Hurricane Energy PLC (LON:HUR) shares slumped a further 30% in Friday morning’s deals as the flailing oil field developer revealed it will soon open talks with bondholders and other stakeholders over a possible restructuring and new funding.
The company’s Lancaster oil field has been running only one well for most of the time since its last project update in October, as its team continues to rework the project amidst worse-than-forecast performance and unexpected problems with high water volumes being pumped from wells.
Lancaster is still producing positive cash-flow, Hurricane said, and the company had US$87mln of cash in the bank at the end of November.
The company added, however, that new investment will be needed to optimise product and ensure oil recoveries are maximised.
Moreover, the company said that September’s downwards revision of oil reserve estimates and lower crude pricing have negatively impacted the projected future cash generation potential of the field.
This may be particularly notable given that much of the financing for the Lancaster field came in the form of convertible bonds – in July 2017 it issued US$230mln of convertible bonds which have a 7.5% coupon and are due for redemption in 2022 (at a price substantially higher than the prevailing share price).
In the near term, Hurricane is seeking support from its stakeholders as it wants to raise around US$60mln of new capital to invest in a new Lancaster well, slated for drilling in 2021.
Hurricane wants to drill the well in 2021, targeting what is described as the “central attic high of the Lancaster field” via a sidetrack horizontal well via the existing 205/21a-7z well.
The company said such a well could “add meaningfully to production capacity” and accelerate production of existing reserves, and, depending on oil prices, materially improve near-term cashflow generation. It hopes to reach a sanction decision for the programme in the first quarter of 2021, which could allow production by late 2021.
Additionally, the company said that implementing a water injection programme could materially improve recovery from Lancaster. Such a programme could take place in 2022 and is estimated to cost around US$75mln.
Hurricane said it has appointed Evercore Partners International and Dentons UK and Middle East LLP as its financial and legal advisors, respectively.
It will shortly start talks with key stakeholders and convertible bond holders in relation to the funding of and/or the necessary support for the proposed development options.
In regard to the impact of possible funding measures, Hurricane cautioned: “It should be noted that there is a risk of dilution to existing shareholders from a possible restructuring and/or partial equitisation of the convertible bonds.
“Furthermore, if no agreement can be reached with the company’s stakeholders on additional investment, further development activity at Lancaster might not be possible.
“In such a scenario, Lancaster could continue to produce from existing wells before reaching the economic limit, the timing of which would depend on oil prices, actual production levels delivered and the level of cost savings achievable.
“The field may then be decommissioned, with potentially limited or no value returned to shareholders. Notwithstanding these risks, the company will endeavour to secure the best possible outcome for all stakeholders.”
In London, Hurricane shares dropped 1.26p or 30% to change hands at 2.96p on Friday.