5-Feb-2015
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 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. Tullow became the Operator of the Concession on April 1, 2013.
We refer to Tullow, Dana and us in the Concession as the "Consortium".
Pursuant to the Share Purchase Agreement ("SPA") between Tullow and us, Tullow agreed to pay all of our participating interest share of expenditures associated with joint operations in the Concession up to a gross expenditure cap of $100 million incurred during the carry period that began on September 21, 2013. The timing of the planned well is uncertain. We will be responsible for our 37% interest share of the cost in excess of the remaining gross carry amount. Additionally, Tullow agreed to pay our participating interest share of future costs for the drilling of an appraisal of the initial exploration well, if drilled, up to a gross expenditure cap of $100 million.
The Consortium planned to drill the exploration well in ultra-deepwater in the first half of calendar 2014. On March 11, 2014 Tullow unilaterally asserted its claim that there had been a Force Majeure event under the PSC with the Government of Guinea, the Joint Operating Agreement ("JOA") between Dana, Tullow and us and the SPA. Tullow stated in its notice that the decisions by the DOJ and the SEC to open investigations into our activities in obtaining and retaining the Concession rights constituted a Force Majeure event under the terms of the PSC, JOA and SPA. Tullow unilaterally lifted its declaration of Force Majeure effective May 3, 2014. Diligent efforts are being made to satisfy the conditions to resuming petroleum operations which include clarification from the government of Guinea that the investigations of Hyperdynamics will not adversely affect operations under the PSC. The Ebola virus outbreak in Guinea and surrounding countries is closely being evaluated by the Consortium and it may be an impediment to resumption of petroleum operations. The Consortium continues to monitoring efforts to control this epidemic. We cannot predict the timing or outcome of these events.
Since the grant of the Concession, we have conducted 2-dimensional ("2D") and 3-dimensional ("3D") seismic surveys of a portion of the Concession and drilled one non-commercial well completed in February of 2012. The most recent 3D seismic survey covering approximately 4,000 square kilometers in the deeper water portion of the Concession was completed and processed. These results are being used by the Consortium in the planning of the next exploratory well.
Our primary focus is the advancement of exploration work in Guinea. We have no source of operating revenue, and there is no assurance when we will, if ever. We have no operating cash flows, and we will require substantial additional funds, through additional participation arrangements, securities offerings, or through other means, to fulfill our business plans. 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 key participation arrangements with Dana and Tullow, we have no commitments for additional capital resources. The terms of any such arrangements, if made, may not be advantageous. Our need for additional funding may also be affected by the uncertainties involved with the planned exploratory well and the FCPA investigations. Costs associated with these matters were significant in the year ended June 30, 2014, and while total costs and outcomes are not currently known, we expect the costs to continue to be substantial; having incurred $2.8 million in the six month period ended December 31, 2014.
Table of Contents
Results of Operations
Based on the factors discussed below the net loss attributable to common shareholders for the three months ended December 31, 2014 decreased $4.7 million, or 56% to a net loss of $3.7 million, or $0.18 per share, from a net loss of $8.4 million, or $0.40 per share for the three months ended December 31, 2013. Net loss attributable to common shareholders for the six months ended December 31, 2014 decreased $5.1 million, or 39%, to a net loss of $7.7 million, or $0.37 per share, from a net loss of $12.8 million, or $0.61 per share for the six months ended December 31, 2013.
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.
Three months ended December 31, 2014 Compared to Three Months Ended December 31, 2013
Revenues. There were no revenues for the three months ended December 31, 2014 and 2013.
Depreciation. Depreciation on property and equipment decreased 37% or $42 thousand from the fiscal 2014 period to the fiscal 2015 period. Depreciation expense was $69 thousand and $111 thousand in the three months ended December 31, 2014 and 2013, respectively.
General, Administrative and Other Operating Expenses. Our general, administrative and other operating expenses were $3.6 million and $8.3 million for the three months ended December 31, 2014 and 2013, respectively. This represents a decrease of 56% or $4.7 million from the fiscal 2014 period to the fiscal 2015 period. The decrease in expense was attributable to decreases in personnel related costs of approximately $0.3 million, investor services cost of $0.1 million, foreign currency losses of approximately $0.2 million and legal fees of $3.9 million, which can primarily be attributed to legal and other professional fees related to the FCPA investigations which decreased $1.6 million and the AGR lawsuit which decreased $1.5 million. Our prior period foreign currency transaction losses were primarily the result of a large balance in accounts payable denominated in foreign currency, primarily associated with our drilling contract with AGR, for which payment had been frozen pending the resolution of our legal dispute with AGR. This dispute was settled in May 2014 resulting in substantially reduced accounts payable activity denominated in foreign currency and therefore reduced foreign currency transaction losses in the three months ended December 31, 2014.
Loss from Continuing Operations. As a result of the factors discussed above, our loss from operations decreased by $4.7 million from $8.4 million in the three months ended December 31, 2013 to $3.7 million for the three months ended December 31, 2014.
Six months ended December 31, 2014 Compared to Six Months Ended December 31, 2013
Revenues. There were no revenues for the six months ended December 31, 2014 and 2013.
Depreciation. Depreciation on property and equipment decreased 30% or $65 thousand from the fiscal 2014 period to the fiscal 2015 period. Depreciation expense was $155 thousand and $221 thousand in the six months ended December 31, 2014 and 2013, respectively.
General, Administrative and Other Operating Expenses. Our general, administrative and other operating expenses were $7.6 million and $12.6 million for the six months ended December 31, 2014 and 2013, respectively. This represents a decrease of 40% or $5 million from the fiscal 2014 period to the fiscal 2015 period. The decrease in expense was attributable to decreases in personnel related costs of approximately $1 million, contract labor costs of $0.2 million, investor services cost of $0.2 million, foreign currency losses of approximately $0.5 million and legal fees of $3 million, which can primarily be attributed to legal and other professional fees related to the FCPA investigations which decreased $0.2 million and the AGR lawsuit which decreased $2.4 million. Our foreign currency transaction losses were primarily the result of a large balance in accounts payable denominated in foreign currency, primarily associated with our drilling contract with AGR, for which payment had been frozen pending the resolution of our legal dispute with AGR. This dispute was settled in May 2014 resulting in substantially reduced accounts payable activity denominated in foreign currency and therefore reduced foreign currency transaction losses in the six months ended December 31, 2014.
Loss from Continuing Operations. As a result of the factors discussed above, our loss from operations decreased by $5.1 million from $12.8 million in the six months ended December 31, 2013 to $7.7 million for the six months ended December 31, 2014.
