Proposal to remove five directors and appoint two new directors
Crystal Amber Fund, the activist investment fund, announces that it has sent to the board of Hurricane a requisition notice requiring Hurricane to convene a general meeting at which resolutions will be proposed to remove Steven McTiernan, Dr David Jenkins, John van der Welle, Sandy Shaw and Beverley Smith as directors and to appoint John Wright and David Cruik to the board as non-executive directors. Details relating to John Wright and David Cruik are set out below in Appendix 3.
Since 2013, the Fund has been a shareholder in Hurricane. To enable Hurricane to commence and continue its workstreams, the Fund was, on three separate occasions, asked to provide capital to Hurricane. Each time, the Fund responding favourably, investing a total of more than £25 million. The board of Hurricane had previously presented the company as a strategic asset of national importance. However, it has failed to reconcile its earlier estimates of the value of Hurricane’s West of Shetland portfolio with its latest, downbeat assessment.
The Hurricane board has also demonstrably failed to protect shareholders’ interests. Its actions (more fully set out below) provide ample evidence of its evasive and obstructive engagement with its shareholders. The Fund believes there may well have been a failure by the incumbent Board to act in accordance with section 172 (1) of the Companies Act 2006, which states that a director must act in a way most likely to promote the success of a company.
The Fund, therefore, believes that, at the earliest opportunity, a new Hurricane board should assume responsibility.
On 4 March 2021, the Fund referred in its interim results for the six months ended 31 December 2020, to experiencing a dramatic deterioration over the previous six months in Hurricane’s engagement with the Fund. An extract relating to Hurricane is set out in Appendix 1 along with a chronology of events. Appendix 2 provides an extract relating to Hurricane included in the monthly net asset value announcement published on 22 April 2021. The Fund stated that it believed the Hurricane board had failed to provide evidence that it was acting in the interests of all stakeholders. The Fund concluded that it had lost confidence in the board of Hurricane. The Fund subsequently requested that both the Chairman and the Senior Independent Director resign immediately. They refused to do so.
Consistent with the Hurricane board’s disdain towards its shareholders, on 30 April 2021 Hurricane released details of a proposed financial restructuring whereby the Fund believes that Hurricane will be put into an extended wind down and shareholders’ interests in Hurricane will be wiped out almost completely in favour of the Bondholders.On 13 May 2021, Hurricane released its”Explanatory Statement” relating to its proposed financial restructuring.
The Fund has now had an opportunity to assess Hurricane’s proposals. Its preliminary view is that they are premature, contrary to the best interests of all of Hurricane’s stakeholders and unnecessarily detrimentalto the interests of Hurricane’s shareholders.
The Hurricane bonds are not repayable until July 2022. All interest has been paid and at 31 March 2021, Hurricane had $127 million of net free cash, with cash having increased by $10 million per month since 30 November 2020. The Hurricane board has said in clearest terms that Hurricane will have no difficulties servicing the future interest payments on the bonds. The Fund does not currently understand how the Board can say now, more than 12 months from the repayment date and having made almost no effort to find alternatives, that Hurricane will not be able to repay the bonds.
On 14 January 2021, Hannam & Partners published research paid for by Hurricane. It estimated a “risked net asset value” of 10p a share, valuing the equity at £199 million. This assumed an average price for Brent crude oil of $60 a barrel, compared to a current price of approximately $69 a barrel, an increase of 15 per cent. It also predicted that bondholders would be repaid in full. On 10 May 2021, an operational update was provided which stated that its Lancaster P6 well was producing 11,600 barrels per day. In circumstances where it is now said by the Hurricane board that Hurricane has little or no chance of repaying the bonds, there may well have been a 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 isinsufficient 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 abusiness 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.
