TIDMHUR
RNS Number : 2511U
Hurricane Energy PLC
28 March 2019
28 March 2019
Hurricane Energy plc
("Hurricane" or the "Company")
Final Results for the Year Ended 31 December 2018
Hurricane Energy plc, the UK based oil and gas company focused
on hydrocarbon resources in naturally fractured basement
reservoirs, announces its final audited results for the year ended
31 December 2018.
Dr Robert Trice, Chief Executive of Hurricane, commented:
"We will soon be generating the long-term production data that
will enable the Company to plan for full field development of the
Greater Lancaster Area (GLA). Initial production is planned to be
17,000 barrels of oil per day, net of anticipated downtime. At this
rate we expect to generate significant cash flow - over $200
million in operating cash flow on a full year run-rate basis at a
$60/bbl Brent oil price. This will allow us to pursue significant
further appraisal and development activities within our Rona Ridge
portfolio.
This follows a highly successful 2018, which involved execution
of a development programme including the upgrade of the Aoka Mizu
FPSO and a significant offshore installation programme. We also
welcomed a new partner, Spirit Energy (Spirit), who farmed into 50%
of the Greater Warwick Area (GWA) in a transformational deal.
The Spirit farm-in has significantly accelerated activity on the
GWA, providing up to $387 million for a phased work programme. This
includes the drilling of three wells in 2019 with minimal net cost
to Hurricane, targeting first oil from a tie-back to the Aoka Mizu
in 2020. The transaction brings forward a potential final
investment decision on a full field development on these assets by
a number of years. The deal also means we will be able to fund the
next phase of appraisal drilling on the GLA and Whirlwind from our
own resources, thereby putting Hurricane in a position to achieve
maximum optionality and greatest value for our shareholders.
With first oil from the Lancaster EPS and a three well drilling
programme on the GLA, we look forward to another exciting period
for Hurricane in 2019 as we advance our strategy of de-risking and
monetising the substantial resources in our Rona Ridge
portfolio."
2018 Results summary
Financial results
-- Loss after tax was $60.9 million (2017: $7.0 million) - the
majority of which was the non-cash fair value loss of $42.4 million
(2017: fair value gain of $10.4 million) on the embedded derivative
associated with the Convertible Bond
-- The Group finished the year with a closing cash position of
$83.0 million in usable funds (including cash and cash equivalents
and liquid investments, but excluding restricted cash) (2017:
$326.6 million)
-- Development cash expenditure on the Lancaster EPS was $205.3
million, including continued upgrade work on the FPSO, well
completions and SURF delivery and installation
-- Operating expenses were $12.7 million (2017: $14.6 million)
with operating cash outflow 46% lower at $4.4 million (2017: $8.1
million)
Operational and corporate developments
-- Lancaster EPS delivery on budget and on schedule for first
oil in 1H 2019, following completion of substantial FPSO upgrade
and offshore installation works
-- Transformational farm-in agreement with Spirit for 50% of the GWA
o Provides up to $387 million for a phased work programme
o Partners working towards unlocking half a billion barrels of
reserves (gross) with initial full field development of the GWA
-- Transitioned from exploration and appraisal company to
full-cycle exploration, development and, very shortly, production
business
o Expansion in headcount and office space to support the step-up
in scope of activity, whilst maintaining corporate culture and
without substantial increase in overhead
o Continued enhancements in corporate governance and disclosure,
targeting standards commensurate with a Premium Listed business
Outlook
-- Lancaster EPS expected to produce at net 17,000 barrels of
oil per day following initial facilities ramp-up period
o Production per well of 10,000 barrels of oil per day at
long-term uptime assumption of 85%, expected to be achieved 6
months following first oil
o Expected to generate in excess of $200 million in operating
cash flow on a full year run-rate basis at a $60/bbl Brent oil
price
-- Lancaster EPS is poised to begin generating the reservoir
data needed to clarify the ultimate potential of Hurricane's
extensive Rona Ridge reserves and resources
o Period of 6-12 months of steady-state production expected to
provide data to support Hurricane's reservoir model and indicate
the ultimate potential of the Lancaster reservoir
-- Fully-carried three well drilling programme on the GWA in 2019
o Three 1 km horizontal wells to be drilled and tested by
year-end, ahead of tying a single well back to the Aoka Mizu
o All wells to be suspended with downhole gauges as a means of
'seeing' subsequent GWA well tests and confirming Hurricane's
geological model that the GWA is a single supergiant field rather
than a number of separate hydrocarbon accumulations
o First well, Warwick Deep, expected to spud in April 2019
-- Hurricane has a clear path to potentially booking over 100
million barrels of 2P reserves during 2020
o Final investment decision on GWA tie-back will add incremental
production from 2020
o Commercial agreements and decision to proceed with gas export
in 2020 is expected to allow an extension to the Lancaster EPS
field development plan (FDP) to include the full 10-year contract
life of the Aoka Mizu, subject to regulatory approvals
o Following gas export, debottlenecking is expected to raise
Aoka Mizu throughput to 40,000 barrels of oil per day
Contacts:
Hurricane Energy plc
Dr Robert Trice, Chief Executive Officer +44 (0)1483 862
Alistair Stobie, Chief Financial Officer 820
Stifel Nicolaus Europe Limited
Nominated Adviser & Joint Corporate Broker
Callum Stewart / Nicholas Rhodes / Ashton
Clanfield +44 (0)20 7710 7600
Morgan Stanley & Co. International plc
Joint Corporate Broker
Andrew Foster / Tom Perry / Alex Smart +44 (0)20 7425 8000
Vigo Communications
Public Relations
Patrick d'Ancona / Ben Simons
hurricane@vigocomms.com +44 (0)20 7390 0230
About Hurricane
Hurricane was established to discover, appraise and develop
hydrocarbon resources associated with naturally fractured basement
reservoirs. The Company's acreage is concentrated on the Rona
Ridge, in the West of Shetland region of the UK Continental
Shelf.
The Lancaster field (100%) is Hurricane's most appraised asset,
with five wells drilled by the Company to date. It has 2P reserves
and 2C contingent resources of 523 million stock tank barrels of
oil. The Company is currently proceeding towards the first phase of
development of Lancaster, an Early Production System which will be
the UK's first basement field development. It involves a two well
tie-back to the Aoka Mizu FPSO and is expected to initially produce
17,000 barrels of oil per day (gross production of 20,000 bopd with
assumed operating efficiency of 85% following ramp-up). First oil
is targeted for 1H 2019.
Hurricane's other assets include Lincoln (50%), Warwick (50%),
Halifax (100%), Whirlwind (100%), and Strathmore (100%). Together
with Lancaster, these assets have total combined 2P reserves and 2C
contingent resources of 2.6 billion barrels of oil equivalent (2.3
billion barrels of oil equivalent net to Hurricane).
In September 2018, Spirit Energy farmed-in to 50% of the Lincoln
and Warwick assets, committing to a five-phase work programme
targeting sanction of full field development in 2021.
Inside Information
This announcement contains inside information as stipulated
under the market abuse regulation (EU no. 596/2014). Upon the
publication of this announcement via regulatory information service
this inside information is now considered to be in the public
domain.
Competent Person
The technical information in this release has been reviewed by
Dr Robert Trice, who is a qualified person for the purposes of the
AIM Guidance Note for Mining, Oil and Gas Companies. Dr Robert
Trice, Chief Executive Officer of Hurricane Energy plc, is a
geologist and geoscientist with a PhD in geology and has over 30
years' experience in the oil and gas industry.
Standard
Resource estimates contained in this announcement have been
prepared in accordance with the Petroleum Resource Management
System guidelines endorsed by the Society of Petroleum Engineers,
World Petroleum Congress, American Association of Petroleum
Geologists and Society of Petroleum Evaluation Engineers.
Chairman's Statement
Dear Shareholders,
I am pleased to report that Hurricane remains on schedule for
first oil from the Lancaster Early Production System (EPS) in the
first half of 2019. The Aoka Mizu FPSO was successfully hooked-up
to the turret mooring buoy on 19 March 2019 and commissioning is
now underway.
Delivery of Lancaster EPS
Delivery of the Lancaster EPS was the Company's strategic
priority throughout 2018. Your Company raised $547 million in 2017
to fund vessel upgrades for operation in the harsh environment West
of Shetland, complete two wells for production, install the turret
mooring system and install other subsea equipment.
It is a huge tribute to Hurricane's management team that this
ambitious work programme has so far been completed on budget, and
first production continues to be expected within the time frame
advised to shareholders. The Lancaster EPS is the cornerstone of
Hurricane's strategy to create shareholder value. Production in
2019 will start to deliver the reservoir data needed to clarify the
ultimate potential of our extensive reserves and resources on the
Rona Ridge. The results from the Lancaster EPS will have a
'read-across' for the whole of the Company's fractured basement
play. Cash flow generated from the Lancaster EPS will also provide
funding for further activity to continue value uplift.
Spirit farm-in
Whilst prioritising successful execution of the Lancaster EPS
project during 2018, in September Hurricane also entered into a
transformational farm-in agreement with Spirit Energy (Spirit). The
Spirit farm-in provides up to $387 million for a phased work
programme leading towards an initial full field development of the
Greater Warwick Area (GWA). This starts with a committed three-well
appraisal drilling campaign in 2019. The deal enables the
accelerated appraisal and development of the GWA, bringing forward
a potential final investment decision on a full field development
on these assets by a number of years.
I welcome this co-operation with Spirit, a first class and
compatible partner, which shares our enthusiasm for the basement
play.
Step-up in scope of activity
Management responsibilities in 2019 and beyond include
satisfying the considerably increased demands of production
operations at the Lancaster EPS and, in addition, the drilling
operations on behalf of the GWA joint venture with Spirit. In
aggregate, this has resulted in a significant step-up in the scope
of activities and the Group's organisational structure has been
carefully expanded in Eashing and Aberdeen to the extent necessary
to deal with these increased demands. This expansion in staffing
has been accomplished without dilution of Hurricane's unique
entrepreneurial corporate culture, which has seen it pioneer the
basement play on the UK Continental Shelf, while delivering the
additional skills, resources and depth required.
Corporate governance and the Board
I was pleased to be asked to become Chairman of the Board,
effective 1 May 2018. Dr David Jenkins, who had acted as Interim
Chairman from November 2017, returned to his previous role as
Senior Independent Director on this date. David's stewardship of
the Company was exemplary during that period, and I have been most
grateful for his continued guidance during my transition into the
Company.
John van der Welle has also been a huge support as an
independent non-executive director, acting as Chair of the Audit
and Risk Committee and also Chair of the Listing and Governance
Committee (LGC).
As mentioned in last year's Annual Report, despite Hurricane
being an AIM-quoted company, the Board decided to take steps over
time to meet or exceed the principal provisions of the UK Corporate
Governance Code commensurate with standards expected for Premium
Listed companies. John van der Welle, as Chair of the LGC, oversaw
the initial gap analysis and the formulation of the plan towards
meeting these goals.
To make further progress towards meeting the highest standards
of governance, levels of disclosure in this year's Annual Report
will be further enhanced. The Nominations Committee also began to
take the steps required to achieve a more appropriate balance to
the Board, starting with the appointment of an additional
independent non-executive director. Sandy Shaw was appointed to the
Board in January 2019, and we are fortunate to benefit from her
extensive and highly relevant legal, commercial and transactional
experience in the oil and gas industry, especially in the UK.
Although the Company is now well placed to meet the requirements of
a Premium Listing, the Board continues to evaluate the benefits and
timing of a Premium Listing whilst focussing its efforts on
commissioning the Lancaster EPS and successful delivery of the 2019
drilling campaign on the GWA.
Acknowledgements
I would like to commend our Tier 1 contractors on the Lancaster
EPS development for their critical assistance towards achieving
project completion with an exemplary health and safety record.
I must also thank our new partners at Spirit, for the belief
they have demonstrated in the basement play and Hurricane as
operator, and their highly collaborative approach to our
partnership. Our regulators have also been supportive and
especially helpful in facilitating our partnership with Spirit at
short notice.
And, of course, I would like to acknowledge and applaud the
immense efforts of our Chief Executive, Dr Robert Trice, the other
executive directors, and all of Hurricane's staff. Their unstinting
efforts have delivered a very successful 2018, and they have set an
exciting course for 2019, not only with first production expected
from the Lancaster EPS but also a full drilling campaign on the
GWA.
On a personal note, it has been a privilege to join the Company
at such a critical moment in its journey, as developments over the
next year could be game changing not only for Hurricane and its
shareholders, but also for the wider UK oil industry.
Steven McTiernan
Chairman
Chief Executive Officer's Review
Introduction
On 19 March 2019, we announced that the Aoka Mizu had
successfully hooked-up to the turret mooring buoy. FPSO
commissioning work is ongoing and the Company is on track for first
oil from the Lancaster EPS during the first half of 2019.
The Group's loss after tax for the year was $60.9 million (2017:
$7.0 million), $42.4 million of which relates to the non-cash fair
value loss on the embedded derivative associated with Hurricane's
Convertible Bond. The financial statements presented in this Annual
Report will be Hurricane's last with no revenue.
The primary purpose of the Lancaster EPS is to obtain reservoir
data to enable the Company to plan for full field development,
principally on the Greater Lancaster Area (GLA), but the data
gathered will also inform our GWA development. Having spent 2017
and 2018 raising capital and executing the workstreams for the
Lancaster EPS, the balance of 2019 will be spent gathering dynamic
reservoir data to benchmark our reservoir model and validate the
substantial resources across the GLA, while generating cash.
Coupled with our three well, fully carried appraisal drilling
campaign on the GWA, 2019 should prove to be another exciting year
for Hurricane.
Both the Lancaster EPS and the GWA appraisal drilling campaign
advance our strategy of de-risking and monetising the substantial
resources in our Rona Ridge portfolio. The planned single well
tie-back from the GWA to the Aoka Mizu is intended to provide
further reservoir information ahead of an initial stage of full
field development on the GWA.
We have commenced planning for further drilling and testing
across the GLA to confirm our exploration model that the Lancaster
and Halifax licences may contain a single supergiant field. We are
also beginning to evaluate the optimum approach for the next phase
of development of the GLA. This evaluation will review how funding
could be achieved through our own resources to expand our current
development and increase production, thereby putting Hurricane in a
position to achieve maximum optionality and greatest value for
shareholders.
The Spirit farm-in to the GWA partially addressed the capital
availability issue in 2019 and will, in the longer term, address
our constrained human resources as we hand over operatorship to
Spirit for full field development of the GWA. This farm-in has
significantly accelerated appraisal activity. We expect the first
of a fully carried three well campaign to spud in April 2019. The
three well drilling and testing programme is planned to be
completed by the end of the year, ahead of tying a single well back
to the Aoka Mizu. With the installation and completion phase
scheduled for the summer of 2020, we expect first oil from the GWA
in the fourth quarter.
The Spirit farm-in means that over 90% of our 2019 committed
capital programme is carried. This allows us to build our capital
reserves during 2019 and to plan to undertake appraisal and
development activities concurrently on the GLA, the GWA and
Whirlwind over the next few years.
Greater Lancaster Area
Our focus in 2018 was the upgrade of the Aoka Mizu in the
Drydocks World Dubai facility, fabrication and installation of the
turret mooring system buoy and Subsea Umbilical, Risers and
Flowlines (SURF), and completion of the two production wells. The
year was marked by progressing a series of project milestones which
culminated in the completion of the offshore installation programme
in September and sail-away of the Aoka Mizu from Dubai in October.
The long hot summer experienced across the UK stretched as far
north as Shetland and meant that we were able to carry-out the well
completions and offshore installation programme with limited
downtime.
Our contracting strategy sought to transfer timing risk to our
Tier 1 contractors, which were incentivised to deliver on schedule
without compromising operational efficiency. Bluewater, TechnipFMC
and Petrofac all successfully managed their scopes taking
responsibility towards delivering the Lancaster EPS on time and on
budget. We look forward to working with them all as we further
de-risk our Rona Ridge assets.
To facilitate the Spirit farm-in, we have already commenced work
on reinstating the gas compression system on the Aoka Mizu and
tie-in to the West of Shetland Pipeline System (WOSPS) to evacuate
the GLA and GWA associated gas. Subject to regulatory approval,
this will allow us to utilise all of the 30,000 barrel a day
throughput capacity of the Aoka Mizu. Debottlenecking studies are
ongoing to potentially increase the throughput to 40,000 bopd.
Spirit farm-in to GWA
Spirit's acquisition of a 50% interest in the GWA was as
unexpected as it was beneficial. A clear meeting of minds on how to
effectively advance the GWA led to a deal being concluded quickly.
The transaction clearly sets out a phased appraisal and development
programme leading to a final investment decision in 2021 on the
first phase of full field development of the GWA.
The Spirit farm-in has significantly accelerated activity on the
GWA, with the added benefit that with limited calls on our capital
investment across the licences in 2019, it is expected that we will
be able to fund the next phase of appraisal drilling on the GLA and
Whirlwind from our own resources.
The first of the GWA appraisal wells, Warwick Deep, is expected
to spud in April 2019 once the Transocean Leader rig has been
released by EnQuest. The Warwick Deep well will be the first
horizontal producer we will have drilled outside local structural
closure. It is anticipated that the Warwick Deep well test will
provide a unique insight into the productivity potential of the
deeper fracture network, providing more evidence of the mobility of
oil within the basement reservoir.
Hurricane's geological model for the GWA has been informed by
the drilling and testing results from the GLA, Whirlwind and
Lincoln wells. As a consequence, Hurricane believes that the
seismically mapped faults that subdivide the GWA into the Lincoln
and Warwick volumes represent high permeability features rather
than reservoir barriers. It is therefore anticipated that the GWA
will be proven to be a single supergiant field rather than a number
of separate hydrocarbon accumulations. In order to test this
geological model, all three of the wells in the 2019 programme are
planned to be suspended with downhole gauges which should provide a
means of 'seeing' subsequent GWA well tests. Furthermore, the
planned single well tie-back will provide the option to undertake
interference testing which, when combined with a further three
horizontal production wells, will inform the GWA joint venture's
planning for the initial stage of GWA full field development.
Corporate growth
We commenced the 2016-2017 drilling campaign with ten full time
employees. To facilitate the Lancaster EPS and GWA joint venture
with Spirit, we will have reached a total of 51 full time employees
at the end of the first quarter of 2019. Notwithstanding the
significant growth in personnel, we recognise our ability to
operate is as much defined by human capital as it is by cash. In
achieving this growth, we have been mindful to ensure that the new
joiners are willing to embrace Hurricane's corporate culture.
Implicit in this growth, and sympathetic to the culture that has
delivered on our promises, we have updated our policies and
procedures to reflect the size of the Company and our aspirations
for continued growth. With this preparation in place we have the
foundations to be ready, when the Board determines that it is the
right time, to pursue a Premium Listing.
Basement plays
2018 was the year in which basement plays across the North Sea
began to be promoted by companies other than Hurricane. Basement
opportunities have been presented at international geoscience
conferences in the UK, Norway and Oman. Discoveries, prospects and
leads have been identified West of Shetland, in the Norwegian North
Sea, and in the Southern North Sea Danish sector.
Most notable of these was Lundin Petroleum's Rolvsnes well
16/1-28S which drilled a thick and aerially extensive interval of
porous and fractured basement. We were delighted with the initial
success of the Rolvsnes well, which not only flowed at a
constrained rate of 7,000 bopd but reinforced Lundin's pre-drill
geological model. We will watch with interest as this successful
well is tied back to the Edvard Grieg platform and generates
extended well test results.
The increased basement awareness resulting from this recent
industry promotion and co-operation has demonstrated that
understanding the differences between basement reservoirs is as
important as understanding the numerous similarities. Of central
importance is that the basement play typically comprises large
easily mapped structures within which the natural fracture network
has been enhanced through tectonics and sub-aerial weathering
processes. The presence of basement opportunities within otherwise
well-known petroleum systems represents a significant
under-exploited play, and offers the oil industry an as-yet
unquantified material upside close to established
infrastructure.
Regional environment
While Hurricane has been progressing delivery of the Lancaster
EPS and the GWA joint venture with Spirit, the ownership of UKCS
acreage and assets has been changing around us. Given our reservoir
focus and absence of legacy assets, we are less concerned by the
change of ownership in the traditional North Sea. However, the
forces driving this change in ownership is now manifesting itself
West of Shetland, with Equinor, BP and Shell making
acquisitions.
The recent stability of the UK tax regime and the relative
stability (at its mid-point at least) of the oil price has helped
encourage this M&A activity. A number of participants believe
that there is a lot more to come. This commercial backdrop offers a
potentially fertile environment for Hurricane to pursue its
strategy of attracting a field development partner for its
Lancaster field.
People
2018 was an extraordinary year in Hurricane's history and
another is well underway. None of this would be possible without
the dedication, initiative and hard work of our expanding team. I
would like to sincerely thank them all for taking Hurricane another
step closer to demonstrating the productivity and considerable size
of our Rona Ridge assets.
Dr Robert Trice
Chief Executive Officer
Operational Review
Operational delivery was Hurricane's focus throughout 2018. For
the first time in the Company's history this did not mean an
emphasis on the drill-bit as activity at the fabrication/upgrade
yard and SURF installation offshore took centre stage. Having
raised the required financing, executed the relevant contracts and
obtained applicable consents for the Lancaster EPS in 2017, the
task for the project team was clear: maintain budget and schedule
to put the Company in position to achieve first oil in the first
half of 2019.
I am delighted to report good progress throughout the year, with
the Lancaster EPS project on schedule and on budget at the time of
writing. Crucially, we did so with strong health and safety
performance despite over 2 million man-hours being expended across
the project in 2017-18 by Hurricane and its contractors and
subcontractors.
However, the Lancaster EPS is now only part of the story.
Following the Spirit farm-in we are now progressing separate parts
of our portfolio in parallel. The deal has allowed us to accelerate
our planning for future phases of activity, including a three-well
campaign in 2019. We plan to follow this with a further three wells
and the tie-back of one of the 2019 wells in 2020, subject to
partner approval. To enable this accelerated activity, we have
expanded our organisational structure to accommodate operations
across a number of concurrent projects.
FPSO and turret mooring system
We started the year in review with the Aoka Mizu having recently
arrived at Drydocks World, Dubai, for its upgrade and life
extension works. This thorough refurbishment is designed to give
the Aoka Mizu a fresh ten-year lifespan with a degree of
futureproofing built-in. Following sea trials, which commenced
before the end of September, sail-away was announced on 15 October
2018. Whilst the added greenwater protection and new paint works
are clearly evident, these do not do justice to the scale of the
overhaul carried out in the intervening period. By way of example,
40km of new cabling was installed onto the vessel. We are now
carrying out the engineering work to deliver a GWA single well
tie-back, reinstatement of gas compression, and debottlenecking of
production capacity up to 40,000 bopd by the end of 2020.
Fabrication of the buoy for the turret mooring system in the
same yard as the FPSO upgrade allowed for operational efficiencies.
It also meant that a dry trial fit of the buoy into the Aoka Mizu
could be carried out before the buoy departed for installation at
the Lancaster field.
Well completions
The offshore phase of the Lancaster EPS development commenced
with installation of the Enhanced Horizontal Xmas Trees on the
Lancaster 6 and 7Z wells. The Far Superior offshore construction
vessel was used to carry out this operation, making opportune use
of vessel availability. Well completions themselves were carried
out to plan using Transocean's Paul B. Loyd Jr rig. This operation
included installation of dual-pod Electrical Submersible Pumps
(ESPs) in each well. The Lancaster EPS will determine the extent to
which ESPs are required to enhance natural flow to target
production levels. Crucially, they will also provide significant
data to improve reservoir understanding, which is the core purpose
of the Lancaster EPS.
Offshore installation
Offshore, the focus was on the SURF and mooring installation
campaign: flowlines, umbilical, manifolds and turret mooring system
buoy. The preparation for these works included moving over 6,000
boulders away from the pipeline and mooring line corridors and
concluded with the covering of the flowlines and umbilical with
over 30,000 tonnes of rock as protection from the ongoing fishing
activities and observed environmental conditions. The mooring
system utilises 12 chain and wire lines, each anchored to a mooring
pile driven into the seabed. The SURF and mooring system was
successfully installed by TechnipFMC, one of our Tier 1
contractors, and its subcontractor SBM Offshore in the middle of
2018. The buoy, having been delivered from Dubai to Lerwick, was
successfully installed in early August, connecting it to the
mooring system and SURF. Rock protection was completed in the last
quarter of 2018 meaning the system was then ready for the arrival
of the Aoka Mizu.
Hurricane had highlighted the offshore installation phase of the
Lancaster EPS development as being key to delivery of first oil in
the first half of 2019. These operations needed to take place
during the summer weather window to provide a system to which the
Aoka Mizu would be able to hook-up. The budget for the Lancaster
EPS had largely been fixed in lump sum contracts, passing a
significant proportion of the risk of cost overruns back to
contractors. Offshore installation represented the area of greatest
retained exposure. Hurricane was fortunate in benefiting from
historically good weather in the summer of 2018. Calm conditions
prevailed, allowing successful installation of the turret mooring
buoy system and SURF.
First oil imminent
The FPSO is now hooked-up to the turret mooring buoy and
commissioning work is ongoing prior to first oil. Following issues
during initial hook-up attempts, Hurricane and Bluewater made the
most of downtime whilst waiting on weather and delivery of
replacement components to progress areas of pre-commissioning,
where possible. The commissioning and start-up procedures remain
critical steps in the overall development. Time will be taken to
individually bring each well online in order to maximise reservoir
data. We look forward to the announcement of first oil.
Health and safety
Hurricane had permanent representatives onsite at the upgrade
yard in Dubai and offshore throughout Lancaster EPS operations.
Together with our Tier 1 contractors, we carried out HSSEQ
incentive programmes which we believe contributed to an exemplary
health and safety record for the year.
Future phases
The Spirit farm-in allowed Hurricane to begin planning for and
progressing future phases of activity, without waiting for first
oil to provide certainty of funding. As a result of the deal,
Hurricane was able to commit to a rig to drill three wells on the
GWA in 2019. Hurricane has shown that it has an effective working
relationship with both Petrofac Facilities Management Limited and
Transocean on previous drilling campaigns and this formula is being
repeated on this campaign, with the Transocean Leader rig due to
spud the first well in April 2019.
The three 2019 GWA wells are the first step in a pathway to full
field development which has been agreed with Spirit. This is
conditional on the success of each phase and the subsequent
decisions to proceed. Our joint venture hit the ground running from
the start. The deal went from concept to closure in very short
order, with our corporate cultures proving to be very compatible.
We have had a collaborative approach to the first phase of our
operations which has included alignment on the subsurface
interpretation and objectives of the 2019 wells. We also commenced
planning and engineering study work to tie a single GWA well back
to the Aoka Mizu, reinstate the gas compression system, tie the
Aoka Mizu into WOSPS and to carry-out the Aoka Mizu host
modifications to enable this.
We are also looking ahead for what lies in store for the GLA and
look forward to being able to announce next steps for activity
following first oil and initial data from the Lancaster EPS. During
the course of 2018, the Company significantly added to its team and
the breadth of its responsibilities. Many in the core team of
consultants who were integral to delivering the Lancaster EPS have
joined Hurricane full time. The Company now has skilled integrated
teams able to deliver and support the Lancaster EPS, and also the
GWA well campaign and tie-back activities. In addition, we have
brought in-house contracts, procurement and logistics functions. We
can now derive the synergies from providing support to the Aoka
Mizu and the drilling rig as well as having greater control over
our procurement operations.
Hurricane has transitioned from exploration and appraisal to
development and will, very shortly, complete this journey by
becoming a production company.
Neil Platt
Chief Operations Officer
Finance Review
In 2018, Hurricane continued its progress to first oil, with the
Lancaster EPS remaining on schedule and budget. In September 2018,
the Group successfully farmed out 50% of its GWA licences to
Spirit, accelerating activity across the Hurricane portfolio.
The first half of the year was focussed on continuing the
upgrade work on the Aoka Mizu and undertaking well completion
operations. The second half of the year saw the installation of the
buoy on the Lancaster field and the related installation of the
subsea flowlines and umbilical. By the end of the year, the
Lancaster EPS infrastructure was all in place and the Aoka Mizu
ready to hook up.
The second half of the year also saw the Spirit Energy farm-in
to 50% of the Group's Lincoln and Warwick licences, in exchange for
future carry contributions of up to $387 million. The farm-out
arrangement sees the significant acceleration of activity across
the Group's portfolio, in particular on the GWA. In the initial
phases, Spirit will fund 100% of three wells to be drilled in 2019,
along with 100% of the preparation work and long-lead items to
enable one of the exploration wells to be tied back to the Aoka
Mizu. Additional detail on the Spirit farm-in deal is included in
the CEO's Review.
The Group's loss after tax for the year was $60.9 million (2017:
$7.0 million), the majority of which was the non-cash fair value
loss of $42.4 million (2017: fair value gain of $10.4 million) on
the derivative associated with the $230 million 7.5% convertible
bonds issued by the Company in July 2017 (Convertible Bond). The
fair value loss on the derivative does not have a cash or tax
impact.
Our principal financial goals continue to be to manage the
existing funds held by the Group to deliver first oil from the
Lancaster EPS on schedule and on budget. This will bring us to the
point where the Lancaster EPS begins to generate free cash which
can be utilised to deliver the Group's long-term strategy. In
addition, the Group has the financial goal to manage activity on
the GWA within the agreed joint venture budget and to deliver the
work scopes on schedule.
Use of funds
In 2018, the Group's primary uses of funds were:
-- development cash expenditure on the Lancaster EPS, $205.3
million - this includes continued upgrade work on the FPSO, well
completions and SURF delivery and installation;
-- operating cash outflow, $4.4 million (2017: $8.1 million) -
this decrease on the prior year reflects the lower level of
corporate activity through the year, and a higher proportion of
time and resource being spent on projects and therefore
capitalised; and
-- Convertible Bond coupon payments, $17.3 million (2017: $4.3 million).
Income Statement
The Group's loss after tax for the year was $60.9 million (2017:
$7.0 million). The majority of the loss for the year was the
non-cash fair value loss of $42.4 million (2017: fair value gain of
$10.4 million) on the derivative associated with the Convertible
Bond. The Group's operating expenses, foreign exchange losses and
finance costs make up the balance of the costs incurred. This was
partially offset by interest income received from cash and liquid
investments held by the Group during the period.
The decrease in other operating expenses from $14.6 million in
2017 to $12.7 million in 2018 reflects the lower level of corporate
activity in the year compared to 2017. The average headcount
increased from 21 to 31 over the year, with the majority of the
focus on the Lancaster EPS and, in the last quarter of the year,
the GWA. Headcount as at 31 December 2018 was 41. This has
increased the overall gross staff cost (including share-based
payment expense) from $9.1 million in 2017 to $13.0 million in
2018. However, as a significant portion of these costs are
capitalised within projects, the resulting impact within operating
costs in the Income Statement is $5.7 million (2017: $6.2
million).
The accounting for the Convertible Bond required the recognition
of an embedded derivative liability related to the equity
conversion option. The fair value of the embedded derivative is
based on a simulation model which is impacted, in particular, by
the volatility assumption applied and the Group's share price at
the reporting date. The higher the assumed volatility and the
higher the Group's share price, the more the fair value of the
derivative liability increases. Any increase in the liability
creates a corresponding non-cash charge in the Income
Statement.
At 31 December 2017, the fair value of the embedded derivative
liability was valued at $28.6 million. Between 31 December 2017 and
31 December 2018, Hurricane's share price rose from GBP0.31 to
GBP0.44 per ordinary share, and the volatility assumption increased
from 23.6% to 30.1%. The volatility assumption was calculated as a
blended average of the trading history of the Group's own shares
and shares in a relevant peer group, for a period of six months
prior to the measurement date. It is assumed that this is an
approximate forecast of the volatility in Hurricane's share price
for the period to conversion. These movements have driven an
increase in the derivative liability of $42.4 million, to a closing
figure at 31 December 2018 of $71.0 million. Further share price
rises would increase the liability and corresponding losses,
assuming other factors remain the same. The majority of interest
costs of $24.5 million for the Convertible Bond have been
capitalised during the year.
Due to the nature of the Group's business, it has accumulated
significant tax losses since incorporation. Upon receipt of FDP
approval for the Lancaster EPS in September 2017, for tax purposes,
the Group is considered to have commenced trading. Pre-trading
capital expenditure of $89.2 million is carried forward at 31
December 2018 and tax relief will be available once the FDP
approval is received on the remaining licences. The Group has ring
fenced trading losses of $526.5 million, non-ring fenced trading
losses of $7.2 million, other deductible temporary differences of
$25.5 million and pre-trading expenditure of $0.8m at 31 December
2018, which have no expiry date and would be available for offset
against future taxable profits.
No asset has been recognised in the Financial Statements for a
potential deferred tax asset of $31.9 million (2017: $16.1 million)
resulting from the effect of carried forward trading losses, after
offsetting $184.4 million (2017: $141.2 million) against a deferred
tax liability. The directors have concluded it is not appropriate
to recognise any of the potential deferred tax asset until the EPS
has begun production and hence demonstrated an ability to generate
taxable profits.
Exploration and evaluation assets and property, plant and
equipment
Throughout the year the Group continued incurring expenditure in
relation to the Lancaster EPS and on the Lancaster field. Total
expenditure in the year was $252.7 million. All such expenditure
was included within property, plant and equipment. These
capitalised costs included $23.3 million of capitalised
interest.
Following the Spirit farm-in, the Group began preparing for its
2019 drilling programme and related work for a single GWA well
tie-back. Whilst this expenditure was charged to exploration and
evaluation assets, due to the carry element of the farm-in deal,
the net cost to Hurricane for this work was minimal. Other
expenditure relating to exploration and evaluation was in relation
to the other assets in the Group's portfolio.
Cash and debt
The Group finished the year with a closing cash position of
$83.0 million in usable funds (including cash and cash equivalents
and liquid investments, but excluding restricted cash). The $230
million in convertible bonds, issued in July 2017, remained
outstanding. Under the terms of the Convertible Bond, the first two
years of coupon payments were placed in escrow ($34.5 million), of
which $21.6 million has been paid out to date. The maturity date of
the Convertible Bond is July 2022, although bondholders have the
option to convert the bonds to ordinary shares in the Company of
GBP0.001 each (Ordinary Shares) before that time. As at the year
end, no bonds had been converted to Ordinary Shares. The initial
conversion price on the bonds was set at $0.52, representing a 25%
premium to the share price fixed at the time of issue (being
GBP0.32 converted into USD at a rate of $1.30).
The Convertible Bond is recorded on the Balance Sheet and is
split between the host debt contract and the embedded derivative
related to the equity conversion option. At the Balance Sheet date
the fair value of the embedded derivative was $71.0 million and the
carrying value of the host debt contract at amortised cost was
$198.4 million.
In April 2018 the Group agreed with one of its Tier 1
contractors that up to GBP18 million of invoices could be deferred
until September 2019 at an annual interest rate of 7%. This has
provided the Group with additional working capital during this
period.
This deferral accounts for the majority of the $21.3 million of
trade creditors at 31 December 2018.
In April 2018, as agreed with the Regulator, the Group increased
the level of decommissioning security held in trust up to a total
of GBP16.8 million to cover the post-tax cost of decommissioning
the Lancaster EPS. This amount was placed on long-term deposit to
maximise interest income and as such is accounted for as a
non-current restricted liquid investment and recognised within
non-current assets on the Balance Sheet as at 31 December 2018. In
February 2019, the Group replaced this cash security held in trust
with a decommissioning bond of the same value. Under the terms of
the agreement with the bond provider, up to 90% of the original
funds will be released back to the Group in tranches once specific
production milestones are met. Until those milestones are reached,
the funds will remain within escrow. The Group expects the
milestones to be achieved within six months of first oil from the
Lancaster EPS.
Cash flow
Net cash outflow from operating activities of $4.4 million is a
reduction from the $8.1 million in 2017. This decrease is driven by
the lower level of corporate activity in the year, with a greater
proportion of time and resource spent on both the Lancaster EPS and
the GWA activity. The cash expenditure on oil and gas property,
plant and equipment of $205.3 million (2017: $85.0 million) was in
relation to the Lancaster EPS. Cash expenditure on intangible
exploration and evaluation assets in the year of $4.2 million
(2017: $180.6 million) was in relation to the Group's non-Lancaster
assets.
The Group did not carry out any financing activities during the
year as it holds sufficient funds to progress the Lancaster EPS
through to first oil. The Spirit farm-in did not involve any cash
being received as all consideration is in the form of carry on
future capital expenditure.
The net decrease in cash, cash equivalents, and liquid
investments in the year was $236.9 million (including the effects
of foreign exchange rate changes).
IFRS 16 - Leases
Effective from 1 January 2019, the Group has adopted the new
accounting standard on leases (IFRS 16 'Leases'). The main effect
of this new standard for the Group is to bring operating leases
onto the Balance Sheet recognising a right-of-use asset and lease
liability for all leases greater than 12 months in length (unless
the underlying asset has a low value). For Hurricane this has an
impact in two areas: office leases and the charter of the FPSO.
Office leases
In respect of existing office leases as at 1 January 2019 the
Group expects to recognise right-of-use assets of approximately
$2.8 million and lease liabilities of approximately $3.3 million.
The expected impact on profit and loss in 2019 is to decrease other
operating expenses by $0.2 million and to increase finance costs by
$0.2 million.
Aoka Mizu FPSO
In respect of the Aoka Mizu, the Group expects to recognise a
right-of-use asset and lease liability of approximately $90-100
million upon commencement of the lease (at first oil). The impact
on profit and loss for 2019 will depend on the timing of first oil
being reached, and oil production achieved (as the right-of-use
asset will be depreciated on a unit-of-production basis). If the
lease had commenced on 1 January 2019, it is estimated that the
impact on profit and loss for 2019 would be to recognise a
depreciation charge of approximately $14 million and a finance cost
of approximately $9 million.
Brexit
Management has considered the impact that Brexit could have on
the Group and its activities. As the Group's licences and
activities are currently entirely UK based, with its future oil
sales lined up to be with a UK company, management considers the
risk relating to Brexit not to be significant. Some supplies are
obtained from European Union suppliers outside of the UK and
therefore there is a possibility for either customs-related delays
or tariffs. The risk of delays has been mitigated by the advanced
purchase of these materials where they are required for critical
activities. This stockpiling will enable the Group to absorb delays
that may occur. Given that European Union sourced supplies are not
significant, the impact of any increase in tariffs is not expected
to be material.
Should Brexit create a reduction in the value of Sterling
against the US Dollar, this will in fact benefit the Group as
future revenues will be in US Dollars and a significant portion of
costs will be in Sterling. Management will also consider putting in
place FX hedging to manage the downside exposure to fluctuations in
the FX rates.
Overall, whilst the Group acknowledges that Brexit does present
some risks to the business, these risks are manageable and the
resulting impact unlikely to materially impact the Group.
Going concern
The directors have considered the going concern basis of the
Group. Based on their assessment (see details in note 2 of the
financial information), the directors have a reasonable expectation
that the Group will be able to continue and meet its liabilities as
they fall due for the foreseeable future, being twelve months from
the date of approval of the financial information.
Alistair Stobie
Chief Financial Officer
Group Statement of Comprehensive Income
Year ended Year ended
Notes 31 Dec 2018 31 Dec 2017
$'000 $'000
---------------------------------------------- ----- ----------- -----------
Write-off and impairment of intangible
exploration and evaluation assets 5 - (10,412)
Other operating expenses (12,660) (14,586)
---------------------------------------------- ----- ----------- -----------
Operating loss (12,660) (24,998)
Interest income 3,152 880
Foreign exchange (losses)/gains (5,329) 8,020
Finance costs (1,869) (1,322)
Fair value (loss)/gain on derivative
financial instruments (42,374) 10,416
Loss on liquidation of subsidiary (1,831) -
---------------------------------------------- ----- ----------- -----------
Loss before tax (60,911) (7,004)
Tax - -
---------------------------------------------- ----- ----------- -----------
Loss for the year (60,911) (7,004)
Cumulative foreign exchange differences
recycled to Income Statement on liquidation
of subsidiary 1,831 -
Total comprehensive loss for the year (59,080) (7,004)
---------------------------------------------- ----- ----------- -----------
Cents Cents
Loss per share (basic and diluted) 3 (3.11) (0.46)
---------------------------------------------- ----- ----------- -----------
All results arise from continuing operations.
Group Balance Sheet
Notes 31 Dec 2018 31 Dec 2017
$'000 $'000
Non-current assets
Property, plant and equipment 4 728,171 445,291
Intangible exploration and evaluation
assets 5 131,526 126,365
Other non-current assets 6 24,298 16,089
Other receivables 191 202
-------------------------------------- ----- ----------- -----------
884,186 587,947
-------------------------------------- ----- ----------- -----------
Current assets
Inventory 4,571 1,434
Trade and other receivables 2,565 4,737
Liquid investments 6 - 201,973
Cash and cash equivalents 6 98,864 141,956
-------------------------------------- ----- ----------- -----------
106,000 350,100
-------------------------------------- ----- ----------- -----------
Total assets 990,186 938,047
-------------------------------------- ----- ----------- -----------
Current liabilities
Trade and other payables (55,064) (28,833)
Derivative financial instruments - (11)
-------------------------------------- ----- ----------- -----------
(55,064) (28,844)
-------------------------------------- ----- ----------- -----------
Non-current liabilities
Convertible loan liability 7 (198,364) (191,102)
Derivative financial instruments 7 (71,007) (28,622)
Decommissioning provisions (37,657) (7,023)
-------------------------------------- ----- ----------- -----------
(307,028) (226,747)
-------------------------------------- ----- ----------- -----------
Total liabilities (362,092) (255,591)
-------------------------------------- ----- ----------- -----------
Net assets 628,094 682,456
-------------------------------------- ----- ----------- -----------
Equity
Share capital 2,843 2,843
Share premium 813,681 813,496
Share option reserve 24,067 19,477
Own shares reserve (380) (323)
Foreign exchange reserve (90,828) (92,659)
Accumulated deficit (121,289) (60,378)
-------------------------------------- ----- ----------- -----------
Total equity 628,094 682,456
-------------------------------------- ----- ----------- -----------
Group Statement of Changes in Equity
Share Share Share Own Foreign Accumulated Total
capital premium option shares exchange deficit
reserve reserve reserve
$'000 $'000 $'000 $'000 $'000 $'000 $'000
--------------------- -------- -------- -------- -------- --------- ----------- --------
At 1 January
2017 1,860 508,510 15,648 (366) (92,659) (53,374) 379,619
Loss for the
period - - - - - (7,004) (7,004)
Shares allotted 983 319,873 - - - - 320,856
Transaction costs - (14,887) - - - - (14,887)
Share-based payments - - 3,829 - - - 3,829
Net release of
own shares held
in SIP Trust - - - 43 - - 43
At 31 December
2017 2,843 813,496 19,477 (323) (92,659) (60,378) 682,456
--------------------- -------- -------- -------- -------- --------- ----------- --------
Loss for the
period - - - - - (60,911) (60,911)
Other comprehensive
income - - - - 1,831 - 1,831
--------------------- -------- -------- -------- -------- --------- ----------- --------
Total comprehensive
loss for the
period - - - - 1,831 (60,911) (59,080)
Shares allotted - 185 - - - - 185
Share-based payments - - 4,590 - - - 4,590
Net purchase
of own shares
held in SIP Trust - - - (57) - - (57)
At 31 December
2018 2,843 813,681 24,067 (380) (90,828) (121,289) 628,094
--------------------- -------- -------- -------- -------- --------- ----------- --------
Group Cash Flow Statement
Year ended Year ended
Notes 31 Dec 2018 31 Dec 2017
$'000 $'000
Net cash outflow from operating activities 8 (4,445) (8,088)
--------------------------------------------- ----- ----------- -----------
Investing activities
Interest received 3,152 885
Decrease/(increase) in liquid investments 180,642 (201,973)
Expenditure on property, plant and equipment
- oil and gas properties (205,319) (85,004)
Expenditure on property, plant and equipment
- other fixed assets (343) (58)
Expenditure on intangible exploration
and evaluation assets (4,217) (180,612)
Expenditure on inventory (3,137) (991)
--------------------------------------------- ----- ----------- -----------
Net cash used in investing activities (29,222) (467,753)
--------------------------------------------- ----- ----------- -----------
Financing activities
Convertible bond interest paid (17,250) (4,313)
Bank charges (17) (15)
Net proceeds from borrowings - 223,095
Additional borrowing transaction costs - (303)
Net proceeds from issue of share capital
and warrants 49 313,895
Additional equity issue transaction
costs - (7,976)
Net cash (used in)/from financing activities (17,218) 524,383
--------------------------------------------- ----- ----------- -----------
Net (decrease)/increase in cash and
cash equivalents (50,885) 48,542
--------------------------------------------- ----- ----------- -----------
Cash and cash equivalents at the beginning
of the period 158,045 101,482
(Decrease)/increase in cash and cash
equivalents (50,885) 48,542
Effects of foreign exchange rate changes (5,329) 8,021
--------------------------------------------- ----- ----------- -----------
Cash and cash equivalents at the end
of the period 6 101,831 158,045
--------------------------------------------- ----- ----------- -----------
Notes to the Consolidated Financial Information
1. General information
The financial information set out above does not constitute the
Company's statutory accounts for the years ended 31 December 2018
or 2017, but is derived from those accounts. A copy of the
statutory accounts for 2017 has been delivered to the Registrar of
Companies and those for 2018 will be delivered following the
Company's annual general meeting. The auditors have reported on
those accounts; their reports were unqualified, did not draw
attention to any matters by way of emphasis without qualifying
their report and did not contain statements under section 498(2) or
(3) of the Companies Act 2006. Whilst the financial information
included in this announcement has been computed in accordance with
International Financial Reporting Standards (IFRS), this
announcement does not itself contain sufficient information to
comply with IFRS.
2. Significant accounting policies
Basis of preparation
The financial information has been prepared under the historical
cost convention, (except for derivative financial instruments which
have been measured at fair value) in accordance with International
Financial Reporting Standards as adopted by the European Union
(IFRS), and in accordance with the requirements of the AIM
Rules.
Amounts presented in US Dollars and rounded to the nearest
thousand unless otherwise stated.
Going concern
The Group has no source of operating revenue prior to first oil
from the EPS (currently anticipated to occur in H1 2019) and to
date has obtained working capital primarily through equity and debt
financing.
The Group ended the year with $123.2 million of cash and cash
equivalents and liquid investments, of which $83.0m was
unrestricted. The Group also has convertible bond debt which had a
carrying value of $198.4m at the year end and has a coupon of 7.5%
payable quarterly in arrears. The cash balances are forecast to
allow the Group to meet its outstanding trade and other payables of
$55.1 million that existed at 31 December 2018, the remainder of
the Lancaster EPS pre-operation costs and coupon payments on the
convertible bond debt that falls due within one year.
The directors have performed a robust assessment, including a
review of the budget for the year ending December 2019 and
longer-term strategic forecasts and plans, including consideration
of the principal risks faced by the Group. In particular, the
directors considered a number of scenarios which included the
impact of a delay in first oil from the EPS and, following first
oil, downside sensitivities in relation to production rates,
operational uptime, oil price, operational costs and foreign
exchange rates. An aggregated downside scenario combining the
impact of a delay to first oil together with reductions in
production rates and oil price was also considered, taking into
consideration mitigating actions within management's control. The
directors also noted that the majority of 2019 capital commitments
were carried by Spirit. The directors identified that the Group's
ability to meet its liabilities as they fall due for the next 12
months is dependent on, in particular, first oil on the Lancaster
EPS being reached in the first half of 2019, or shortly thereafter.
The directors continue to believe that whilst uncertainties exist
in this regard that are outside of the Group's control, a number of
which are at least partly dependent on weather conditions, a
significant delay is unlikely and first oil on the Lancaster EPS is
expected to be achieved in the first half of 2019.
Following this review, the directors are satisfied that, taking
into consideration reasonably foreseeable downside sensitivities,
the Company and the Group have adequate resources to continue to
operate and meet their liabilities as they fall due for the
foreseeable future, a period considered to be at least 12 months
from the date of approving this financial information. For this
reason, they continue to adopt the Going Concern Basis for
preparing this financial information.
New and amended accounting standards
In the current year, the following accounting standards became
effective and have been adopted but have not materially affected
either the Group's accounting policies or the amounts reported in
this financial information in either the current or prior year:
-- IFRS 9 'Financial Instruments'; and
-- IFRS 15 'Revenue from Contracts with Customers'.
There have been no other material changes to the Group's
accounting policies in the current year.
3. Earnings per share and share capital
Earnings per share:
The basic and diluted loss per share has been calculated using
the loss for the year ended 31 December 2018 of $60,911,000 (2017:
$7,004,000). The loss per share is calculated using a weighted
average number of Ordinary Shares in issue, excluding own shares
held.
Year ended Year ended
31 Dec 2018 31 Dec 2017
Loss after tax ($'000) (60,911) (7,004)
Basic and diluted weighted average number
of shares in issue 1,958,468,753 1,538,803,716
Basic and diluted loss per share (cents) (3.11) (0.46)
The effect of the warrants and options outstanding in 2018 and
2017 was antidilutive as the Group incurred a loss. The impact of
the conversion feature included within the Convertible Bond (note
7) was also antidilutive in both years.
Shares allotted, called up and fully paid:
Year ended Year ended
31 Dec 31 Dec
2018 2017
Ordinary $'000 Ordinary $'000
Shares Shares
----------------------------- ------------- ---------- ------------- ----------
At 1 January 1,959,210,336 2,843 1,202,860,397 1,860
Shares issued under warrants
(at GBP0.52 per share) - - 25,000,000 25
Shares issued under placing
(at GBP0.32 per share) - - 731,222,213 958
Shares issued to SIP 341,301 - 127,726 -
At 31 December 1,959,551,637 2,843 1,959,210,336 2,843
------------------------------ ------------- ---------- ------------- ----------
Total transaction costs relating to the issue of shares in 2017
was $14,887,000, of which $6,911,000 was settled directly from the
gross proceeds of $320,806,000.
As part of its 2016 fundraising programme, the Group issued
warrants to Crystal Amber Fund Limited to subscribe for up to
23,333,333 Ordinary Shares at a price of GBP0.20 per share. These
warrants expire in May 2019. If the warrants are exercised, Kerogen
Investments No. 18 Limited is entitled to subscribe for up to such
number of Ordinary Shares, also at a price of GBP0.20 per share, as
will result in it holding the same percentage share capital of the
Company as it held prior to those warrants being exercised.
4. Property, plant and equipment
Oil and gas Other fixed Total
properties assets
$'000 $'000 $'000
Cost
At 1 January 2017 - 995 995
Additions 109,381 58 109,439
Reclassification from intangible
assets 335,856 - 335,856
------------------------------------- ----------- ----------- -------
At 31 December 2017 445,237 1,053 446,290
Additions 252,673 343 253,016
Changes to decommissioning estimates 29,906 -- 29,906
At 31 December 2018 727,816 1,396 729,212
------------------------------------- ----------- ----------- -------
Depreciation -
At 1 January 2017 - (977) (977)
Charge for the year - (22) (22)
------------------------------------- ----------- ----------- -------
At 31 December 2017 - (999) (999)
------------------------------------- ----------- ----------- -------
Charge for the year - (42) (42)
------------------------------------- ----------- ----------- -------
At 31 December 2018 - (1,041) (1,041)
------------------------------------- ----------- ----------- -------
Carrying amount at 31 December
2017 445,237 54 445,291
------------------------------------- ----------- ----------- -------
Carrying amount at 31 December
2018 727,816 355 728,171
------------------------------------- ----------- ----------- -------
Oil and gas properties relate solely to the Lancaster EPS. Other
fixed assets comprise leasehold improvements, fixtures, office
equipment and computer hardware.
On 24 September 2017 approval was granted for the EPS field
development. As a result, $335,856,000 of intangible exploration
and evaluation assets were reclassified to property, plant and
equipment. Included within that transfer from intangible assets was
$4,409,000 of borrowing costs that were previously capitalised
within intangible exploration and evaluation assets.
Depreciation of the oil and gas properties will commence once
production begins. Included within additions to oil and gas
properties is $23,253,000 (2017: $6,039,000) of capitalised
borrowing costs.
5. Intangible exploration and evaluation assets
Year ended Year ended
31 Dec 2018 31 Dec 2017
$'000 $'000
At 1 January 126,365 302,539
Additions 4,611 169,113
Changes to decommissioning estimates 550 981
Impairment of intangible exploration and evaluation
assets - (1,971)
Write-off of intangible exploration and evaluation
assets - (8,441)
Reclassification to property, plant and equipment
- oil and gas properties - (335,856)
---------------------------------------------------- ----------- -----------
At 31 December 131,526 126,365
---------------------------------------------------- ----------- -----------
Intangible exploration and evaluation assets comprise the cost
of licence interests and exploration and evaluation expenditure
within the Group's licensed acreage in the West of Shetland area.
The directors have fully considered and reviewed the potential
value of licence interests, including carried forward exploration
and evaluation expenditure. The directors have considered the
Group's tenure to its licence interests, its plan for further
exploration and evaluation activities in relation to these and the
likely opportunities for realising the value of the Group's
licences, either by farm-out or by development of the assets. The
directors have concluded that no impairment triggers have arisen in
relation to any of its exploration and evaluation expenditure in
the current year. In doing so they have concluded that, although
the licence that holds the Whirlwind and Lincoln assets (with a
combined carrying value at 31 December 2018 of $97 million) is due
to expire in December 2019, they expect this licence to be
renewed.
In the prior year, the Group relinquished its licences relating
to the Typhoon and Tempest fields and as such the intangible
exploration and evaluation assets relating to those licences were
fully written off. An impairment charge for all costs incurred to
date relating to the Strathmore field was also recognised as the
Group assessed it had no further plans for that field in the
foreseeable future.
On 24 September 2017 approval was granted for the Lancaster EPS
field development. As a result, $335,856,000 of intangible assets
were reclassified to oil and gas properties within property, plant
and equipment.
No borrowing costs were capitalised into intangible assets in
the year (2017: $4,409,000).
6. Cash and cash equivalents and liquid investments
31 Dec 2018 31 Dec 2017
$'000 $'000
Restricted Unrestricted Total Restricted Unrestricted Total
$'000 $'000 $'000 $'000 $'000 $'000
--------------------------- ---------- ------------ ------- ---------- ------------ -------
Current cash and cash
equivalents 15,864 83,000 98,864 17,327 124,629 141,956
Non-current cash and
equivalents 2,967 - 2,967 16,089 - 16,089
--------------------------- ---------- ------------ ------- ---------- ------------ -------
Cash and cash equivalents
(per Cash Flow Statement) 18,831 83,000 101,831 33,416 124,629 158,045
Current liquid investments - - - - 201,973 201,973
Non-current liquid
investments 21,331 - 21,331 - - -
--------------------------- ---------- ------------ ------- ---------- ------------ -------
Total cash and cash
equivalents and liquid
investments 40,162 83,000 123,162 33,416 326,602 360,018
--------------------------- ---------- ------------ ------- ---------- ------------ -------
Current restricted cash and cash equivalents represent amounts
held in escrow relating to coupon payments under the terms of the
Convertible Bond and for future expected costs related to the
current Lancaster EPS project. The amounts can only be withdrawn on
the consent of both the relevant third party and the Company.
At 31 December 2018 $2,967,000 (2017: $3,151,000) of the
non-current restricted cash and cash equivalents is held in escrow
for future expected costs associated with the Group's
decommissioning obligations. In 2017 $12,938,000 of the non-current
restricted funds were held in escrow relating to coupon payments
(due in more than one year) under the terms of the Convertible
Bond. Non-current restricted funds are included in the Balance
Sheet in other non-current assets.
The non-current restricted liquid investment balance at 31
December 2018 represents cash held in trust under a decommissioning
security agreement for the Lancaster EPS. Non-current liquid
investments are included in the Balance Sheet in other non-current
assets.
7. Borrowings
In July 2017 the Group raised $230 million (gross) from the
successful placement of the Convertible Bond. The Convertible Bond
was issued at par and carries a coupon of 7.5% payable quarterly in
arrears. The Convertible Bond is convertible into fully paid
Ordinary Shares with the initial conversion price set at $0.52,
representing a 25% premium above the placing price of the
concurrent equity placement, being GBP0.32 (converted into US
Dollars at USD/GBP 1.30). The number of potential Ordinary Shares
that could be issued if all the Convertible Bond were converted is
442,307,692 (assuming conversion at the initial conversion price of
$0.52). Unless previously converted, redeemed or purchased and
cancelled, the Convertible Bond will be redeemed at par on 24 July
2022. The Convertible Bond contains a covenant relating to a
restriction on incurrence of indebtedness. This restriction shall
not apply in respect of:
-- any indebtedness in respect of the Convertible Bond (Bond Debt);
-- any other indebtedness where the aggregate principal amount
of such other indebtedness, when combined with the aggregate
principal amount of all other indebtedness of the Group from time
to time (excluding the Bond Debt), would not cause the total
indebtedness of the Group on a consolidated basis to exceed US$45
million (or the equivalent thereof in other currencies at then
current rates of exchange); and
-- any permitted indebtedness, being:
o any liability in respect of any lease or hire purchase
contract which would, in accordance with IFRS, be treated as a
finance or capital lease, with respect to the bareboat charter of
the Aoka Mizu FPSO;
o amounts borrowed, or any guarantee or indemnity given with
respect to any security, where required by The Oil and Gas
Authority or any other applicable regulator, in relation to
suspended wells, decommissioning or other related regulatory
obligations of the Group; and
o any amount raised under any transaction, having the commercial
effect of borrowing, in respect of the deferral of payment of
invoices due to Technip UK Limited (or any of its affiliated
companies) in connection with the agreement for the provision of
subsea umbilical risers and flowlines and subsea production systems
for the Company's operations in the Lancaster Field.
The conversion feature of the Convertible Bond is classified as
an embedded derivative as the Convertible Bond can be settled by
the Group in cash and hence does not meet the 'fixed for fixed'
criteria outlined in IAS 32 for recognition as an equity
instrument. It has therefore been measured at fair value through
profit and loss. The amount recognised at inception in respect of
the host debt contract was determined by deducting the fair value
of the conversion option at inception (the embedded derivative)
from the fair value of the consideration received for the
Convertible Bond. The debt component is then recognised at
amortised cost, using the effective interest method, until
extinguished upon conversion or at maturity. The effective interest
rate applicable to the debt component is 13.5%.
The amounts recognised relating to the Convertible Bond, being
all liabilities arising from financing activities, are as
follows:
Debt component Derivative Total
component
$'000 $'000 $'000
At 1 January 2017 - - -
Gross proceeds from issue of
Convertible Bond 190,951 39,049 230,000
Transaction costs paid (5,984) (1,224) (7,208)
--------------------------------------- -------------- ---------- --------
Net proceeds from issue of Convertible
Bond 184,967 37,825 222,792
Cash interest paid (4,313) - (4,313)
Fair value gains - (10,427) (10,427)
Interest charged 10,448 - 10,448
Transaction costs expensed - 1,224 1,224
At 31 December 2017 191,102 28,622 219,724
Cash interest paid (17,250) - (17,250)
Fair value losses - 42,385 42,385
Interest charged 24,512 - 24,512
At 31 December 2018 198,364 71,007 269,371
--------------------------------------- -------------- ---------- --------
Of the $7,208,000 transaction costs paid, $6,905,000 was settled
directly from the gross proceeds.
8. Reconciliation of operating loss to net cashflow from
operating activities
Year ended Year ended
31 Dec 2018 31 Dec 2017
$'000 $'000
------------------------------------------------ ----------- -----------
Operating loss (12,660) (24,998)
Adjustments for:
Depreciation of property, plant and equipment 42 22
Impairment/write-off of intangible exploration
and evaluation assets - 10,412
Share-based payment charge 4,669 3,922
------------------------------------------------ ----------- -----------
Operating cash outflow before working capital
movements (7,949) (10,642)
Decrease/(increase) in receivables 2,182 (3,370)
Increase in payables 1,322 64
------------------------------------------------ ----------- -----------
Cash used in operating activities (4,445) (13,948)
Research and development tax credit received - 5,860
------------------------------------------------ ----------- -----------
Net cash outflow from operating activities (4,445) (8,088)
------------------------------------------------ ----------- -----------
9. Capital commitments
As at 31 December 2018 the Group had contractual commitments to
purchase property, plant and equipment and intangible assets of
$11.0 million (2017: $199.7 million).
10. Subsequent events
Hook-up of FPSO
On 19 March 2019 the Aoka Mizu FPSO successfully hooked-up to
the turret mooring system buoy on station at the Lancaster field
and was securely moored.
Share incentive plan
On 25 January 2019, Global Shares Trustee Company Limited,
trustee of the HMRC-approved Hurricane Energy plc SIP, awarded
815,582 Ordinary Shares to participants in the SIP at a price of
GBP0.46 per share. The SIP award has been satisfied by the issue of
815,582 new Ordinary Shares issued to the SIP Trustee at a
subscription price of GBP0.001 per share (being the nominal value
of the shares).
Glossary
Category Definition Full form
Units bopd Barrels of oil per day
------------------- ------------------------------------------------
GBP British Pounds Sterling
------------------- ------------------------------------------------
USD United States Dollars
------------------- ------------------------------------------------
Technical 2P reserves Proved plus probable reserves under the
terms Society of Petroleum Engineers' Petroleum
Resources Management System
------------------- ------------------------------------------------
2C contingent Best case contingent resources under the
resources Society of Petroleum Engineers' Petroleum
Resources Management System
------------------- ------------------------------------------------
FPSO Floating production storage and offloading
vessel
------------------- ------------------------------------------------
SURF Subsea, Umbilical, Risers, Flowlines
------------------- ------------------------------------------------
Xmas trees An assembly of valves, spools, and fittings
used at the head of an oil and gas well
------------------- ------------------------------------------------
Definitions AIM The AIM sub-market of the London Stock Exchange
------------------- ------------------------------------------------
Aoka Mizu Aoka Mizu FPSO
------------------- ------------------------------------------------
Bluewater Bluewater Energy Services and affiliates
------------------- ------------------------------------------------
Board Board of Directors of the Company
------------------- ------------------------------------------------
Carry Payment of a partner's working interest
share of costs
------------------- ------------------------------------------------
Convertible $230million of 7.5% convertible bonds issued
Bond by the Company in July 2017
------------------- ------------------------------------------------
EPS Early Production System
------------------- ------------------------------------------------
FDP Field Development Plan
------------------- ------------------------------------------------
GLA Greater Lancaster Area
------------------- ------------------------------------------------
Group Hurricane Energy plc, together with its
subsidiaries
------------------- ------------------------------------------------
GWA Greater Warwick Area
------------------- ------------------------------------------------
HSSEQ Health, Safety, Security, Environmental
and Quality
------------------- ------------------------------------------------
Hurricane Hurricane Energy plc, together with its
subsidiaries
------------------- ------------------------------------------------
IAS International Accounting Standard
------------------- ------------------------------------------------
IFRS International Financial Reporting Standards
------------------- ------------------------------------------------
LGC Listing and Governance Committee
------------------- ------------------------------------------------
Ordinary Ordinary shares in the Company of GBP0.001
Shares each
------------------- ------------------------------------------------
Premium Listed on the premium segment of a recognised
Listed stock exchange
------------------- ------------------------------------------------
Regulator Oil and Gas Authority, Department for Business
Energy and Industrial Strategy, The Health
and Safety Executive
------------------- ------------------------------------------------
SIP Share Incentive Plan
------------------- ------------------------------------------------
Supergiant Field with 1 billion or more barrels of
ultimately recoverable oil (ref: Encyclopaedia
Britannica)
------------------- ------------------------------------------------
Technip TechnipFMC plc
------------------- ------------------------------------------------
Tier 1 contractors Hurricane's major direct contractors
------------------- ------------------------------------------------
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR SEFEFWFUSEFD
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