There is a well-established playbook for junior oil explorers, but Hyperdynamics Corporation (OTCMKTS:HYDN) is calling its own plays from the line of scrimmage.
Virtually all oil explorers look to play the percentages to give themselves multiple shots at success but end up holding small stakes in any winners.
Hyperdynamics, which owns all of the rights to a highly prospective block off the coast of Guinea, West Africa, “really likes the geology on the block”, in the words of president and chief executive officer Ray Leonard, and has a 100% share in its ultra-deep water two-well drilling programme.
You read that right.
Not a stock for widows and orphans
It is keeping its entire focus on Guinea and staying with as high and interest as it can financially handle, and if it achieves success the upside could be enormous.
If it does not achieve success, well, don’t say you were not warned: this is not a stock for your mother’s pension plan, Leonard advises.
Hyperdynamics has a market capitalisation of just US$25mln and the normal form for companies of this size, especially with assets in a deep water location, is to bring in one or more partners to finance a number of exploration wells and diversify the portfolio.
The junior becomes just that: a junior partner. It gets several rolls of the dice, thanks to a multiple well programme, but the fruits of any success have to be shared with its partners.
In contrast, Hyperdynamics offers a true high risk/high reward play and seeing as it has to spud the well in the first half of next year in order to keep the licence, investors will not have to hang around for long to find out how this one plays out; the company expects to commence drilling the first exploration well in April 2017.
Reasons for taking the path less travelled
Speaking to Proactive Investors, the company’s boss, Ray Leonard, explained why the company had adopted this unusual strategy.
First off, the company has held the licence for the block since 2006, at times in partnership with Tullow Oil and Dana Petroleum, and the rights were due to expire this year as, for various reasons, such as the Ebola crisis and the collapse of the oil price, an exploration well was never drilled.
The government of Guinea agreed to extend the licence until September 2017 but, presumably not wanting further delays, was not prepared to wait around for a lengthy farm-out process to complete.
You want it, you drill it, was the message.
Hyperdynamics wanted it, all right, and we’ll see why shortly.
Secondly, Leonard said that the funding options have actually increased by going it alone.
“You want a partner for a deep water prospect in which the partner would have to operate, there are maybe only 20 companies in the world that would be interested,” Leonard asserts.
“The ability to operate it ourselves increases by an order of magnitude the number of potential partners, and gives us the option of retaining 100% ownership if we choose,” Leonard explained.
In addition, the industry downturn means that first class rigs and personnel are available to drill at costs far below a few years ago, and with higher level of competence and reliability than when Hyperdynamics drilled its first well offshore Guinea in 2011.
Finally,, and probably most importantly, Hyperdynamics and its independent consultant, Netherland Sewell, really like the way the numbers stack up.
The block’s Fatala prospect has, according to Netherland Swell, a mean recoverable resource of 647mln barrels of oil.
The potential upside is enormous
A discovery in Senegal that had similar parameters was recently sold at pre-development stage on the basis of US$2 per barrel of oil equivalent (BOE).
According to the company, an initial discovery would reduce risk on surrounding prospects with recoverable resources of about 2bn barrels, which could be tested with follow-up drilling.
At this stage it might be pertinent to remind potential investors of Hyperdynamics market capitalisation: US$22mln.
“If we’re successful, I can see the possibility of someone coming in and buying us for sum far in excess of our current value. Let’s face it, if someone wants to buy, we’ll take the money for the maximum benefit of our shareholders and move on,” the Hyperdynamics boss candidly admitted.
“We’ve doubled down on something we really like,” Leonard said, explaining why the company had gone for the high risk/high reward strategy.
Whether you do likewise depends on your appetite for risk. Remember Leonard’s advice that this is not a stock for widows & orphans, but if you have some money earmarked for a speculative buy, go to your favourite search engine and search for “Tullow Jubilee” to see what a jackpot result off the coast of West Africa looks like.