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.
How often does this kind of thing happen on this scale? Sure, the third world is rife with corruption, but a lot of business is still successfully done even with corrupt third-world states. I can’t see how any state can just spit out a termination order after years of good-faith dealing… it amounts to rogue lawlessness. Are there any previous examples of this kind of thing?
Editor: I’m sure there are others, but I haven’t researched any specific example.
WHAT kind of a recorse could HYPD possibly have with a country like guinea? any?
Editor: According to the press release, they can go to binding arbitration in England. We’ll see if and when it happens. My guess is that they will pursue this course, and it will take years.
Doesn’t HDY have all the confidential data? Wouldn’t a new company have to do all the stuff that HDY has already done? Also, given that Guinea broke agreements with HDY, what other company/country be willing to enter into an agreement with them?
Editor: All good questions. If I had to guess, I would assume the HYD did have great seismic data, someone knew it, and someone bribed someone with big money. All just speculation on my part, but that part of the world is notorious for corruption.
There is a copy of the original US Oil agreement attached to the SEC filing. From my brief scan it appears to require the contractor to provide the government with all seismic, exploration, and drilling location data on an ongiong basis. (and in reproducable form) It also seems to require notice from the government if they terminate for cause, and also allows for binding arbitration. This would be between US Oil and the government. This would be some reassurance noramlly, but with Conte’s failing health who knows what condition the government is in right now.
Editor: Thank you for your contribution. This is probably not over, but I believe it is for the stock for the time being.
Why do you say it will take years to reconcile? The 8k says the following. Failing such a resolution, we would be left with no choice but to exercise our rights to pursue arbitration. The PSA specifically provides for binding arbitration in London (England) failing the parties’ effort to amicably resolve their issues after three (3) months from date of notice of any dispute; including a dispute regarding whether any grounds for termination exist to justify a termination pronounced by the Government. It sounds like this should be wrapped up quicker than “years”. Would like your comments.
Editor: It might not take years to resolve, but it doesn’t change my feelings about the stock price. The market will assume the deal is off until proven otherwise. Without the upside of the Guinea deal, I make the value of the company somewhere in the $.25 to $.50 range. I have no interest in having my speculative money in a company with a few natural gas wells in Lousianna. I am hunting elephants. So, it circumstances change, I will change my views.
I HOPE THAT I AM NEVER APPROACHED TO GIVE A CONTRIBUTION TO A POOR NATION IN AFRICA. ITHINK YOU KNOW THE ANSWER I WILL HAVE FOR THEM.
Editor: Makes it kind of tough, but I hardly think you can blame the 25 million African Aids victims for the actions of one corrupt person.
Would you comment on Eden Energy, EDNE, who is now drilling in Utah? The stock is blasting off towards heaven. TKs
Editor: The OTC Journal doesn’t cover the stock, but I would sell it.
You’ve done a great job covering the stock in the past and we’re ostensibly onboard with their program. You have failed to remain objective as an analyst, however, and have injected your trading strategy without letting the story unfold. Read the PSA, you’ll see why I think this isn’t over.
Editor: Perhaps you are correct, but as I mentioned, there will be believers who are in denial. I can always change my views if this get straightened out, but for the time being I believe the Guinea deal is dead. Let’s see how you feel in 90 days when there has been no resolution to the situation.
I wouldn’t give up on this company so fast. Guinea has no motivation to drag this out for years. They will just be losing any chance of getting oil revenues for years. No other oil company in the world would get close to this concession without clear title and that won’t happen as long as HDY is in the picture. Guinea has no oil expertise or money to go it alone. I think this will be settled a lot faster than you think perhaps even by next week. This may just be a negotiating strategy by Guinea to attempt to get a larger piece of the pie.
Editor: As I stated before, I can always change my views. I’ll believe when the wells are drilled.
COULD THE PROBLEM BE – ((CHINA)) THEY NEED OIL- AND THEY HAVE CONTRACTS WITH IRAN-SUDAN-AND WANTED TO BUY UNICAL OIL-COULD BE A BEHIND THE DOOR DEAL
Editor: Could be- I just don’t know.
i have the feeling someone else has their hand in the pot, proberbly china with a better deal and the country being new to the business thinks it can disolve the contract.just follow the money trail , they had a good deal we all know that , bottom line, they must have a better deal under the table,who gives up money for nothing.
Editor: Good a guess as any.
I think you are giving up on this company way too quickly. I have reviewed the Production Sharing Agreement and it is rock solid. This will be worked out one way or another because no other oil company or oil field service company will touch this area while it is under dispute and Guinea sure can’t do it themselves. I have no idea how long the delay will be but I suspect Guinea will come to its senses and realize it is to their benefit to get the drilling started ASAP. I also think you are WAY underestimating the value of the Louisiana properties. One well tested at 32 bbls per day. Do the math and multiply that by say $50 a bbl times 75 wells times 365 days a year and see what revenue you come up with. Then add in the revenue they will get from the gas. Then remember that this is only from one of the possible producing zones. I think the Louisiana properties alone are worth the current stock price. So if you still want to sell your shares at $1 of less please email me. I’ll take them.
Editor: That is why I have this BLOG- so people with different points of view can have their voice heard. I hope everybody reads your commentary and then makes up their own mind.
It is amazing to me that no one at Hyperdynamics has any direct relationship with anyone in the Guinean government. All their contact is through US Oil and one unofficial Guinean “advisor”. Common prudence dictates, when one’s entire future depends on a single relationship, that one endeavor to nurture and develop that relationship most assiduously. It is inexcusable that Hyperdynamics management were so clueless that they did not even see this coming! I cashed out when they announced the drilling would not start until November figuring nothing would happen at least until then and I would have time to get back in. Lucky decision! Brad Hessel
Editor: They have a direct contact through US Oil. Nice timing on the cash out- if they end up getting the permits, it would be a good time to get back in. Nice Timing.
What bad luck. I watched this thing for months, feeling a bit skittish at times about doing business with a small country like this, then bought this stock on TUESDAY of last week—-and sold this morning in the .86-.98. It would have felt better if I had just opened my wallet and given about $8K to poor people on the street! I’d bet on one of several things, and they all add up to greed in the Guinea gov’t. 1) best scenario is that they got impatient with the rate of their oil development, and this notice to USOil is mostly a ploy to get new promises and concessions to move things along, and give up some profit margin; 2) as you pointed out, someone is getting bribed to push USOil out so their company can take over; 3) someone at USOil grandly insulted someone important in the govt , or did something in violation of the contract . But, I’d mostly bet on #1 or #2. brotherofdilbert
Editor: Until Friday, I was content to sit with my 38K shares and wait for the drilling to commence. As you said- very bad luck. Perhaps it will still work out. There is some time to get it rolling again if they get the right people on board.
In the press release the statement “letter was sent to USOil without a signature of a minister of the government”. I am concerned as to the credibility of this claim, it seems to me even with a corrupt and rogue government there seems no shortage of Govn’t officials willing to take credit for it. Also with binding agreements why risk arbitration? Any thoughts?
Editor: My thought is the market is now only willing to give about a $.25 premium for the Guinea concession potential. I hear the State Department is getting involved, and the company is going right to the top. We’ll see if they can turn it.
In your opinion how would this event affect their recent listing on the AMEX?
Editor: I’m not with the AMEX, but as far as I can tell it won’t effect it at all. If AMW can stay on the AMEX, anyone can.
You say to sell and that you were sitting on 38,000 shares. So did you sell them all or are you selling in small batches? I’m just wondering how the larger holders are dealing with this. Thanks.
Editor: I sold some today. I am selling in small batches. I hope for the sake of everyone associated with this company that I have made the wrong decision.
I am the Editor of the Internet news site about the Republic of Guinea. Boubah.com (In French only) I already wrote about this subject on the site and I am now researching to follow up this story. My contacts in Guinea are trying to get the information, but no one seems to know for sure as unlike other projects, this one is being handled at the Presidency. Does anyone have any contact with Hyperdynamics, as I tried to reach them numerous times without success. Boubah Email: courrier@boubah.com
Editor: Simply contact Robert Gleckman at 818 347 9848