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HDY > SEC Filings for HDY > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for HYPERDYNAMICS CORP

Form 10-Q for HYPERDYNAMICS CORP


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

This Report contains "forward-looking statements" within the meaning of
Section 27 A of the Securities Act of 1933, as amended, and Section 21 E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements concerning plans, objectives, goals, strategies, expectations, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "plan," "project," "anticipate," "estimate," "believe," or "think." Forward-looking statements involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. We assume no duty to update or revise our forward-looking statements based on changes in plans or expectations or otherwise.

As used herein, references to "Hyperdynamics," "Company," "we," "us," and "our" refer to Hyperdynamics Corporation and our subsidiaries.

Overview

We are an independent oil and gas exploration company that was incorporated in 1996 as a Delaware corporation with large prospects in offshore Republic of Guinea ("Guinea") in Northwest Africa pursuant to rights granted to us by Guinea (the "Concession") under a Hydrocarbon Production Sharing Contract, as amended ("PSC"). We are the operator and hold a 77% interest. Our participant, Dana Petroleum, PLC ("Dana"), which is a subsidiary of the Korean National Oil Corporation, holds the remaining 23% interest in the Concession.

In October 2011, we commenced drilling operations on the Sabu-1 well. In February 2012, the Sabu-1 well reached the planned total depth of 3,600 meters. The well encountered oil shows while drilling the targeted Upper Cretaceous section and our well-log interpretations indicated the presence of residual oil in non-commercial quantities. Subsequent analysis of rock samples from the well has confirmed the presence of hydrocarbons in fluid inclusions in the rock. We believe: (1) the Sabu-1 well was not a commercial success because of the lack of reservoir seal (such as marine shales or reservoir-seal pairs) needed for a commercial accumulation, and (2) that the evidence that hydrocarbon generation has taken place in the basin enhances the prospectivity of our Concession.

We have conducted 2-dimensional ("2D") and 3-dimensional ("3D") surveys of a portion of the Concession. The acquisition phase of the most recent 3D seismic survey covering approximately 4,000 square kilometers in the deeper water portion of the Concession was recently completed by the CGG Veritas Ocean Endeavor. Processing of the most recent 3D data set is in progress. The first preliminary time section results were received in March 2012. Completion of this processing work is expected in early calendar year 2013. The cost for acquiring the survey, processing and other services is expected to total approximately $30.0 million gross, or $23.1 million for our 77% interest. Of these estimated costs, we have incurred approximately $26.4 million on a gross basis as of September 30, 2012.

Our wholly owned subsidiary, SCS Corporation Ltd, ("SCS") has entered into an agreement with a subsidiary of Tullow Oil plc, a leading independent oil & gas exploration company, for exclusive negotiations in respect of a potential acquisition of a forty percent (40%) gross interest (the "Interest") in the Concession offshore Guinea. The exclusivity period is scheduled to terminate on November 19, 2012. In the event that a definitive agreement for the acquisition of the Interest is entered into during the exclusivity period, it is expected to be subject to customary provisions relating to the satisfaction of certain conditions precedent prior to completion of acquisition. In the event that a definitive agreement for the acquisition is entered into, completion of the transaction is expected to take place by year end 2012

We intend to continue acquiring, exploring and developing oil and gas properties. At this time, however, we have no source of operating revenue and there is no assurance when we will, if ever. We have no operating cash flows and will require substantial additional funds, through additional participants, securities offerings, or through other means, to fulfill our business plans.

Reportable segments

We have one reportable segment: our international operations in Guinea conducted through our subsidiary SCS. SCS is engaged in oil and gas exploration activities pertaining to offshore Guinea.


Table of Contents

Results of Operations

Based on the factors discussed below the net loss attributable to common shareholders for the three months ended September 30, 2012 increased $1,814,000, or 41%, to a net loss of $6,190,000, or $0.04 per share, from a net loss of $4,376,000, or $0.03 per share for the three months ended September 30, 2011.

Three months ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Revenues. There were no revenues for the three months ended September 30, 2012 and 2011.

Depreciation. Depreciation on property and equipment increased 2%, or $4,000. Depreciation expense was $183,000 and $179,000 in the three months ended September 30, 2012 and 2011, respectively.

Selling, General and Administrative Expenses. Our selling, general and administrative expenses were $5,570,000 and $4,352,000 for the three months ended September 30, 2012 and 2011, respectively. This represents an increase of 28% or, $1,218,000 from the fiscal 2012 period to the fiscal 2013 period. Non-cash stock compensation of $1,214,000 and $1,144,000 were included in selling, general and administrative expenses for the three months ended September 30, 2012 and 2011, respectively. The $1,148,000 increase in cash expense was primarily attributable to a $1,013,000 increase in employee-related costs. This was driven by an increase in our staff from 38 employees as of July 1, 2011 to 45 employees as of September 30, 2012. The staffing increase primarily related to personnel required for our activities in Guinea and our support staff. Additionally, there was an increase in legal and accounting fees in the current quarter of $670,000 over the prior period. These current period increases were partially offset by a decrease in costs associated with prospective oil and gas investment opportunities of approximately $552,000. We are currently evaluating our administrative cost structure and expect to make appropriate adjustments as we transition from the role of operator to non-operator of the Concession.

Amortization of Costs. We amortized an additional $441,000 of proved oil and gas properties during the three months ended September 30, 2012. These are additional costs recognized during the three months ended September 30, 2012 associated with the non-commercial Sabu-1 well. As required by the Full-Cost Accounting rules, we evaluated and moved these costs to proved properties and then fully amortized them through our Full-Cost Ceiling Test.

Interest income. Interest income totaled $4,000 and $155,000 for the three months ended September 30, 2012 and 2011, respectively. The decrease is attributed to interest income on available-for-sale securities held during the three months ended September 30, 2011which were sold during the third quarter of fiscal 2012.

Loss from Continuing Operations. Primarily as a result of the increase in selling, general and administrative expenses of $1,218,000 and the full amortization of proved oil and gas properties of $441,000, our loss from continuing operations increased by 41%, or $1,814,000, from $4,376,000 in the three months ended September 30, 2011 to $6,190,000 for the three months ended September 30, 2012.

Liquidity and Capital Resources

On September 30, 2012, we had $33,131,000 in cash and $19,183,000 in restricted cash, which is held in escrow in connection with our drilling contract with AGR. We had $23,967,000 in liabilities, which are comprised of current liabilities of $23,848,000 and noncurrent liabilities of $119,000.

We plan to use our existing cash to fund our portion of the remaining expenditures related to the Sabu-1 well. The cost incurred on the Sabu-1 well is $126.4 million, or $97.4 million for our 77% interest. We have paid approximately $113.6 million of the well costs on a gross basis, or approximately $87.5 million based on our current 77% interest, as of September 30, 2012. As described in Legal Proceedings, we have filed suit against AGR following unsuccessful negotiations to address the cost overruns associated with the Sabu-1 well. Payment of the remaining drilling costs is pending resolution of this dispute. AGR filed a countersuit on October 1, 2012 in which AGR has made claims for additional cost of $9.5 million on a gross basis or $7.3 million based on our 77% share, which we dispute and have excluded from cost incurred to date. Resolution of this dispute may result is the recovery of a portion of the costs incurred to date, however, it is possible that the resolution of this dispute may result in additional liability associated with disputed costs.

Additionally, we entered into an Agreement for the Supply of Marine Seismic Data with CGG Veritas. The cost for acquiring the survey, processing and other services is expected to total approximately $30.0 million gross, or $23.1 million based upon our current 77% interest in the Guinea Concession, of which, we have paid $25.9 million on a gross basis as of September 30, 2012 or $19.9 million based upon our 77% share. We plan to use our existing cash to fund these remaining expenditures.


Table of Contents

After giving effect for the remaining liabilities and excess supplies associated with the Sabu-1 well and for the remaining costs associated with the 3D seismic survey, our cash should be in the range of $30 - 35 million.

We have satisfied all requirements of the current exploration period, which runs until September 2013 under the Concession. The current exploration period may be renewed to September 2016 and may be extended for one additional year to allow the completion of a well in process and for two additional years to allow the completion of the appraisal of any discovery made. To satisfy the September 2013-2016 work requirement, we are required to drill an additional exploration well, which is to be commenced by the end of September 2016, to a minimum depth of 2,500 meters below seabed. Our ability to drill additional wells will depend on obtaining additional capital through sales of additional interests in the Concession, equity or debt financings, or through other means. If we farm-out additional interests in the Concession, our percentage will decrease. Although we have been successful in raising capital and in entering into a key participation arrangement with Dana, we have no firm commitments for additional capital resources. The terms of any such arrangements, if made, are unknown, and may not be advantageous.

As we transition from Sabu-1 drilling activity and to a new operator, we expect to continually evaluate and make appropriate adjustments to our overhead costs. Overhead adjustments made to date include staff reductions and the closure of our London office.

We are currently involved in various legal proceedings. We are unable to predict the outcome of such matters; however, an adverse development could have an impact on liquidity.

Net cash used in operating activities for continuing operations for the three months ended September 30, 2012 was $3,330,000 compared to $4,114,000 for the three months ended September 30, 2011. The decrease in cash used in operating activities was largely attributable to changes in working capital offset by an increase in the net loss for the three months ended September 30, 2012. Cash used in investing activities for continuing operations for the three months ended September 30, 2012 was $1,045,000 compared to $36,878,000 in the three months ended September 30, 2011. This decrease was primarily due to a decrease in expenditures associated with the drilling of our first well combined with a decrease in the cash transferred to our restricted escrow account. Additionally, there was a decrease in cash used for a prospective investment from $5,000,000 in the three months ended September 30, 2011 to zero in the three months ended September 30, 2012. There was net cash provided by financing activities for the three months ended September 30, 2012 of $358,000 compared to $588,000 during the three months ended September 30, 2011. This decrease is due to a decline in the exercise of options.

Capital Expenditures

During the first three months of fiscal 2013, $1,075,000 was expended on oil and gas properties, while $30,000 was provided from sales of property plant and equipment net of related expenditures. This is compared to $15,113,000 and $395,000 spent in the same period of fiscal 2012 on oil and gas properties and property, plant and equipment respectively. Fiscal 2012 expenditures mostly pertained to costs associated with our drilling activity which commenced in October 2011 and the acquisition of our most recent 3-D survey which commenced in November 2011, while fiscal 2013 expenditures primarily related to the processing of our most recent 3-D seismic data on our Concession.

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