#275290
Postby Biffadog » January 5th, 2020, 1:12 pm
dspp,
That certainly is a bleak view of HUR’s prospects and to be frank, I’ve amazed that you continue to hold the stock. However, on closer examination I would have to suggest that some of your observations are somewhat misleading and a couple are just plain incorrect.
I also note your propensity to state some things as fact, when they are not proven as such, but are merely your opinion. Not a great trait for one supposedly expressing a balanced view. It’s fine to state facts as facts, just not opinions as facts.
It’s worth highlighting that the rider with HUR has always been that the EPS must be proven to be a success over a period of time (6-12 months), otherwise the investment case for HUR is fatally flawed. That has always been the case and is nothing new. It’s funny that you now choose to refer to HUR’s finances as “hanging by a delicate thread” when previously you were more than happy to band about pie in the sky figures for HUR’s assets and production. How times have changed.
I’ll start with the easy stuff. You say “or to prove up aquifer ingress (which of course cannot be reversed)”. Not true. Coning (water produced from the aquifer) is reversible. Fact. Whilst we all would agree it is not desirable in any shape or form, it can be reversed by simply shutting in the well for a period of time and allowing the water/oil equilibrium to reestablish itself.
You mention disappointing results from the EPS and the 2019 drilling campaign and state categorically that both models are plain “wrong”.
All reservoir models are developed over time and it might be more appropriate to say that the model used needs further refining rather than being confined to the bin. In actual fact, HUR have had considerable success with drilling FB WOS. They have two successful horizontal drills on Lancaster and although the results at Warwick were poor, they hit significant oil with the Lincoln Crestal drill, producing 9.8k bopd (likely to increase after further cleaning up of the well). Even in sandstone reservoirs drilling and models are not an exact science and in the early stages of field development, unsuccessful wells are drilled regularly, so all in all, not too bad for a model that is “wrong”.
As for the EPS, I don’t see how you can possible say it is anything other than successful at this moment in time (and that’s all we can go on as nobody can foresee the future performance). HUR have two wells on Lancaster, which when run individually, are producing at 14.7k and 9.4k respectively without the aid of the ESPs and have so far delivered up 2.8M barrels of oil ($165M revenue), giving an average of 13.3k bopd since hydrocarbons were introduced back in May 2019. More importantly, HUR expect to be flowing both wells simultaneously from the end of January at 20k bopd (giving 18k bopd with an expected 90% availability). Not bad at all and hardly the result a “wrong” model would deliver. Perched water was always part of the equation and whilst now higher than the base case forecast, was nevertheless an expected outcome.
“The results of the individual well tests have surpassed our expectations.” (HUR TOU 13th Dec)
To address the water cut issue, I think the best bet is to look at the facts, figures and statements given by HUR themselves. I note your penchant for using out of date OGA data that doesn’t break down production between wells, and as such, is pretty useless for the purpose of dissecting the water cut issue. Whilst your graphs look pretty and give an air of superior knowledge, they are rather meaningless, and in any case, you might be better off using the more recent data supplied by HUR, that does at last break things down on an individual well basis.
So here are some important statements from the company themselves.
“Notwithstanding the instant communication between the two wells, and that the wells are effectively acting as a single well bore, the bottom hole pressure response observed to date gives the Company sufficient confidence to reiterate 2020 guidance of 20,000 barrels of oil per day, before operational downtime.” (HUR TOU 13th Dec).
So it would appear that HUR are not concerned about the AM’s ability to handle the associated water to produce 20k bopd (18k bopd net) of oil throughout 2020. I also note that you have not provided any concrete information on how the water produced is handled by the AM and what the handling capacities actually are, before casting dispersion on it’s ability to cope with an increased water cut (if that were indeed to happen). It’s worth noting that some of the older North Sea operations have a water cut in the range of 60-80%. The idea that HUR are trying to hide the water cut by using a different terminal to Rotterdam is frankly ludicrous, especially given that they have just given the most recent water/oil production figures in the December TOU.
“The Company is confident that the water cut observed is related to perched/stranded water, based on temperature data, lack of rate-dependency, and water production behaviour after shut-in periods.” (HUR TOU 13th Dec).
HUR have given concrete reasons why they believe the water is perched and you either believe that the company is telling the truth, or you think that the company is lying (worst case) or deliberately choosing to mislead investors (nearly as bad). If you think the BOD is lying then it’s probably time to sell up and move on.
Perched/stranded water will vary from time to time over the life cycle of each well by it’s very nature (trapped pockets of water in a fissure). For anybody wanting more detailed information on this, the 11th July CMD on HUR’s website covers this subject in depth and explains why the company does “not expect to see coned aquifer water during the lifetime of the EPS”.
Having said the the water cut on 7z has risen from 7.5% to 25-30% since FOIL and any increase in water cut is not a good thing. In an ideal world, the water cut would be zero but as long as it is not from the aquifer and does not substantially increase, then an aggregate water cut of 15% is doing no harm whatsoever and that’s where we are at this moment in time.
The CMD on the 25th March 2020 is a very important day indeed.
On to the finances and paying back the Convertible Bonds ($230M) by 24th July 2022, I’m not sure why you feel HUR have a problem here. Year end there is $150M unrestricted cash and assuming $60 oil and 18k bopd (net), HUR will generate a further $262M p.a or just over $400M before the 24th July 2022. On that basis, there is plenty of free cash available to pay down the CBs leaving $320M to fund the Capex as outlined in the current plan. This is obviously on the proviso that the EPS continues to perform, but I covered that off at the beginning of my post and if you don’t believe that will happen, I’m surprised you have bothered to read this far.
It worth noting that at this point in time Kerogen have not sold down further after covering their position on HUR with the 17th July 2019 sale of approximately 25% of their holding. They have been eligible to sell further shares since mid November. Going forward it will be telling if they sell further shares but at this moment in time they have not done so.
As for Spirit being “taken to the cleaners, professionally”, I’m not entirely sure what you mean. Are you suggesting the HUR board lied to Spirit because that’s what it sounds like. Spirit will have had access to the full facts and made a decision to farm-in to HUR on that basis. There are no guarantees in the oil business. However, it looked like a good deal for Spirit given the potential reward balanced against the initial financial commitment on their part. Don’t forget they have come up trumps with Lincoln even if Warwick disappointed.
Hopefully my post will provide food for thought and I hope it will also provide some balance to your rather bleak view of HUR’s position. Only time will tell but I don’t think things are half as bad as you would have people believe.
I think that covers everything but for the avoidance of any doubt, all opinions are my own and should not be taken as investment advice.
TTFN
Biffadog