Activist investment fund, Crystal Amber (CRS) has sent the board of Hurricane a requisition notice requiring Hurricane to convene a general meeting at which resolutions will be proposed to remove six directors and appoint two new directors. The directors that CRS proposes removing are executives Antony Maris and Richard Chaffe, Non-Executive Chairman, Philip Wolfe and, conditional on the appointment of Tony Buckingham and Franco Castelli, Crystal Amber nominees, David Craik, John Wright and Juan Morera, in order for Hurricane to maintain its independence.
CRS says that the removal of Craik, Wright and Morera is required to ensure that the board of Hurricane maintains its independence. It says that their proposed removal is in no way a reflection on the performance of these Crystal Amber nominees and it thanks them for their contributions.
Background to requisition request
CRS has been a shareholder in Hurricane since March 2013. In May 2021, the Fund requisitioned a general meeting to remove five directors and appoint two directors. In June 2021, immediately prior to the general meeting, the five directors resigned and Crystal Amber’s nominees, David Craik and John Wright were appointed.
In February 2022, CRS requested and was then offered a position on the Hurricane board “to assist Hurricane to fully realise its potential”. In March 2022, Juan Morera was appointed to the board. Subsequently, the arrival of two additional independent non-executive directors means that the Hurricane board now meets the necessary governance standards.
On 2 November 2022, Hurricane announced that it had received an unsolicited offer for the company and that following a period of engagement with the bidder, Hurricane had received an offer for the entire issued share capital of the Company at an indicative offer of 7.7p per Hurricane share in cash. In its announcement regarding the indicative offer, the Hurricane Board stated that it had concluded that the Indicative Offer should not be recommended to Hurricane shareholders. The Hurricane Board also stated that it had decided to launch a formal sale process for Hurricane to establish whether there is a bidder prepared to offer a value the Hurricane Board considers attractive, relative to the standalone prospects of Hurricane as a publicly listed company and one that should be recommended to all Hurricane shareholders. In the Hurricane Announcement, Hurricane stated that whilst the outcome of the formal sale process is uncertain, it is in a very strong financial and operational position.
In the same Hurricane Announcement, the Hurricane Board stated that in the event that the formal sale process does not result in a transaction, it intends to commence a significant capital return programme with up to US$70m (equivalent to 3.1p per Hurricane share at the then current exchange rates) to be returned to shareholders in Q1 2023, upon completion of a capital reduction by Hurricane which would require the approval of Hurricane shareholders and confirmation by the High Court of Justice in England and Wales. Furthermore, Hurricane announced that in the absence of alternatives that would generate better returns for Hurricane shareholders, further distributions totalling up to US$110m could be made during 2023 and 2024 in aggregate, with a final distribution of up to US$30m in 2025, following the cessation of production from the Lancaster operations. Hurricane further advised that the amount of cash available to distribute to Hurricane shareholders following cessation of operations and decommissioning is dependent on many factors, including oil price, ultimate oil recovery from Lancaster, whether the decision to cease operations is planned or forced and the cost and timing of decommissioning.
In the Hurricane Announcement, the Hurricane Board reserved the right to alter any aspect of the process as outlined above or to terminate the process at any time and in such cases will make an announcement as appropriate. The Hurricane Board also reserved the right to reject any approach or terminate discussions with any interested party at any time. On 18 November 2022, Hurricane announced that it had received multiple expressions of interest from several counterparties.
“Orphan asset with no further growth potential”
Hurricane has forecast net cash at the end of 2022 to be approximately US$118m , equivalent to 4.9p a share. CRS says that it believes that, as long as well performance is able to continue as forecast, production could continue into Q2 2025, based upon current oil prices, additional value in excess of the indicative offer of 7.7p per share could be returned to shareholders. However, it also says that given Hurricane was unable to achieve regulatory approval for its “P8″well in September 2022 (something crs describes as a management failure after trumpeting its potential and fast payback to investors), under its present management, Hurricane has become a cash rich and cash generative “orphan asset,” with no further growth potential.
On this basis, CRS says that it has concluded that in the continuing absence of a firm offer that reflects the value of Hurricane, it would be better served under new management that has a track record of delivering for shareholders. Crystal Amber has been in discussions with Tony Buckingham, the founder and Chief Executive of Albion Energy Limited and Franco Castelli, Managing Director of Albion Energy Limited. Tony Buckingham is the founder of Heritage Oil, which in 2014 was acquired for $1.6 billion. (Albion Energy Limited discovered more than two billion barrels gross of oil.) Tony Buckingham and Franco Castelli have agreed to act as directors.
Potential remains within Hurricane’s acreage – options abound
CRS says that it has also been informed by Albion Energy Limited that it is of the view that there remains substantial potential within Hurricane’s acreage and that under the right leadership, Hurricane could attract significant new investment to fund growth opportunities. In the event that Tony Buckingham and Franco Castelli are appointed directors of Hurricane, CRS understands that the remuneration packages for Tony Buckingham and Franco Castelli will be set by the ongoing Remuneration Committee of Hurricane but CRS says that it would be supportive of the grant of options to Albion Energy Limited over 100m Hurricane shares, equivalent to approximately 5% of the issued share capital of Hurricane at an exercise price of £0.001, being the par value of a Hurricane ordinary share, with such options vesting quarterly over the following 12 months.
In addition, CRS says that it would be supportive of Hurricane granting options over a further 200m shares, equivalent to approximately 10% of the current issued share capital of Hurricane to Albion Energy Limited, at an exercise price of 10p a share. A vesting condition of such options would be that, by 31 July 2023, Hurricane raises a minimum of £250m of capital to spend on a drilling programme within Hurricane’s acreage. These options should vest quarterly in arrears over two years.
In the event that Crystal Amber accepts a cash offer from a third party that is declared wholly unconditional on or before 30 April 2023, Crystal Amber would give Albion Energy Limited the economic value of effectively having an option over 20m Hurricane shares held by Crystal Amber at an exercise price of 7.7p a share.
Hurricane has announced its intention to return U$70m in Q1 2023. Crystal Amber is supportive of this capital return and would expect any new board of Hurricane to honour this commitment, in the absence of an offer that is declared wholly unconditional.