19 May 2021
CRYSTAL AMBER FUND LIMITED
("Crystal Amber Fund" or the "Fund")
Crystal Amber Fund requisitions General Meeting of Hurricane Energy plc ("Hurricane")
Proposal to remove five directors and appoint two new directors
Crystal Amber Fund, the activist investment fund, announces that it has sent to the board of Hurricane a requisition notice requiring Hurricane to convene a general meeting at which resolutions will be proposed to remove Steven McTiernan, Dr David Jenkins, John van der Welle, Sandy Shaw and Beverley Smith as directors and to appoint John Wright and David Cruik to the board as non-executive directors. Details relating to John Wright and David Cruik are set out below in Appendix 3.
Since 2013, the Fund has been a shareholder in Hurricane. To enable Hurricane to commence and continue its workstreams, the Fund was, on three separate occasions, asked to provide capital to Hurricane. Each time, the Fund responding favourably, investing a total of more than £25 million. The board of Hurricane had previously presented the company as a strategic asset of national importance. However, it has failed to reconcile its earlier estimates of the value of Hurricane's West of Shetland portfolio with its latest, downbeat assessment.
The Hurricane board has also demonstrably failed to protect shareholders' interests. Its actions (more fully set out below) provide ample evidence of its evasive and obstructive engagement with its shareholders. The Fund believes there may well have been a failure by the incumbent Board to act in accordance with section 172 (1) of the Companies Act 2006, which states that a director must act in a way most likely to promote the success of a company.
The Fund therefore believes that, at the earliest opportunity, a new Hurricane board should assume responsibility.
On 4 March 2021, the Fund referred in its interim results for the six months ended 31 December 2020, to experiencing a dramatic deterioration over the previous six months in Hurricane's engagement with the Fund. An extract relating to Hurricane is set out in Appendix 1 along with a chronology of events. Appendix 2 provides an extract relating to Hurricane included in the monthly net asset value announcement published on 22 April 2021.The Fund stated that it believed the Hurricane board had failed to provide evidence that it was acting in the interests of all stakeholders. The Fund concluded that it had lost confidence in the board of Hurricane. The Fund subsequently requested that both the Chairman and the Senior Independent Director resign immediately. They refused to do so.
Consistent with the Hurricane board's disdain towards its shareholders, on 30 April 2021 Hurricane released details of a proposed financial restructuring whereby the Fund believes that Hurricane will be put into an extended wind down and shareholders' interests in Hurricane will be wiped out almost completely in favour of the Bondholders. On 13 May 2021, Hurricane released its "Explanatory Statement" relating to its proposed financial restructuring.
The Fund has now had an opportunity to assess Hurricane's proposals. Its preliminary view is that they are premature, contrary to the best interests of all of Hurricane's stakeholders and unnecessarily detrimental to the interests of Hurricane's shareholders.
The Hurricane bonds are not repayable until July 2022. All interest has been paid and at 31 March 2021, Hurricane had $127 million of net free cash, with cash having increased by $10 million per month since 30 November 2020. The Hurricane board has said in clearest terms that Hurricane will have no difficulties servicing the future interest payments on the bonds. The Fund does not currently understand how the Board can say now, more than 12 months from the repayment date and having made almost no effort to find alternatives, that Hurricane will not be able to repay the bonds.
On 14 January 2021, Hannam & Partners published research paid for by Hurricane. It estimated a "risked net asset value" of 10p a share, valuing the equity at £199 million. This assumed an average price for Brent crude oil of $60 a barrel, compared to a current price of approximately $69 a barrel, an increase of 15 per cent. It also predicted that bondholders would be repaid in full. On 10 May 2021, an operational update was provided which stated that its Lancaster P6 well was producing 11,600 barrels per day. In circumstances where it is now said by the Hurricane board that Hurricane has little or no chance of repaying the bonds, there may well have been a failure by the Hurricane board to update market participants with information already shared with Hurricane's bondholders.
The Fund believes that the emergency legislation upon which the Hurricane board is seeking to exploit with the Restructuring plan is intended to be applied for emergency fund raises where there is insufficient time to obtain shareholder approval, in order to ensure a company's immediate survival. It is concerning that the Hurricane board believes it is appropriate to apply Covid 19 legislation in order to circumvent the sacrosanct right of the owners of a business to vote on, and if thought necessary, approve a financial restructuring.
During the last fortnight, the Fund has requested sight of the legal advice provided to the Hurricane board in relation to the Restructuring. Hurricane has refused. All shareholders are entitled to receive and consider that legal advice.
In 2017, following publication of the Competent Persons Report, Hurricane presented that it had reserves and contingent resources of up to 2.6 billion barrels of oil. Its updated Competent Persons Report, announced on 7 April 2021, has cut this estimate to less than 200 million barrels, with the oil producing Lancaster field estimate reduced by more than 90% from 523 million barrels. Hurricane has failed to provide market participants with an adequate explanation as to the reasons for the scale of this downgrade and when the Hurricane board became aware of this.
The Fund therefore notes and welcomes Hurricane's disclosure that on 10 May 2021, the FCA's Market Oversight Department requested that Hurricane provide information in relation to historic announcements made and recent developments in relation to the proposed restructuring.
The Fund believes that Hurricane's future prospects would be greatly improved with the removal of the current non-executive directors and the appointment of the Fund's nominees. Whilst the Fund lacks confidence in the executive directors, it believes that their technical and financial knowledge of the current situation means they should continue in office for the time being.
The Fund is the beneficial owner of approximately 14.7 per cent. of the issued share capital of Hurricane.
For further enquiries please contact:
Crystal Amber Fund Limited
Christopher Waldron (Chairman) Tel: 01481 742 742
Allenby Capital Limited - Nominated Adviser
David Worlidge/Liz Kirchner Tel: 020 3328 5656
Winterflood Investment Trusts - Broker
Joe Winkley/Neil Langford Tel: 020 3100 0160
Crystal Amber Advisers (UK) LLP - Investment Adviser
Richard Bernstein Tel: 020 7478 9080
Extract from announcement made by the Fund on 4 March 2021
The Fund has been a shareholder in Hurricane since March 2013. In April 2016, Hurricane asked the Fund to invest GBP7 million to enable it to commence its workstream. Six months later, when Hurricane raised additional capital, the Fund invested GBP12.6 million at 34 pence per share. In the mishandled fundraise of June 2017, the Fund invested a further $10 million.
Aside from Kerogen Capital, which until recently was represented on Hurricane's board, the Fund is Hurricane's largest shareholder and the only disclosable institutional shareholder. Following last year's oil price collapse, the Fund added to its shareholding and currently owns more than 11% of its share capital.
The Fund regards itself as a long-term part owner of Hurricane. In 2015, the Fund introduced Hurricane to its highly regarded technical consultants who have engaged constructively with the company on several occasions. The Fund believes that since 2013, it has done everything possible to support the business.
Over the last six months, the Fund has experienced a dramatic deterioration in the way that Hurricane is engaging with the Fund. This is consistent with what the Fund considers to be inadequate, confusing and poor messaging to market participants.
Within its regulatory news service announcement of 11 September 2020, Hurricane stated that it would be "engaging with all our key stakeholders regarding our formal work programme and financial arrangements and updating the market". On 8 October 2020, Hurricane stated that "as disclosed in the interim results announcement, the Company intends to engage with all key stakeholders regarding its forward work programme, capital allocation and financing arrangements". During September and October 2020, the Fund suggested, following discussions with other Hurricane shareholders, that it should allocate a portion of its cash to buy in some of the Hurricane loan notes at below 50% of par value. The Chairman of Hurricane had previously told the Fund that he regarded such a purchase as "a commercial no brainer". No update on bond purchases or capital allocation has been provided to the Fund or the market.
On 18 December 2020, the Chief Executive of Hurricane told the Fund that he would ask Hurricane's lawyers if, given that there had been no covenant breaches and repayment was more than 18 months away, bond holder consent would be required before the company could enter into financial commitments on its forward workstream and capital allocation. He said that he would revert back to the Fund. The Fund followed up in writing on this point on 8, 13, 26, 27 and 30 January 2021. On 31 January 2021, the Chief Executive responded to say that they had been advised to "be engaging with the bond holders". There was no answer to the question as to whether consent would be required.
On 8 January 2021, the Fund shared its updated technical report with Hurricane. This stated why the Fund and its consultants believe that the board of Hurricane does not seem to be focusing on the upside potential of the fractured basement play within Hurricane's licences. The Fund sought an explanation as to why Hurricane was not keen to tie back the existing Lincoln Crestal well which was reported to have tested at a sustained commercial rate. Production from Lincoln could significantly increase overall output with minimal pressure drawdown at Lancaster. The Fund believes that the Lancaster basement play may contain resources greatly in excess of the pool currently being developed by the Lancaster EPS.
At the date of this report, the Fund has not been provided with any explanation. On 14 February 2021, the Fund wrote to Hurricane requesting a call between Hurricane and its technical consultants. Despite follow up by the Fund, Hurricane has failed to arrange such a call.
On 14 February 2021, the Fund wrote to the Chief Executive of Hurricane requesting that Crystal Amber nominates a director to the board of Hurricane. Other than responding to note that the request had been shared with the board of Hurricane, the Fund has received no response to this request.
On 2 March 2021, Hurricane stated that within its stakeholder engagement, "discussions on the Company's formal work programme, strategy, financing and balance sheet recapitalisation are ongoing". As described above, the Fund has had no such discussions with Hurricane,
The Fund notes that the seven board members of Hurricane own shares with a total value of GBP60,000.
The Fund is no longer prepared to be excluded from participating in the evaluation of impending critical decisions by those who have virtually no skin in the game. The Fund always prefers to engage privately and constructively with its investee companies. However, the Fund has found the board of Hurricane to be both indecisive and obstructive. Therefore, it now intends to take appropriate action in order to maximise Hurricane's potential.
A trading update in January 2021 highlighted how cash generation has recently improved as a result of the recovery in the oil price, with the company generating $19 million in the month of December 2020 alone, taking cash to $106 million. The Fund notes that the price of Brent crude has recently continued its strong recovery, from $38 per barrel in October 2020 to more than $60 a barrel. The Fund believes that in 2021, this increase alone should add more than $100 million in cash to Hurricane. It should also significantly increase the value of Hurricane's other, hitherto, untapped resources if this level is maintained.
Extract from announcement made by the Fund on 22 April 2021
During the quarter, Hurricane delivered average production of 11,200 barrels of oil per day. Production efficiency of 95% exceeded the company's planned assumption of 90%. Encouragingly, during the quarter, the average water cut was unchanged from the previous quarter at 25%. Net free cash at 31 March 2021 was $127 million as against $106 million at 31 December 2020 and $87 million at 30 November 2020.
Early in April 2021, Hurricane published a summary of the yet to be published full CPR (Competent Person's Report). The summary CPR was broadly consistent with management's estimates for Lancaster and Lincoln presented in September 2020. The Fund believes these estimates are very cautious and pessimistic in the critical issue of oil-water contact. Logs and sampling demonstrate the occurrence of oil below the 'new' oil water contact. The Fund, as well as all market participants, only have visibility over the limited published data. The Fund awaits publication of the full CPR in order to comment further. The Fund also notes the company's failure to update market participants on the positive financial impact of the oil price, which has doubled over the last year and since 31 December 2020 has increased by $15 a barrel. Nor has the company commented on the financial impact of the $40 million increase in free cash over the four months to 31 March 2021.
In September 2020, Hurricane stated that it would be engaging with all key stakeholders regarding its work programme and financial arrangements. The company guided that more definitive estimates of the range of reserves and resources would be made available in an updated CPR in Q1 2021.
As reported in our interim results announced on 4 March 2021, the Fund is extremely concerned with the company's failure to engage. On the same date the Fund wrote to Hurricane asking for responses on matters including bondholder consent and the Fund's request to nominate a director. The Fund also requested that market participants be made aware of the quantum of financial commitments that the board has contracted with professional advisers, including Evercore.
On 22 March 2021, having had neither a response nor an acknowledgment, the Fund wrote again asking for these points to be answered.
Hurricane's website states that: "the board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. It believes that shareholder dialogue is key to developing an understanding of the views of shareholders and encourages two-way communication, providing prompt responses to queries received orally or in writing."
The Fund's experience with the board of Hurricane is contrary to the above assertion. Moreover, it makes a mockery of such a statement. It is now more than two months since its Chief Executive wrote that he would have a telephone call and since the Fund requested to nominate a director to the board of Hurricane. The Fund regards it as both astonishing and appalling that the board of Hurricane purports to value shareholder dialogue, yet fails to respond to a long-term supporter and provider of substantial capital that has been a shareholder for eight years and owns more than 14% of the equity.
In total, the summary CPR recognises 2C contingent resources of 125.7 million barrels of oil. Whilst this is a small fraction of previous estimates, it nonetheless represents a commercially significant volume of good quality oil at accessible depths with the availability of floating production facilities. Previously, the Fund had expressed its concerns around the proposed side-tracking of the Lancaster 7z well, and in March 2021 the company backtracked from its intention to drill it this summer.
The Fund believes that Hurricane's assets are valuable but are still at the exploratory stage of characterisation. Further investment in well stock together with a plan for gas disposal agreed with the Oil and Gas Authority is likely. The Fund believes that management's current focus on production from existing wells will fail to maximise shareholder returns from Hurricane's west of Shetlands portfolio. Crystal Amber believes that Hurricane's focus should be on its fractured basement assets. This could involve a farm out or a strategic partnership.
The lack of communication with market participants in general and with the Fund in particular is indicative of a board that has failed to provide evidence that it is acting in the interests of all stakeholders. As a result, the Fund has lost confidence in the board of Hurricane. As soon as Hurricane provides overdue operational and technical information, the Fund intends to assess this and provide its comments accordingly, in order to protect shareholders' interests, restore investor confidence and fully capitalise on the opportunities from this potentially significant UK strategic asset.
Details relating to John Wright and David Craik
John Wright has a petroleum engineering background, specializing in commercial roles both in the UK and the USA with CNR, Amerada Hess and most recently, before becoming a consultant, to BG Group, managing a number of its regions.
In 2008 John formed XMT UK Limited, a commercial consultancy, with projects covering many of the worlds hyrdocarbon basins including Ghana, Congo, South Africa, Indonesia, USA, UK North Sea, Middle East, South America and the Falklands - both in oil and gas, upstream and mid-stream.
David Craik is a highly experienced petroleum explorer with over 35 years work in the industry, having worked on a wide range of international and UKCS projects. Areas worked include the C.I.S. and Eastern Europe, UKCS, Atlantic margins, Africa, Caribbean and Falklands, Mediterranean, Middle East, Philippines and China. David has held technical and managerial posts at most levels for exploration companies. In 1996, he established an independent geological consultancy for clients including private equity backed E&P start-ups and multi-national corporations. Holds a B.Sc. in Geology and M.Sc. in Sedimentology. David currently works with John Wright at XMT UK Limited.