News came out from Hyperdynamics at 9:00 est on Thursday night, and it’s as ugly as it can possibly be. According to the press release, the Republic of Guinea has terminated its agreement to allow hydrocarbon exploration in the concession off its coast.
Here’s an excerpt:
“While SCS was in the process of commencing its drilling program offshore West Africa, it was shocked to receive a letter from USOil Corp. regarding cancellation of the 2002 Royalty and Production Sharing Agreement (the “PSA”) between USOil and the Republic of Guinea. The PSA is the contract that SCS has adhered to and complied with in dealing with the Republic of Guinea. The letter from USOil was a result of their receipt of a termination letter from the Government of Guinea.”
HYD spent millions of dollars and several years conducting seismic studies. Recently, HYD applied to the Guinea Government for three permits to drill shallow wells in late 2005.
According to the press release, HYD is going to attempt to resolve the issue amicably with the Guinea government, and barring success, will go into a binding arbitration process.
I have to admit, this is one development I had not forseen. In the intial stages of the coverage which dates back about 20 months, I was skeptical of the strength and existance of the relationship. However, as time went by and HYD conducted numerous seismic studies in the region, I became convinced the relationship with the government was for real. HYD SEC filings also contained hard information on the relationship, and those 10ks were signed off on by auditors. They must have reviewed the documents before signing off on the 10ks.
This news brings into clear focus the danger of doing business with an unstable third world country. To those who were always skeptical of this idea due to the instability factor, I tip my hat- you were right.
HDY had a window of opportunity to get rolling off the coast of West Africa, and the window has all but shut at this point. Perhaps something can be salvaged. I can’t say. I don’t know who’s fault this is- perhaps HDY for taking so long to start a drilling program
For me the speculation is now at an end. I like microcaps with big upside. A few natural gas wells off the coast of Lousianna doesn’t do it for me. Billions in oil off the coast of West Africa was worth the risk.
By the time you read this the stock will no doubt have cratered. The company is not going out of business. They still have their Louisiana properties which are generating revenue according to recent disclosure. So far, we have no idea how much. Rumor has it in the $5 million in annual revenue range, but I cannot confirm.
However, in my view the majority of the nearly $100 million market valuation was predicated on the upside in Guinea. For the time being, that is gone.
The stock closed at $2.23 today. I wouldn’t be surprised to see it trade into the $.50 range tomorrow. It might even be good for an oversold bounce if you have the courage try to pick the bottom.
As of the close of business today, we owned 38,200 shares of HDY. 10,000 shares were purchased in the open market at a cost of $2.59. The remaining balance was booked as income with a cost basis of $1.25.
It is now my intention to sell all those shares, take the loss, and move on. I won’t be selling them on Friday. In the market there is always a knee jerk reaction to bad news. Many will be in denial. Many will think the stock is a bargain and try to pick it up cheap.
If and when the stock rebounds from oversold levels I will offload the position and move on. I might even buy some if it gets cheap enough tomorrow.
If they are successful in reviving the relationship I can always buy it back. If my views change due to circumstances, I will publish accordingly.
Your comments, questions, and thoughts are welcome.
When you are betting on the future of young and unproven companies sometimes bad stuff happens.