Hurricane Energy Plc Annual Report and Group Financial Statements 2020
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Annual Report and Group Financial Statements 2020 Financial Statements Group Annual and Report Annual Report and Group Financial Statements 2020 Hurricane Energy plc Hurricane was established to discover, appraise and develop hydrocarbons from naturally fractured basement reservoirs Our licences and assets P2308 Halifax 205/23-3A P1368C LANCASTER P1368S LINCOLN WARWICK CREST P2294 N 0 2.5 5 10km STRATEGIC REPORT STRATEGIC Key figures Strategic Report 1 Highlights 2 Chairman’s statement Revenue 4 Chief Executive Officer’s review From 12 cargoes 7 Our response to COVID-19 8 Strategy and business model 10 Stakeholder engagement $180 million 12 Section 172 13 Key performance indicators Operating cash flow generated 14 Principal risks and uncertainties Equivalent to $15.8 per barrel during 2020 24 Going concern and viability statement 27 Operations and subsurface review 30 Chief Financial Officer’s review $80 million 34 Environmental, Social and Governance (ESG) report Statutory loss after tax Corporate Governance $625 million 36 Board of Directors 39 Governance report 49 Audit and Risk Committee Underlying loss before tax† Chair’s report Excluding oil price hedges, asset impairments, write-offs and 55 Nominations Committee Chair’s report fair value gains on the Convertible Bond embedded derivative 58 Environmental, Social and Governance (ESG) Committee Chair’s report 60 Technical Committee Chair’s report $36 million 62 Directors’ remuneration report 82 Directors’ report Production Average daily rate Financial Statements 85 Independent Auditor’s report 13,900 bopd 95 Group statement of comprehensive income 96 Group balance sheet Crude oil sales 97 Group statement of changes in equity Across 12 cargoes 98 Group cash flow statement 99 Notes to the Group financial statements 5.1 MMbbl 129 Company balance sheet 130 Company statement of changes in equity Net free cash† at 31 December 2020 131 Notes to the Company financial statements Excluding restricted cash and liquid investments of $52m 135 Advisers 136 Appendix A: Glossary $111 million 139 Appendix B: Non-IFRS measures Net debt† at 31 December 2020 $119 million Throughout this report, ‘†’ indicates non-IFRS measures, which management believes are useful in providing additional information and context on performance and trends. Definitions and reconciliations to the nearest equivalent IFRS measures are provided in Appendix B. Annual Report and Group Financial Statements 2020 1 STRATEGIC REPORT Chairman’s statement A profoundly challenging year Oil prices re-examined the range of geological and The pandemic had a significant impact on reservoir models for Lancaster and the oil markets, with Brent prices falling to a other Rona Ridge assets. remarkable low of $13/bbl in April 2020 as global lockdowns choked off oil demand. Technical review While demand and prices recovered somewhat A preliminary technical review of the Lancaster during 2020, the global oil supply-demand field was completed in September 2020, balance remains fragile, there are ongoing which concluded that the oil water contact was effects from COVID-19, and there are growing significantly shallower than previously estimated, impacts from energy transition measures. As and that effective reservoir properties within a result, in a market which has always been the fractured basement were worse than prone to price volatility, there is elevated previously thought, consistent with the higher uncertainty over the path of future oil prices. water production and more rapid pressure decline than originally anticipated. The revised Lancaster field under-performance reservoir and geological model, calibrated The Lancaster field Early Production System with observed performance, resulted in the (EPS) was conceived as a long-term production Company significantly downgrading the test with the objective of obtaining critical Reserves and Contingent Resources for the performance data on the fractured basement Lancaster field in September 2020. Steven McTiernan reservoir type, which had never before been Greater Warwick Area Chairman developed in the UK (and only rarely globally). Previous estimates of Reserves and Resources were While the Company’s main focus during 2020 based on standard well evaluation techniques was on Lancaster, the revised interpretation of and short-term tests only, which are more the Lancaster oil water contact also triggered difficult to interpret in fractured basement. a review of the data and assumptions for all Rona Ridge assets. Further progress has been Dear Shareholders, It had always been recognised that a minimum of made on understanding the Greater Warwick It was always expected that 2020 would be 12 months observation of reservoir performance Area (GWA) subsurface following extensive a crucial year for Hurricane, but we did not would be required before firm conclusions analysis of the results of the 2019 drilling anticipate facing multiple shocks from could start to be drawn on the scale of Reserves programme and reinterpretation of existing underperformance at our key Lancaster field and Contingent Resources in Lancaster. seismic data. This work also incorporated the asset, the COVID-19 pandemic, a collapse We had been encouraged by the operational learnings and implications from the results at in oil prices, and significant organisational success of bringing the field on stream in Lancaster, including observed pressure depletion change. As a result, we have had to make May 2019, albeit with water production at Lincoln as a result of Lancaster production. difficult decisions in order to reduce our commencing earlier than expected and This led to the conclusion that hydrocarbon financial leverage and deliver a viable increasing over time. columns are likely limited to local structural financial platform from which to take the closures, and resulted in a significant downgrade During the first half of 2020, Lancaster business forward, resulting in the proposed of the GWA licence resource potential in both experienced a significant deterioration in financial restructuring announced in April 2021. the Lincoln and Warwick Crest discoveries. reservoir performance while attempting to While the Company and its joint venture (JV) ramp production up to towards the target of COVID-19 pandemic partner continue to evaluate options for the 20,000 bopd. This led to a decision to shut in The rapid global spread of COVID-19 during GWA asset, further appraisal of both discoveries the 205/21a-7z well in May 2020 and suspend 2020 led to distressing levels of mortality, as would be required as a first step before any production guidance for the year. This well as profound disruption to businesses and assessment of commerciality and Reserves disappointing performance signalled a personal lives. Protecting Hurricane’s people can be made. material departure from pre-production from the virus while supporting our suppliers expectations, and a need to revisit the basic and partners was a critical concern during the CPR geological model and data interpretations. year. The comprehensive protective measures An independent Competent Persons Report we have taken ensured uninterrupted offshore On 8 June 2020, it was announced that (CPR) was commissioned from ERC Equipoise operations, and our onshore staff successfully Dr Robert Trice had resigned as Chief Executive Limited (ERCE) and published in April 2021, adapted to changes in the working environment. Officer (CEO) by mutual consent with the Board, the results of which were broadly consistent We will aim to strike a suitable balance between and the ably qualified Beverley Smith agreed with the Lancaster and GWA Reserves and office and home working in future. a temporary shift from her non-executive Contingent Resources estimates published by role to become Interim Chief Executive. the Company in September 2020. Additionally, A Technical Committee of the Board was ERCE did not attribute any Contingent established to provide further oversight as Resources to the Halifax well drilled in 2017. 2 Hurricane Energy plc the subsurface team, under new leadership, STRATEGIC REPORT STRATEGIC Financial results If duly approved and implemented, the by Dr Alan Parsley, while Jason Cheng In 2020, we delivered sales revenues of proposed financial restructuring is expected resigned from his alternate director role. $180.1 million at an average realised oil price to take effect in June 2021. However, as approval On 23 September 2020, Dr Parsley resigned of $35.2/bbl, resulting in operating cash flow and implementation of the proposed financial as Kerogen Capital’s nominated director, of $80.2 million. Net free cash† of $111.4 million restructuring is outside of the Company’s and Leonard Tao also stepped down from led to a year end net debt† position of $118.6 control, there is a material uncertainty that may his alternate director role. Kerogen million. The substantial downgrade of Reserves cast significant doubt over the Company’s ability Capital therefore currently has no board and Contingent Resources led to write-downs to continue as a going concern. For further representation, though it retains the right in the carrying value of the Lancaster field details and analysis, see the Going Concern to appoint a director under the relationship and exploration intangibles totalling $567.1 and Viability section of the Strategic Report. deed signed in 2016 and remains a significant shareholder at the date of this report. million and a write-down of deferred tax of As at the date of this report,