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Hurricane deal disappoints investors, but is it really that bad?

By Gary Newman | Friday 30 June 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Hurricane Energy (HUR) is a company that I have followed closely, and have been invested in at various times, since it first floated on the AIM market, and it has come a long way since then.

The market was clearly not exactly enamoured with yesterday’s RNSs relating to the funding of the company through to first oil in 2019, but I think that once the dust eventually settles, the UK offshore oil company still has great prospects longer term, even following this large amount of dilution.

News of the fundraising was not exactly unexpected, as the company had made it clear that a substantial amount would be needed to pay for the Early Production System at its Lancaster field, with a final investment decision due during the summer of this year.

The EPS, which will consist of two wells tied back to a FPSO, will cost $514 million in total, with $45 million having already been spent, and is expected to produce 17,000bopd as well as providing further data to form a full field development plan on the best way to extract the 523mmstb of 2P reserves and contingent resources currently in place.

In the current climate, especially when it comes to investment in UK offshore projects, I believe that the company has done incredibly well to raise $300 million via a placing at 32p, along with $220 million from convertible bonds.

But I can also see why a lot of those currently invested in the company aren’t happy as many had been expecting a farm-out deal. Whilst it is true that such a deal would have reduced the amount of dilution at this stage, it is also worth remembering that it would have had a significant negative impact on future profits net to Hurricane once production started, as at least this way it has kept 100% of the field, which is a big step for a company of this size and one which only began drilling a few years back.

Judging by the recent drift in share price I suspect that some institutions got wind of what was coming and have actively been shorting the stock – although Marshall Wace are the only fund with a disclosable position, but given that is for net shorts it would be interesting to know if the two largest holders (Kerogen at 28.94% and Crystal Amber at 12.11%) have also shorted whilst still being net long. It certainly did drift quickly from the 50p area down to the low 30s before rallying slightly.

It is also interesting that Crystal Amber appear not to have taken part in the placing – there is certainly no mention that it has – and Kerogen has only taken up $35 million of shares, which is a long way off of its holding on a pro rata basis.

The company also looks to have done well on the convertible bond issue, with July 2022 bonds being issued at a coupon of 7.5%, and a conversion price of $0.52, which is a 25% premium to the 32p placing price. In theory this should give the company three years of production revenue prior to the settling of the bonds, assuming of course that they aren’t converted instead, which may well be the case at that point.

Obviously many PIs are miffed that they haven’t had the chance to take part in the fundraising at this price – other than a token $5 million open offer being mentioned – and would have preferred a full open offer or a rights issue, but that was never likely anyway. The funding does of course still need to be ratified by shareholders, given its size, and currently anyone who had wanted to buy can do so on the open market at a similar price anyway.

In the near term I can see the potential for this dropping even lower – although I did close my short this morning – as sentiment is now negative, but ultimately I am still bullish on the company and can see upside long term.

I suspect it will trade in a similar way to the recent large fundraise by Sirius Minerals (SXX) and that the number of extra shares coming onto the market will stall any rise for a fair length of time, but once things settle the share price will rise again.

Whatever your view on the financing package, it is hard not to applaud what Dr Robert Trice and his team have achieved in such a short period of time.

Currently I would be watching this one closely rather than being in any rush to buy the shares as you well get in at a significant discount to the placing price, or worst case will still be able to buy at the 32p level in the coming weeks or possibly even months. 

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