At times companies can claim a lot of things to make themselves look good. However, a due diligence of the financials can provide a clearer picture of how the company is placed.
In a previous article, I mentioned that Hyperdynamics' (NYSE: HDY ) existing petroleum prospects are the stuff made more of great expectations rather than grounded reality. Short-term investors have probably made a lot of money trading off this highly volatile stock. But that does not guarantee a long-term gain, and investors should always do due diligence on any investing idea.
Operating losses of $10.9 million at the end of 2010 do not bode well, especially since they are an increase from $7.3 million from a year ago. Net losses of close to $8 million were marginally lower, thanks to a $3 million sale of assets. Fools should take note of this. It's possible that the company was getting a good price or possible that these weren't exactly productive assets. The sale of assets to cover losses is a bit of an accounting trick and, in general, is usually a bad sign. You don't make money in the future selling off useful assets today.
The company's cash balance of $35 million looks good. The net cash flow, however, was boosted by issuance of common stock worth $51 million -- which is obviously not good, especially if you're a current investor in the company. The balance sheet looks beefed up because of this cash. Unless production in Guinea begins, this may not look good forever though. GMX Resources (NYSE: GMXR ) initiated a similar strategy a couple of years back, and is just now seeing the results.
So the operative question is: Will Hyperdynamics make it that long?
A Foolish take-away
It bodes well that Hyperdynamics has above average liquidity with a current ratio of 9.6 times and near-zero debt. Still, a free cash flow of -$41.7 million shows that time is running out. While a number of E&Ps like Kodiak (AMEX: KOG ) have managed to make it to production, hopefully Hyperdynamics can follow.
At the moment, I would advise Foolish investors to play it safe. If the company starts production from its West African base, the stock would be promising.
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