Is Hyperdynamics Anything More Than a Pipedream?

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.

The finances
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.

We can help you keep tabs on your companies with My Watchlist, our free, personalized stock tracking service. For further Foolish analysis and news on Hyperdynamics, add it to My Watchlist.

Isac Simon does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (19) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 18, 2011, at 11:11 AM, davelfla wrote:

    Thank you for the relatively even handed article on HDY. However you are missing the point (and your own DD is sadly shallow).

    1) You have neglected the recent (March 30, 2011) dilution, which raised about $140m. HDY now has the cash in hand to carry out their drilling plans, and then some.

    2) The assets sold in 2009/10 were losers purchased by the prior management in an expensive, misguided attempt to generate operating revenue. To get anything out of them was considered a success.

    The bottom line is that HDY is certainly a one trick pony at the moment, and perusing it's fy 2010 financials isn't particularly useful, at least in the income or p/l areas.

    They are poised to drill in 4q calendar 2011, and have seasoned international oil veterans in charge of all phases.

    Either they hit oil, or they don't.

  • Report this Comment On April 18, 2011, at 12:41 PM, BOZ52 wrote:

    I agree with the first reply that your DD is lacking.

    He has listed valid points that dispel some of your conclusions.

    Blackrock, now owns around 12% of HDY and I am sure that they have done their own DD before investing. There are truths and half truths in any investment story and your article seems to have gone for the half truth. If anyone wants to do true DD on HDY beyond what you present to them, then they can go to the companies web site and read all that has transpired since Ray Leonard took over as CEO in August of 2009. The company has been run with a transparency that benefits investors. One thing about a company that has a BOD that is compensated heavily on share value is that if they don't make moves that benefit the share price for the long term, then they will not benefit financially. In other words, if the concession acreage that HDY has off of the coast of the Republic of Guinea didn't measure up to the geology necessary to strike oil in a large enough quantity to justify the new management teams move from Amoco then good competent oil professionals would not have made the move. Any investment is risky, but some have a tremendous upside that current financial sheet analysis cannot project.

  • Report this Comment On April 18, 2011, at 12:52 PM, killerbee2 wrote:

    First, you are way behind on your due diligence. As someone else already said, you completely missed the recent financing which raised about 136 million dollars. I really expect better journalism than this from Motley Fool and I hope you take this obligation for accurate reporting more seriously in the future.

    Second, this is a start-up resource company where the profit and loss mean little at this juncture. It is the acreage that HDY owns offshore Guinea, West Africa that gives it value. If you had ever taken the time to either talk to the HDY geolgists or read the independent third-party analysis from Netherland Sewell and Associates report you would better be understand the value in this stock. Again I think you failed to do adequate due dilegence.

    I recognize that fact that you are probably assigned a quota of articles to write each day for a multitude of companies. But that is not an excuse for failing to do adequate research and for publishing inaccurate data and misleading information. Please try to do better in the future.

  • Report this Comment On April 18, 2011, at 1:11 PM, HDYFAN wrote:

    Yes. HDY is more than a pipedream. Your bs leading headline is as sad as your analysis.

    Smarter minds will be buying up these low priced shares, lower than the recent/huge financing price.

    HDY is about BILLIONS of barrels of oil...and it's about helping improve the lives of roughly 10 million Guinean citizens.

    Low budget "journalism" designed to weaken HDY's position is what it is. Pathetic.

    HDY represents what's best about America and capitalism. Folks in a position to mislead and cause harm to that process should take a hard look in the mirror.

    Go HDY. I really don't care about these lame beatdowns on HDY, as I was accumulating and swing trading prior to, during and after the multi year lows with prior management. HDY is now a long term core holding. HDY will succeed and with any luck, Guinea will prosper without suffering the "oil curse" of some African countries. I'm confident HDY will be doing everything they can to insure the best for Guinea.

  • Report this Comment On April 18, 2011, at 1:31 PM, LondonPorter wrote:

    Behind the curve on where HDY is headed is again. I suggest basic fact checking prior to your next article.

  • Report this Comment On April 18, 2011, at 1:33 PM, thirdcoast wrote:

    This DD is so ridiculous, lets just move straight to the rec:

    Yes, PLAY IT SAFE and wait till PRODUCTION to buy.

    Don't wait till HDY proves reserves on their 9,650 square mile concession. Wait till they produce it, you will certainly get the best deal per share then.

    Or you could just wait until the the fool makes a desperate last ditch effort to bash so they can cover lower....buy when they are and sell around production.

  • Report this Comment On April 18, 2011, at 2:07 PM, isacsimon wrote:

    Thanks for all your comments.

    The fact that the company has raised $125 million is definitely good news, however, unless production begins off Guinea, nothing can be said in a concrete fashion. The cash raised will merely beef up the balance sheet.

    I had already mentioned in a previous article about Blackrock buying a 12% stake in HDY:

    http://www.fool.com/investing/general/2011/02/23/is-hyperdyn...

    E&P companies definitely have a hard time in the initial phase, but it is imperative that they hit oil and I've mentioned that if Hdy does, then the stock would be promising.

    -Isac

  • Report this Comment On April 18, 2011, at 2:11 PM, MotleyGruel wrote:

    In other late-breaking news, voters elect Obama president.

    This is as behind the times and the Motley Fool article that claimed the total unrisked reported by NSAI was 2.6 bbl when in fact the deepwater 2D had increased that number to 6 bbl.

    Old news is no news base investment decisions on. For the up to day story on HDY do your own research instead of drinking the motley drool

  • Report this Comment On April 18, 2011, at 2:28 PM, DDDaviddid wrote:

    This guy has several facts wrong.

    I wouldn't listen to these fools.

    Do your own DD.

    You can start here:

    http://www.hypd.com/index.htm

    In my opinion the time to buy is now!

  • Report this Comment On April 18, 2011, at 3:19 PM, ArniePalmer wrote:

    Nice title to your article, Isac. Where did you get it from? shorts r us?

  • Report this Comment On April 18, 2011, at 4:35 PM, killerbee2 wrote:

    The whole idea of buying now is because you get a whole lot of very prospective acreage at a very cheap price. Of course there is some risk in this company but exploration wells offshore West Africa are running at about a 40% success rate using current technology. With the latest capital raise HDY has enough cash to drill at least 5 or 6 wells. Do the math and figure out what the chances of success are with a 5 to 6 well program.

    While some consider the latest raising of cash to be dilutive, I think it was great. It gave HDY the capital needed to drill while allowing them to retain 77% of the concession. And it also put them in stronger bargaining position for bringing in a larger partner if they wish to or they can just go it alone.

    I would compare this company to Kosmos. Although Kosmos is private they had a great management team like HDY does now, they raised enough capital to fund an exploration program, they went out and drilled and they hit Jubilee. That made Kosmos a multibillion dollar company overnight. The same thing could easily happen here. The similarities in the geology and the companies are there but you have to do your DD to realize it.

  • Report this Comment On April 18, 2011, at 5:06 PM, thirdcoast wrote:

    Isac,

    Your readers and fool subscribers would like to know when this "pipe dream" will become "promising"?

    - When HDY "hits oil" proving reserves.

    OR

    - When HDY "begins production offshore of Guinea"?

    OR

    - When your interest is covered and you are finished bashing HDY with bearish headlines?

  • Report this Comment On April 18, 2011, at 5:38 PM, scotto80 wrote:

    If the company starts production from its West African base, the stock would be promising.

    Yeahhhhhhh it sure would be promising but you will have to pay a tad bit more to own it! Oil exploration companies have a foolish way of going up if they hit oil and going down if they don't. Good grief!

  • Report this Comment On April 18, 2011, at 11:02 PM, thirdcoast wrote:

    Isac,

    I cant believe you acknowledged failing to mention the recent share offering in your article.

    Its beyond me how you could fail to mention something of that MAGNITUDE.

    You say its "good news" in your comment. The fact is it is OLD NEWS, publicized weeks before your pathetic article.

    I do commend you for being obvious about your lack of DD, anyone who is influenced by it deserves what they get :)

  • Report this Comment On April 21, 2011, at 1:10 AM, travel2much wrote:

    I have known this company for 10 years, before they were Hyperdynamics they were Microdata, It has always been a pump and dump and it will always be. They started in puppy miling computers and now are in oil and gas? Have they ever once posted a profit in there entire existance? Buy at 1$ sell at 4$ otherwise they are overpriced.... remember these words

  • Report this Comment On April 21, 2011, at 11:29 PM, thirdcoast wrote:

    travel2much,

    Yes, they used to be pump and dump when watts was in control and ROG was out of control with no real HDY financing or realistic plans to explore.

    TODAY- New exploration experienced mgmt and bigger institutional ownership. Fund-raising completed and drilling plans on schedule.

    Sorry you got burned in the past, its not too late to make up those losses and hop in.

  • Report this Comment On April 22, 2011, at 4:57 AM, travel2much wrote:

    Still to much risk for me.... Hopefuly the new talent will outshine the past burden,.. my other big concern would be the stability of the Guinea government and the risk of after a major drilling investment is made a new Junta comes in and declares the concession contract HDY has as invalid and repatriates its oil feild for the benefit of the Guinea people. (Read the past news from a couple years ago when the HDY contract was in question) After all it does seem that all there eggs are in the Guinea basket....With that said I watch with interest

  • Report this Comment On April 23, 2011, at 11:36 AM, thirdcoast wrote:

    Travel,

    I sympathize with your past experiences prior to Ray & Co, and prior to ROG stability. I also understand your concerns over those ROG risks.

    Sure there are still concerns over the general African business culture and ROG tribal opposition.

    However, the landscape has changed drastically.

    Soros is backing ROG and he is backing HDY. American Friends of Guinea (AFG) needs HDY to be successful as does the broke ROG in general.

    HDY has no earnings like you mentioned. It wasnt mentioned in Isac Simoron's article, but what doesn't make this a "pipe dream" is that HDY raised $140 mil to drill with these ROG risks in the air.

    ROG leaders are going to let HDY do the WORK and drill. When reserves are proven and oil revenue is on the way, THEN Ray will deal with the understood African business culture.....until then HDY drills or gets bid up for a buyout.

    Much more upside potential than downside. Its not about limiting risk, but understanding it and managing it.

    Hop on board, or you will be kicking yourself.

  • Report this Comment On April 25, 2011, at 5:59 AM, travel2much wrote:

    thirdcoast,

    "When reserves are proven and oil revenue is on the way, THEN Ray will deal with the understood African business culture....."

    Then it might be to late, I did not know the African Business Culture was so understood.

    If ROG had potential BP or Shell would be there, not HDY

    Anyhow one of us will be proven wrong, I have nothing in it so I hope it goes well for you.

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