated decommissioning liability on the Lancaster EPS on a pre-tax basis. At 30 June 2022, a total of $41.4 million was held in trust as decommissioning security for the Lancaster EPS.

Cash flow

Net free cash† bridge for H1 2022:

*Comprises operating cash flow excluding decommissioning spend and including fixed lease repayments

At 30 June 2022, the Group had $126.9 million of net free cash† (being unrestricted cash net of payables and accruals and including trade receivables), an increase of $75.4 million from 31 December 2021.

Average realised sales price was $99.6/bbl and cash production costs were $35.4/bbl, generating cash per barrel (before working capital movements) of $70.4/bbl in H1 2022 (full year 2021: $39.1/bbl).

Other operating cash outflows included the general and administrative costs of staff and other overheads. After adjusting for movements in working capital the Group's operating cash inflow for the period amounted to $110.1 million.

Capital expenditure in the period was $4.5 million, comprising primarily previously committed purchases of long lead items for GLA, licences, geological studies, storage costs for inventory and capitalised time-writing costs.

Financing outflows of $16.8 million included fees in relation to coupon payments on the Convertible Bond and fixed lease repayments primarily for the Aoka Mizu.

Included within the terms of the extension to the Bareboat Charter is the requirement to set aside a certain amount of cash to cover the FPSO day rate during the six month notice period, along with amounts to cover the estimated decommissioning costs associated with the vessel's departure from the Lancaster Field. These funds replace the previous escrowed amounts that were in place under the original charter terms to cover early termination costs. At 30 June 2022, this amount was $19.4 million (31 December 2021: $7.9 million), resulting in an increase of $11.5 million into restricted funds during the period. An additional $7.7million was placed into trust in relation to Lancaster EPS decommissioning arrangements (as outlined above), resulting in a net decrease of $15.1 million to net free cash in relation to restricted cash movements once foreign exchange losses of $4.2 million are taken into account.

Cash flow outlook

As of 31 August 2022, the Company had net free cash† of $76.6 million. The main movements over the two-month period from 30 June 2022 were:

· Revenue of c.$60.2 million from one lifting of Lancaster crude

· Operating costs and G&A of c.$20 million

· Repayment of Convertible Bonds of $78.5 million and quarterly cash coupon payments of c.$1.5 million.

· Net cash capital expenditure of c.$1.1 million

· Net movements out of restricted cash of c.$0.9 million

· Decrease in net working capital of c.$10.3 million

The Convertible Bonds have now been repaid in full.

The Company needs to keep a portion of its net free cash at August 2022 aside to fund ongoing operating, staff and overhead expenses; as well as to cover any additional decommissioning costs (above those held in trust) that could arise should an unplanned cessation of production event occur and decommissioning activities need to take place earlier than previously assumed.

The Company anticipates that, barring any unforeseen issues, production from Lancaster will be towards the upper end of the production guidance of 7,500 - 8,600 bopd during 2022. On this basis, if the price of oil is up to $90/bbl for the remaining cargoes in 2022, the year-end net free cash is forecast to be up to $110 million as at 31 December 2022. Hurricane will continue its work to identify the most effective capital allocation opportunities both within and outside the existing asset base.

Principal risks

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance. Certain of these risks impacted the Company in the first half of 2022 and could continue to impact the Company over the remaining six months of 2022 and could cause actual results to differ materially from expected and historical results. The Group's principal risks are as follows:

· Substantial capital requirements

· Exploration, appraisal and development operational risks

· Production operational risks

· Geological and reservoir risk

· Regulatory

· Oil price fluctuations

· Third-party infrastructure

· Development project delivery

· Health, Safety and Environmental

· Compliance

· Joint venture operations

· Strategy execution and staff retention

· Climate change and energy transition

· Litigation

The principal risks and uncertainties, along with the mitigation measures in place to reduce risks to acceptable levels, are consistent with those as at 31 December 2021 except as described below. Further information on the principal risks and uncertainties and the manner in which they are managed and mitigated provided on pages 22 to 30 of the 2021 Annual Report and Group Financial Statements.

The principal risk 'Repayment of Convertible Bond' previously disclosed is no longer directly relevant, following the payment in full of the Bond on 24 July 2022.

Related party transactions

There have been no new material related party transactions in the period. As of 30 June 2022, Crystal Amber Fund Limited ("Crystal Amber") held 28.9% of the Company's Ordinary Shares, and Crystal Amber has classified its investment in Hurricane as an associate. As such, Crystal Amber is considered to be a related party of the Group.

Going concern

At the time of preparation of these Interim Financial Statements, the Directors have a reasonable expectation that the Group has adequate resources to continue to operate and meet its liabilities as they fall due for the foreseeable future, a period considered to be at least twelve months from the date of signing these Financial Statements. For this reason, they continue to adopt the Going Concern Basis for preparing the Interim Financial Statements.

Further details on the going concern assessment, and key assumptions used therein, are described in Note 1.3 to the Interim Financial Statements below.

REPORT ON REVIEW OF INTERIM FINANCIAL INFORMATION - INDEPENDENT REVIEW REPORT TO HURRICANE ENERGY PLC

Conclusion

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2022 which comprises The Condensed Consolidated Income Statement, the Condensed Consolidated Balance Sheet, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Cash Flow Statement and related notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2022 is not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34 and the AIM Rules for Companies.

Basis for conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity", issued for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in note 1.1, the annual financial statements of the group are prepared in accordance with UK-adopted IASs. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with UK adopted International Accounting Standard 34, "Interim Financial Reporting".

Conclusions relating to going concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for conclusion section of this report, nothing has come to our attention to suggest that management have inappropriately adopted the going concern basis of accounting or that management have identified material uncertainties relating to going concern that are not appropriately disclosed.

This conclusion is based on the review procedures performed in accordance with ISRE (UK) 2410, however future events or conditions may cause the group to cease to continue as a going concern.

Responsibilities of directors

The directors are responsible for preparing the half-yearly financial report in accordance with the AIM Rules for Companies.

In preparing the half-yearly financial report, the directors are responsible for assessing the group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the review of financial information

In reviewing the half-yearly report, we are responsible for expressing to the group a conclusion on the condensed set of financial statements in the half-yearly financial report. Our conclusion, including our conclusions relating to going concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for conclusion paragraph of this report.

Use of our report

This report is made solely to the company's directors, as a body, in accordance with the terms of our engagement letter. Our review has been undertaken so that we might state to the company's directors those matters we have agreed to state to them in a reviewer's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone, other than the company and the company's directors as a body, for our work, for this report, or for the conclusions we have formed.

PKF Littlejohn LLP 15 Westferry Circus

Statutory Auditor Canary Wharf

London E14 4HD

29 September 2022  

All results arise from continuing operations.

Notes to the Interim Financial Statements for the 6 months ended 30 June 2022

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.

This Interim Report and Financial Statements was approved by the Board of Directors and authorised for issue on 29 September 2022.

This set of Interim Financial Statements for the six months ended 30 June 2022 is unaudited and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. Audited statutory Financial Statements for the year ended 31 December 2021 were approved by the Board of Directors on 27 April 2022 and have been delivered to the Registrar of Companies. The auditor's report on those Financial Statements, issued by PKF Littlejohn LLP, 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.

1.1 Basis of preparation

The Interim Financial Statements for the six months ended 30 June 2022 have been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' (IAS 34) in conformity with the requirements of the Companies Act 2006 and the AIM Rules. The annual financial statements of the Group are prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and UK-adopted international accounting standards. The consolidated income statement and related notes represent results arising from continuing operations, there being no discontinued operations in the periods presented. The Interim Financial Statements have been prepared using accounting bases and policies consistent with those used in the preparation of the audited Financial Statements of the Group for the year ended 31 December 2021.

1.2 Significant events and changes in the current reporting period

The financial performance and position of the Group was affected by the following events and changes during the six-month period to 30 June 2022:

· a significant increase in revenue versus the comparative six-month period due to the continued strong recovery in crude oil prices (note 2.1);

· an impairment of intangible exploration and evaluation assets of $4.9m (note 2.4), following the decision to relinquish the Lincoln (P1368 S) and Warwick (P2294) licences during the period following an assessment of the options for further appraisal and potential development in relation to these licences;

· a significant reduction in finance costs versus the comparative six-month period due to a significant repurchase of Convertible Bonds during 2021 and consequent reduction in associated debt (note 5.1); and

· an increase in the lease liabilities and right-of-use assets relating to the Aoka Mizu FPSO resulting from a renegotiation of the bareboat charter of the Aoka Mizu FPSO and increase in the lease term assumption against a background of higher oil prices and consistent performance on Lancaster (notes 2.3 and 5.2)

Since the end of the reporting period, the Group repaid in full its outstanding $78,515,000 7.50 per cent Convertible Bonds plus $1.5 million of accrued interest (see note 7.2.1).

The Group's business and operations are not exposed to seasonality or cyclicality. The Group has reviewed its exposure to climate-related and other emerging business risks but has not identified any of these risks that could impact the financial performance or position of the group as at 30 June 2022. The principal risks and uncertainties impacting the Group are outlined within the Financial Review above.

1.3 Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Chief Executive Officer's review and Financial Review above. The financial position of the Group, its cash flows and liquidity position are set out in these Interim Financial Statements. The Group ended the half year with $203.9 million of cash and cash equivalents, of which $143.1 million was unrestricted. After adjusting for working capital items, net free cash at 30 June 2022 was $126.9 million (Appendix B). The Group's most significant liabilities at 30 June 2022 were $78.5 million in relation to Convertible Bonds which were paid in full in July 2022, and committed lease liabilities in respect of the Aoka Mizu FPSO. These Interim Financial Statements have been prepared in accordance with the going concern basis of accounting, with the presumption of going concern being a critical judgment.

The following key assumptions were used in the assessment of the going concern position:

· Dated Brent oil price of $100/bbl (average for remainder of 2022), $93/bbl (average for 2023) and $85/bbl (average for 2024);

· no sanctioned capital or development projects;

· continued use of the Aoka Mizu FPSO throughout the assessment period; and

· production from the P6 well alone in line with approved guidance and the production profiles supporting the most recent CPR;

· Oil and Gas Energy Profits Levy (EPL) effective from 26 May 2022 until 31 December 2025

Under the base case scenario, the Group had sufficient headroom thereafter for a period of at least 12 months to fund ongoing working capital requirements.

Sensitivity analysis was also undertaken to reflect the following:

• a reduction to the forecast oil price curve of $20/bbl; and 

• a 25% reduction to forecast production rates

Under the sensitivity cases above, both individually and in aggregate, the Group is projected to have sufficient cash to continue operating for a period of at least 12 months.

As a result of the going concern assessment presented above, the directors have a reasonable expectation that, after also taking into consideration the current macroeconomic situation, the Group has adequate resources to continue in operational existence throughout the going concern period.

Therefore, the directors continue to adopt the going concern basis of accounting in preparing these consolidated financial statements and the financial statements do not include the adjustments that would result if the Group were unable to continue as a going concern.

1.4 Accounting policies

The accounting policies adopted are consistent with those of the annual Financial Statements for the year ended 31 December 2021. New and amended standards that became applicable for the Group in the current reporting period have not resulted in changes to accounting policies or retrospective adjustments.

1.5 Critical accounting judgments and key sources of estimation uncertainty

The key risks at 30 June 2022 are the same as those described in the audited Financial Statements of the Group for the year ended 31 December 2021. Changes to underlying key estimates (as compared with estimates made at 31 December 2021) primarily comprise of the change to the lease liability and associated right-of use asset in respect of the Aoka Mizu FPSO following a renegotiation of the lease contract and reassessment of the lease term (notes 2.3 and 5.2).

Section 2 Oil and gas operations

2.1 Revenue

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

2.2 Cost of sales and inventory

Cost of sales

Inventory

No net realisable value provision was held for inventory.

2.3 Oil and gas assets

Oil and gas assets held under leases comprise the Aoka Mizu FPSO bareboat charter, which commenced in May 2019. During the current period, the lease term was reassessed following a renegotiation of the lease contract resulting in the leased asset value (see note 5.2). The Group has reasonable certainty that it will be able to lease the Aoka Mizu FPSO until economic end of life of the Lancaster field. Given that no indications of impairment existed at 30 June 2022 no impairment test for the purposes of determining the recoverable amount of oil and gas assets has been performed. 

Included within the cost of owned oil and gas assets is $42.8 million of capitalised borrowing costs (6 months ended 30 June 2021 and 12 months ended 31 December 2021: $42.8 million).

The total amount of depreciation charged in the period (comprising depreciation of oil and gas assets above, and depreciation of other fixed assets) was $37.0 million (6 months ended 30 June 2021: $49.5 million; 12 months ended 31 December 2021: $98.1 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 which, at 30 June 2022, comprise only the Halifax (licence P2308) following the relinquishment of the Lincoln (P1368 S) and Warwick (P2294) licences during the period.

The Group and its joint operation partner Spirit Energy have determined that further appraisal and development costs to reach an economic development on the Greater Warwick Area (GWA) discovery within the remaining licence term is not feasible. The Group and its joint operation partner Spirit Energy therefore decided to relinquish the Lincoln (P1368 S) and Warwick (P2294) licences, with a consequent impairment charge of $4.9 million being recognised during the period.

2.5 Decommissioning provisions

The provision for decommissioning relates to 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 utilisation of provisions during the period related to the final payments relating to the plugging and abandoning of the Lancaster 4Z well, and cessation of production planning for the Lancaster EPS and FPSO.

Restricted funds held in respect of decommissioning at 30 June 2021 included an amount sitting in trust of $38.9m classified as 'Liquid Investments'. The amount at 30 June 2022 sitting in trust of $41.4m was reclassified from 'Liquid Investments' to 'Restricted Cash' due to the notice of those funds being less than 3 months on this date.

2.6 Joint operation

In September 2018 the Group entered into a joint operation with Spirit to share costs and risks associated with the Greater Warwick Area (GWA) in exchange for granting Spirit a 50% interest in the Group's Lincoln (P1368 South) and Warwick (P2294) licences. Costs of the joint operation are currently being shared equally between the joint operation partners. The Lincoln (P1368 South) and Warwick (P2294) licences were relinquished in the period. Before the joint operation is formally concluded, there remain a number of operational and administrative matters to complete. The Group currently acts as operator of the joint operation and will continue to do so until these matters are concluded. 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 Chief Executive Officer's review above.

2.7 Commitments

Section 3 Income Statement

3.1 Earnings per share

For the 6 months ended 30 June 2021 and 12 months ended 31 December 2021, the potential impact of the conversion feature included within the Convertible Bond was antidilutive as their conversion to Ordinary Shares would have increased earnings per share. The impact of the VCP and PSP share award schemes was antidilutive in 2021 because market based conditions for both schemes was not met at any point during the year.

3.2 Finance income and costs