Hurricane - No Pressure
All,
We have had a few investors revisit the Hurricane situation, hence we are sending out a refresher.
The business appears solvent at this time and bondholders could recover most if not all of their value at maturity in July 2022. However, major risks remain. The biggest, unmeasurable risk is changes in the pressure at the wellhead, which could cause production to cease.
Liquidity estimates for March 2022 suggest the bonds will by that time be cash covered. However, management have previously flagged that in a potential wind-up the company would be incurring costs that may or may not exceed the excess cash balance (above bond liabilities) and that instead of repaying the bonds management would therefore be inclined to enter administration with the bonds unpaid.
The hope for shareholders is that Crystal Amber (25%), who opposed the scheme of arrangement, could pull a rabbit out of their hat. However, we see limited possibility for this given the production risks at Lancaster. There is no urgency on any potential buyers to move early, as the bondholders if they take control, are likely to be similarly motivated to instigate a sale of the asset.
Reliability of Production:
- Underlying problem with Hurricane is the fact that the wellhead flowing pressure in the Lancaster reservoir may become unstable as we approach the end of life. Management confirmed this morning that the pressure may reach the bubble point by the end of Q1 2022, consistent with the time range previously announced in May 2021. This uncertainty and its impact make future production guidance near on impossible. There is also the risk that the gas liberated from the reservoir could be produced which could result in production either being reduced or ceased altogether.
Unrestricted Cash development:
- July: Unrestricted cash was $135m on July 31st, which post Working capital adjustment resulted in Net Free cash of $122m.
- August: This improved over the month of August to $144m.
- September: The Company spent $62m repurchasing some of their Convertible Bonds. Therefore adjusted for the buy-back, Hurricane have $82m of unrestricted cash versus $152m bonds outstanding.
Unrestricted Cash by March 2022:
- The Lancaster field was producing 10,800 boepd from the P6 well as reported on 15th September. The Company this morning has issued guidance for the 6 month period (Oct-March 2022) of 8,500-10,000 boepd. Taking the mid-point would equate to 9,250 boepd for 6 months (1,688k bbl) plus September’s production of c.10,000 = 2M bbl since the Net Free cash figure issued on August 31st.
- Assuming Oil at $75/bbl and a $20/bbl cash production costs, cash would improve by ($55 x 2M bbl) = $110m. If added to the Cash of $82m (adjusted August figure for buyback), this would leave $192m of cash versus $152m of debt.
- However, the Company will have accrued further liabilities in the 6 months:
- Bond interest on the balance of the bonds - $152m @ 7.5% for 8 months (last coupon was July 24th) = $7.6m
- Increased decommissioning costs = $10m incremental reserve
- Depending on the direction of the Company post-March 2022, there is likely to be wind-down costs estimated at $11m which may be offset by early release fee of $16m if they no longer require the FPSO.
-> Net of these adjustments, the cash balance in March 2022, will be $174m versus bond debt of $152m.
Crystal Amber:
- The main shareholder in Hurricane, who appointed the two independent directors are under some pressure themselves. Crystal Amber Fund is a closed-ended fund, trading at a 26% discount to NAV at their year-end. The terms of the fund require a 75% majority for continuation to be passed at their AGM in November. The largest holder, SABA Capital at 25.38%, have indicated in June 2021, they would not support a continuation and should the vote to continue not pass, the Articles require the Fund to “formulate proposals to …… reorganise, reconstruct, or wind up the Company”.
- Given that Saba Capital on their own can vote and prevent a 75% majority, it appears likely that Crystal Amber will have to wind up the fund (and its investments). With that in mind, the Manager has commenced discussions with a number of potential buyers and will update the market participants as and when appropriate.
Analysis:
Because the outstanding bond is now so small, we have not engaged on the name to the point where we would spend time on a write-up. However, do let us know if you are interested in Hurricane and depending on your responses we will decide again.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
M:+44 7786 705 806
www.sarria.co.uk