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| HDY > SEC Filings for HDY > Form 10-Q on 6-Feb-2013 | All Recent SEC Filings |
6-Feb-2013
Quarterly Report
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 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"). After having sold a 40% gross interest in the Concession to Tullow Guinea Ltd. ("Tullow") during the second quarter of fiscal 2013, we now hold a 37% participating interest. Dana Petroleum, PLC ("Dana"), which is a subsidiary of the Korean National Oil Corporation, holds the remaining 23% interest in the Concession. SCS, Dana and Tullow have elected Tullow as the Operator of the Concession beginning April 1, 2013. Tullow has agreed to use reasonable endeavors to provide for the commencement of drilling of the exploration well not later than April 1, 2014.
We have conducted 2-dimensional ("2D") and 3-dimensional ("3D") surveys of a portion of the Concession. In February 2012 we completed the drilling of the Sabu-1 well which we concluded was non-commercial. 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 completed by the CGG Veritas Ocean Endeavor in January 2012. Processing of the most recent 3D data set is in progress. We received the initial products from the prestack time migration in January 2013. Completion of this processing is expected in the first half of calendar 2013.The cost for acquiring the survey, processing and other services is expected to total approximately $28.0 million gross. Of these estimated costs, we have incurred approximately $27.4 million on a gross basis as of December 31, 2012.
We intend to continue acquiring, exploring and developing oil and gas properties. 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.
Results of Operations
Based on the factors discussed below the net loss attributable to common shareholders for the six months ended December 31, 2012 increased $555,000, or 5%, to a net loss of $11,254,000, or $0.07 per share, from a net loss of $10,699,000, or $0.07 per share for the six months ended December 31, 2011.
Three months ended December 31, 2012 Compared to Three Months Ended December 31, 2011
Revenues. There were no revenues for the three months ended December 31, 2012 and 2011.
Depreciation. Depreciation on property and equipment decreased 27%, or $65,000 from the fiscal 2012 period to the fiscal 2013 period. Depreciation expense was $176,000 and $241,000 in the three months ended December 31, 2012 and 2011, respectively. The decrease is primarily attributed to assets used in the prior period relating to drilling operations being fully depreciated in the current period.
Selling, General and Administrative Expenses. Our selling, general and administrative expenses were $4,890,000 and $5,726,000 for the three months ended December 31, 2012 and 2011, respectively. This represents a decrease of 15% or, $836,000 from the fiscal 2012 period to the fiscal 2013 period. Non-cash stock compensation of $878,000 and $1,495,000 were included in selling, general and
administrative expenses for the three months ended December 31, 2012 and 2011, respectively. The $219,000 decrease in cash expense was primarily attributable to a decrease in costs associated with prospective oil and gas investment opportunities of approximately $1,650,000. This was partially offset by an increase in employee related costs of $1,167,000, $830,000 of which is attributed to an increase in the number of employees performing general and administrative work, with the remaining increase being primarily attributable to severance costs associated with current period staff reductions. Additionally, there was an increase in legal and accounting fees in the current period of approximately $346,000. As we transition to a non-operator of the Concession, we expect to make appropriate adjustments to our administrative costs.
Other Income (Expense). Other income (expense) totaled income of $2,000 and expense of ($356,000) for the three months ended December 31, 2012 and 2011, respectively. The decrease in the current period is primarily the result of the recognition of an other than temporary impairment on available-for-sale securities during the second quarter of fiscal 2012. This was partially offset by a decline in interest income attributed to interest income on available-for-sale securities held during the three months ended December 31, 2011 which were sold during the third quarter of fiscal 2012.
Loss from Continuing Operations. Primarily as a result of the decrease in selling, general and administrative expenses of $836,000, our loss from continuing operations decreased by 20%, or $1,259,000, from $6,323,000 in the three months ended December 31, 2011 to $5,064,000 for the three months ended December 31, 2012.
Six months ended December 31, 2012 Compared to Six Months Ended December 31, 2011
Revenues. There were no revenues for the six months ended December 31, 2012 and 2011.
Depreciation. Depreciation on property and equipment decreased 15%, or $61,000 from the fiscal 2012 period to the fiscal 2013 period. Depreciation expense was $359,000 and $420,000 in the six months ended December 31, 2012 and 2011, respectively. The decrease is primarily attributed to assets used in the prior period relating to drilling operations being fully depreciated in the current period.
Selling, General and Administrative Expenses. Our selling, general and administrative expenses were $10,460,000 and $10,078,000 for the six months ended December 31, 2012 and 2011, respectively. This represents an increase of 4%, or $382,000 from the fiscal 2012 period to the fiscal 2013 period. Non-cash stock compensation of $2,109,000 and $2,639,000 were included in selling, general and administrative expenses for the six months ended December 31, 2012 and 2011, respectively. The $913,000 increase in cash expense was primarily attributable to an increase in employee related costs of $2,082,000, $1,006,000 of which is attributed to an increase in the number of employees performing general and administrative work, with the remaining increase being primarily attributable to severance costs associated with current period staff reductions.. Additionally, there was an increase in legal and accounting fees of approximately $820,000 and a $205,000 increase associated with our efforts to sell a portion of our concession. This was partially offset by a decrease in costs associated with prospective oil and gas investment opportunities of approximately $2,454,000. As we transition to a non-operator of the Concession, we expect to make appropriate adjustments to our administrative costs.
Amortization of Costs. We amortized an additional $441,000 of proved oil and gas properties during the six months ended December 31, 2012. These are additional costs recognized during the six months ended December 31, 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.
Other Income (Expense). Other income (expense) totaled income of $6,000 and expense of ($201,000) for the six months ended December 31, 2012 and 2011, respectively. The decrease in the current period is primarily the result of the recognition of an other than temporary impairment on available-for-sale securities during the second quarter of fiscal 2012. This was partially offset by a decline in interest income attributed to interest income on available-for-sale securities held during the six months ended December 31, 2011 which were sold during the third quarter of fiscal 2012.
Loss from Continuing Operations. Our loss from continuing operations increased by 5%, or $555,000, from $10,699,000 in the six months ended December 31, 2011 to $11,254,000 for the six months ended December 31, 2012.
Liquidity and Capital Resources
On December 31, 2012, we had $54.6 million in cash and $19.2 million in restricted cash, which is held in escrow in connection with our drilling contract with AGR. We had $27.0 million in liabilities, which are comprised of current liabilities of $26.9 million and noncurrent liabilities of $0.1 million. We plan to use our existing cash to fund our general corporate needs and our remaining expenditures associated with the Concession, including our share of future capital expenditures that are not paid by Tullow on our behalf.
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 $28.0 million gross, of which $0.6 million remain unpaid on a gross basis as of December 31, 2012 or $0.2 million net based upon our 37% share.
The cost incurred on the Sabu-1 well was $126.4 million, or $97.4 million for the 77% interest we held. We have paid approximately $113.6 million of the well costs on a gross basis, or approximately $87.5 million based on the 77% interest we held. 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 the 77% share we held, 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.
After giving effect to 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 $50 - $55 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, 25% of the current Concession must be relinquished and an additional exploration well is required to be drilled, which is to be commenced by the end of September 2016, to a minimum depth of 2,500 meters below seabed. In connection with the sale of an interest in the Concession to Tullow, SCS received $27 million from Tullow as reimbursement of past costs of SCS in the Concession, and as additional consideration, Tullow has agreed to: (i) pay SCS's participating interest share of future costs associated with the drilling of an exploration well in at least 2,000 meters of water in the deep water fan area of the Concession, up to a gross expenditure cap of $100 million, and (ii) pay SCS's share of costs associated with an appraisal well of the initial exploration well, if drilled, subject to a gross expenditure cap on the appraisal well of $100 million. Tullow is obligated to pay its 40% participating interest share of costs associated with the Concession as of November 20, 2012, the date of execution of the sales and purchase agreement. Tullow will begin to pay SCS's costs attributable to the Concession at the earlier of (i) the commencement of the next exploration period, or (ii) should a decision be made to begin spending on an exploration well prior to committing to the next exploration period, the date of such spending. Tullow will continue to pay SCS's costs, subject to the gross expenditure cap of $100 million, until 90 days following the date on which the rig contracted to drill the exploration well moves off the well location. Tullow has agreed to use reasonable endeavors to provide for the commencement of drilling of the exploration well not later than April 1, 2014.
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 and Tullow, 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 to a non-operator role in the Concession, we expect to 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 six months ended December 31, 2012 was $6,967,000 compared to $3,585,000 for the six months ended December 31, 2011. The increase in cash used in operating activities was largely attributable to changes in working capital for the six months ended December 31, 2012. Cash provided by investing activities for continuing operations for the six months ended December 31, 2012 was $24,100,000 compared to cash used of $61,304,000 in the six months ended December 31, 2011. This change was primarily due to a decrease in expenditures associated with the drilling of our first well combined with the receipt of $26.7 million in net proceeds from the sale of an interest in the Concession to Tullow in the current period. Additionally, there was a decrease in cash used for a prospective investment from $10,000,000 in the six months ended December 31, 2011 to zero in the six months ended December 31, 2012. Net cash provided by financing activities for the six months ended December 31, 2012 of $358,000 compared to $608,000 during the six months ended December 31, 2011. This decrease is due to a decline in the exercise of options.
Capital Expenditures
During the first six months of fiscal 2013, $2,672,000 was expended on oil and gas properties, while $29,000 was provided from sales of property plant and equipment net of related expenditures. This is compared to $59,661,000 and $788,000 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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