Hurricane Energy Plc
| Jurisdiction | England & Wales |
| Judge | Mr Justice Zacaroli |
| Judgment Date | 28 June 2021 |
| Neutral Citation | [2021] EWHC 1759 (Ch) |
| Docket Number | Case No: CR-2021-000852 |
| Court | Chancery Division |
[2021] EWHC 1759 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
INSOLVENCY AND COMPANIES LIST (ChD)
IN THE MATTER OF HURRICANE ENERGY PLC
AND IN THE MATTER OF THE COMPANIES ACT 2006
7 Rolls Building, Fetter Lane
London EC4A 1NL
Mr Justice Zacaroli
Case No: CR-2021-000852
Tom Smith QC, Matthew Abraham and Ryan Perkins (instructed by Dentons UK and Middle East LLP) for the Company
Stephen Robins (instructed by Akin Gump LLP) for the Ad Hoc Committee of Bondholders
Andrew Thornton QC and Ben Shaw (instructed by Rosenblatt Limited) for Crystal Amber Fund Limited
Mr Paul Steward, Mr Peter Baker and Mr Derek French, shareholders in the Company, appeared in person
Hearing dates: 21, 22 and 23 June 2021
Further written submissions and evidence received: 24 and 25 June 2021
APPROVED JUDGMENT
This is an application to sanction a restructuring plan (the “Plan”) in respect of Hurricane Energy PLC (the “Company”) under section 901F of the Companies Act 2006 (“CA 2006”).
The hearing took place over Monday to Wednesday, 21–23 June 2021 at the end of which the parties indicated that – for reasons which I explain below – a decision was required at the latest by first thing on Monday 28 June 2021. Given the real possibility of an urgent application for permission to appeal, the parties required reasons to accompany the decision. While I have considered all of the submissions made by the parties and those shareholders who wrote to the Court or appeared (remotely) at the hearing, given the pressure of time this judgment does not expressly deal with each and every point advanced by them. It addresses what I consider to be the central issues raised by the application.
The Company, which is listed on the Alternative Investment Market (“AIM”), was incorporated in September 2004 as part of a group of companies whose business is extracting oil stored within fractures in solid rock beneath the sea, known as fractured basement reservoirs. It is the parent company of Hurricane Holdings Limited, which in turn is the intermediate holding company for two subsidiaries: Hurricane GLA Limited (“GLA”) and Hurricane GWA Limited (“GWA”). These hold the following licences from the Oil and Gas Authority (“OGA”), of which the Company is the operator, covering an area to the west of Shetland:
P1368 comprising two areas, Lancaster and Lincoln. Lancaster is owned by GLA, and Lincoln is owned by a joint venture between GWA and Spirit Energy Resources Limited (“Spirit Energy”). The term of this licence expires in December 2024.
P2294, compromising the Warwick area, owned by GWA. The term of this licence expires in August 2023.
P2308, comprising the Halifax area, owned by GLA. The term of this licence expires in November 2024.
The Lancaster area
Initial investigations led to the discovery of oil in the Lancaster area. In 2017, the Company announced the results of its initial work, which indicated there was producible oil in the Lancaster area, with a deep oil water contact. An independent report, known as a Competent Persons Report (“CPR”), was produced by RPS Energy in May 2017 which indicated that there were material reserves in the Lancaster area.
On the back of this information, the Company raised US$300 million via an equity placing and US$230 million via the issue of convertible bonds, in order to embark on extracting the oil.
Oil production commenced from the Lancaster area in May 2019. Two wells were operational: P6 and P7Z, the latter being drilled to a greater depth. From the outset, small amounts of water were produced, known as “water cut”. The water cut steadily increased throughout 2019 but the Company considered this (as reported to the market in a regulatory news service announcement – “RNS” – in December 2019) to be the result of “perched water” (pockets of water trapped by buoyancy in a dead-end fracture or pore space) and thus of less concern.
Water cut increased during 2020, mostly from the P7Z well (reaching 46% by April 2020). In early May 2020, the decision was made to suspend production from P7Z because the flow had become unstable and it was believed that it was interfering with production from the P6 well. The P6 well remains the Company's only well with any current or planned oil production.
In June 2020 the Company announced a technical review of Lancaster. The preliminary results were presented in an RNS dated 11 September 2020. This concluded that – contrary to the perched water explanation previously given – the more likely explanation for the water cut was a shallower oil water contact. This led to a significant reduction in the estimate of proven probable oil reserves from 37 million barrels to 16 million barrels, and a reduction in the estimate of remaining proven probable reserves (that is, what remains in the well) to 9.4 million barrels. The Company indicated an intention to engage with all key stakeholders.
A further CPR produced in April 2021 by ERC Equipoise Ltd (“ERCE”) broadly confirmed the Company's analysis. The difference in outlook, as between the 2017 CPR and the CPR prepared by ERCE in April 2021, is principally explained by the fact that the latter is prepared with the benefit of 18 months' production data.
It is currently estimated that production from the P6 well will reach the point where it is no longer economic to extract the remaining oil in the first quarter of 2024 (based on current predictions of production profiles and the future price of oil).
The Lincoln, Halifax and Warwick areas
Wells were drilled by the Company in each of the other areas, but there is no current or planned production from any of them. Three wells were drilled in the Greater Warwick area (which consists of Lincoln and Warwick). Two were plugged and abandoned in 2019. A third, relating to the Lincoln area (which successfully tested at commercial flow rates, confirmed to contain light, 43° API oil) is currently required (by the OGA) to be plugged and abandoned by 31 October 2021.
The wells drilled in the Halifax area have also been plugged and abandoned.
The FPSO bareboat charter
The extraction and transportation of oil from the Lancaster area is dependent upon the use of a floating production storage and offloading vessel (“FPSO”). GLA leases a FPSO from Bluewater (Aoka Mizu) B.V. (“Bluewater”) pursuant to a bareboat charter (the “Charter”). The initial term of the Charter expires in June 2022. GLA had an option to extend for a further three years, exercisable no later than 4 June 2021, but that has not been exercised. The Company is currently in negotiation with Bluewater for a shorter extension.
The Company's financial position
The Company's creditors consist primarily of the bondholders under the bonds issued in 2017 (the “Bondholders” and the “Bonds”). The aggregate amount due under the Bonds is US$230 million. The maturity date is 24 July 2022. The Bonds are unsecured and do not have the benefit of any guarantees from other group companies.
The Company is currently meeting its obligations to pay interest under the Bonds and is predicted to be able to continue to do so until maturity. The Company predicts, however, that it will be unable to repay the Bonds in full at the maturity date.
The Company commissioned PwC to report on the anticipated outcome in the event that the Plan is not sanctioned. PwC's updated report is dated 14 June 2021. The following is a summary of the principal conclusions in the report:
(1) Aside from the licences, the principal asset of the Company is cash and cash equivalents. This currently stands at US$168.5 million. Of this US$61.8 million is restricted. This consists of amounts held in escrow (and additional amounts) to meet decommissioning liabilities. It also includes a sum of US$20.3 million to meet a termination fee under the Charter with Bluewater. Since it is not intended to terminate the Charter early, however, this sum is likely to be released to the Company.
(2) The report considers two possible scenarios if the Plan is not sanctioned. The first is an immediate uncontrolled liquidation. The second is a controlled wind-down in which the Company continues to extract oil from the P6 well until shortly before termination of the Charter, followed by a decommissioning process, paying all unsecured debts (save for the Bonds) in full, leading to a liquidation in about April 2023. In circumstances where an uncontrolled liquidation is in the interests of none of the stakeholders of the Company and there is no external pressure which would prevent a controlled wind-down, I exclude the uncontrolled liquidation as a realistic alternative scenario.
(3) The report provides an estimate of the cash position between now and March 2023 in a controlled wind-down. It is anticipated that net cash generated from trading operations up until the end of May 2022 will be US$115.5 million. From this amount is then deducted capital expenditure, wind-down costs, fees and Bond interest associated with the decommissioning process, leading to an unrestricted cash balance of US$176.6 million in March 2023.
(4) The two key variables for the anticipated outcome in the controlled wind-down are production rates from the P6 well and the future price of oil.
(5) The production rates in the report are based upon the projections in the April 2021 CPR from ERCE. ERCE provided both a high and low case for the forecasted production. The high case represents a figure which...
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