TIDMCRS TIDMHUR
RNS Number : 0568Z
Crystal Amber Fund Limited
19 May 2021
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 GBP25 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 GBP199 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 f ailure 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 m
eans 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
Appendix 1
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.
Appendix 2
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.
Appendix 3
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.
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