Hawkley’s share price is drifting down again. Although it peaked around 50c it averaged about 20c over the past 12 months and is currently at 18c and on the way down. The performance is dismal this year, this despite completing a second successful (?) production well, despite converting Sorochynska into a 20yr production licence, despite extending the Chernetska exploration licence for 5yrs – and despite replacing the CEO and a founding partner (the Chairman) 9 months ago. The competent persons review initiated by the replaced CEO resulted in tripling of the 2P reserves in 2011 and identifying several hundred BCF of contingent reserves in an overlooked reservoir, reserves which were subsequently discovered in Sorochynska-2 this quarter.
So what is the problem? For starters: lack of tangible progress with field development, broken deadlines on the gas plant, a CEO with no credibility in the oil business or control over the Ukrainian management, a company with no staff to make things happen, wells that take 9-12 months to drill instead of 3-6, crazy decisions about testing the Chernetska well, poor seismic data because the company went for the cheapest option, and bags of cash and options for NEDs’ who have contributed nothing.
Let’s review the main disappointments and failures of the board:
• Production from Sorochynska-1. Following completion of testing, Hawkley announced on 8 December 2010 that the well would run at a stable rate for 8 to 9 years without a significant decline. This would be practically impossible, given that production leads to lower pressure in the reservoir and therefore less energy to lift the gas to surface. Natural decline in production is inevitable unless in most geological situations and had been experienced in both previous wells that produced from the B18 within the licence area. Whereas the CEO would have been ignorant of this, since he is not from the oil and gas industry, Hawkley’s Chairman was a geologist with 30 years’ experience and would have known this. It was left to the honesty of the succeeding CEO to break the news to the market, but the old CEO is back in the seat and production data is not being announced any more. August was the last report and production was less than 5 million cubic feet/day versus Hawkley’s prediction of 8-15 million a day for 8-9 years! Current production has been boosted several times by opening the choke size, yet is still less than half the predicted rate announced by Hawkley.
Production translates to sales, revenue and sustainability of the company. Lying or covering up only leads to problems with the market down the road. Sales in Q1 2012 were $8.6 million but declined almost 25% to $6.6 million in Q3.
• Chernetska-1 well. Spud was announced in May 2011, with a statement that “Hawkley CEO Richard Reavley said the Company has engaged a well known and respected drilling contractor and has added additional pumping capacity to the rig as well as more efficient mud handling and mud cleaning equipment. ‘We expect the well to take about 5 months to reach the targets,’ he said.” Reality was that the drilling was done using a government rig dating far back into the last century and run by a crew who stopped when they felt like it and took 8 months not 5 to reach the upper target. But the fiasco continued when Prime Gas management, who are used to acting independently of the directors, ran a series of tests and additional drilling to deepen the well on what was a lost cause. No commercial flows were obtained from any of the 3 formations tested. So the well took more than 12 months to drill and test and cost $2 million or 20% over budget.
• Gas plant. Hawkley told us to expect production from Sorochynska-2 during Q3 2012 through their own plant, a plant with the capacity to take 4-5 wells and process 30 million cubic feet/day. Cost estimate was stated to be 1-2 million, but this doubted by Mr Earle and later Hawkley announced the cost would be $5 million. So now Hawkley wants us to congratulate them for buying and modifying a plant for $2.5 million and saving money! But what will be the total cost of purchase and upgrading to the 22 million cubic feet/day by adding a second processing skid – and what value has been lost for shareholders to have production delayed by 3-6 months? And what about the cost of adding a third skid to accommodate new discoveries and take capacity to the original requirement of 30+ million cuibic feet/day? It seems that the total cost including commissioning will approach the $5 million mark.
• Sorochynska-2. Hawkley did not test the reservoir that will be produced and more than double current production! This must be a first for a small oil company drilling one well at a time and drilling a vital well, because the market needs this information to gauge the success or otherwise of the investment, and the company hopes to increase the share price by announcing a good flow rate that lifts the share price. It was a key well for Hawkley because flow rate information is essential for planning the long-term field development, the production profile and revenue stream, and for designing the capacity of the processing plant. Seems that the B18 reservoir didn’t look so hot on logs, and therefore Hawkley focussed publicity on confirming that the B19 had a gas column. But the B19 news was not entirely good because Hawkley reported a likely oil-water contact and water-leg at the base of the reservoir, and therefore that the gas flow could water-out during testing or production. Also, the gas encountered in this well cannot be part of a large and continuous pool downdip – and therefore the B19 reserves are much lower than expected.
• More wells. One problem with Hawkley is that they use Ukrainian rigs and working practices that are grossly inefficient and wells take 2-3 times longer to drill (and test) than could be achieved with a rig and crew brought in from Romania or Poland. One solution to the dearth of newsflow for the market and the painfully slow monetisation of the assets would be to have more than 1 rig drilling. Following the raising of $15 million, Hawkley announced on 28 April 2011 that “Hawkley CEO Richard Reavley said he was extremely pleased the demand for the placement. The capital raising…’allows us to accelerate our drilling program….we are excited about the prospect of commencing three more wells this year as well as further additions to our portfolio’, he said.” But where was the third well in 2011 and what has Hawkley done with the investors’ money that was earmarked for drilling?
• New Projects. Following the placement in 2011, Hawkley CEO stated that “And $4.5 million of the $15 million placement was earmarked for one or more potential acquisitions…Hawkley continues to be very actively engaged in assessing acquisition opportunities. A strong balance sheet is an important factor in the Company’s success in future licencing and/or acquisition.” Where are the new licenses and opportunities for organic growth – and where is the $4.5 million, since the company had only $7.5 million cash at the end of Q3 and needs to spend most of that before year-end on the gas plant, tying-in both Sorochynska wells to the new plant, and overheads? And what about Sorochynska-3 and the 3D seismic Hawkley said it might acquire in the Chernetska block this year? And the cost of listing on AIM in Q3/Q4 – or is that not going to happen?
Hawkley raised $15 million last year with the promise of increasing the work program, getting new licenses and sustaining the bank balance with profitable production, yet the latest quarterly results show that there is only $7.5 million in the bank compared with $16.5 million at the start of the year. We are told that the current focus is on getting a listing on AIM, but maybe the focus should be to replace all the directors and the Prime Gas management and bringing in some competent people who know about oil and gas and who will deliver results on time and to budget. The CEO was fired once and should be fired again – this time for non-performance: his personal non-performance and non-performance of the company and the share price. The share price is languishing around 20c, which is no higher in discounted terms (inflation, lost interest) than when it was 15c 2 years ago before the success at Sorochynska. Time for a real shake-up in the company.
Hawkley’s brokers Hartley’s used to release supporting research notes frequently, but where are they now? Nothing from them since August, perhaps Hartley’s are not getting the support from Hawkley now that the directors are London-based and maybe going to ditch the Australian investors when the company gets listed on AIM? Seymour Peirce are providing coverage from London and issued their one and only report in June. In it there is a comment that the market is not attributing any value to the contingent resources recently identified in the CPR. It’s no mystery is it – under the current management Hawkley will take 50 years to confirm, drill and get the gas and condensate on production, so the discounted value must be close to zero! SP also say that the one of the company’s strengths is the focus on gas which can be quickly commercialised! It could be if Hawkley drilled wells more quickly, but the local Ukrainian management will not allow this. And Chernetska is unlikely to see production for at least 3 years. The reservoir is a tight limestone and the company will need good 3D and good technical interpretation to identify likely reservoir ‘sweet spots’ in the formation. And the wells will be $20 million for horizontal mult-fracced wells, and Hawkley will need to build a dedicated gas-liquids plant.
SP show a diagram sourced from Hawkley that shows the company using two rigs in 2013 and three in 2014. It’s good to be ambitious, but already the actual performance is worse than the plan because the plan was to spud Sorochynska-203 back-to-back with Sorochynska-202 during Q4 this year. And miraculously, in 2014 Hawkley will be drilling 4 wells with three rigs! Must be magic or bollocks because it’s not achievable. And then there is the production forecast for Sorochynska. It reaches a peak (not a plateau) at 14 million cubic feet/day and 190 bbl/d condensate in 2016 yet the drilling plan shows that Hawkley expects to have drilled a total of 13 wells into the B18 and B19. Seems that they expect a high rate of failure drilling appraisal and development wells, and there are an additional 7 wells drilled before 2016 in the 112 Area and the B22 and B24/25 reservoirs. 20 wells for a peak of 14 million cubic feet/day looks like a very poor performance – but seems that the market gives the management no credence whatsoever to Hawkley’s plan because it know the company cannot deliver.
DEFINITELY time for a real shake-up isn’t it.
HOG Price at posting:
18.5¢ Sentiment: Hold Disclosure: Held
