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Why Hyperdynamics Doesn't Live Up to Its Name

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Independent oil and gas explorer Hyperdynamics (NYSE: HDY  ) seems to have thrown in the towel. What's worse is that the company seems to be heading for some legal trouble as well.

In a recent development, the company is planning to offload about half its stake in an oil resource off the West African shores of Guinea. This field, in which Hyperdynamics holds a 77% interest, happens to be its only oil resource. The company cites liquidity problems despite raising $136 million last year through an equity offering.

Too late now 
Looking at the intended asset sale, it's possible that the company is willing to hang on to its remaining stake in hopes of striking gold. However, it's too early to comment on the prospects.

This day has been coming for Hyperdynamics, which had 16 consecutive quarters go by without ever generating even a dollar in revenue. So it doesn't really come as a surprise when the company gets into liquidity issues. But what's really surprising is that after more than five years of operating off Guinea, management couldn't estimate drilling costs accurately.

As a result, there's now a possibility that the company could come under legal scrutiny. Law firm Faruqi & Faruqi is investigating potential securities fraud on several counts. According to the firm, Hyperdynamics has allegedly failed to disclose the substantial expenditures and delays involved in its operations, leaving investors in the dark about the exact nature of the company's exposure to liquidity problems. The law firm is also investigating whether the company's claims about the prospects of drilling off Guinea were reasonable enough.

It would be interesting to see how the company will defend against these charges. But whether or not they turn out to be true, the company is still one big mess. The last operational update was back in February, and it was depressing: The company had encountered oil in the only well drilled so far -- but it was in non-commercial quantities.

Pure bad luck?
Speaking of African prospects, they actually aren't too bad; it's just that Hyperdynamics got caught up in the wrong location. Offshore Nigeria and the East African assets are some of the most fertile drilling grounds, and Total (NYSE: TOT  ) and Royal Dutch Shell (NYSE: RDS-A  ) are looking into potential ways to cash in on the natural gas find there. Shell has sunk nearly $2 billion into natural gas reserves off Mozambique and is buying Cove Energy for $1.6 billion. Maybe Hyperdynamics could use all its years of experience to drill elsewhere in the continent -- but will investors have any faith left in management?

Foolish bottom line 
Unless something miraculous happens, the sun seems to have set on Hyperdynamics. Meanwhile, The Motley Fool will help you stay up to speed on the latest developments on the company. You can start subscribing to them now by adding Hyperdynamics to your free Watchlist.

However, if you're looking for investing opportunities in energy, The Motley Fool has created a new special oil report titled "3 Stocks for $100 Oil," which you can download today, absolutely free.

Fool contributor Isac Simon owns no shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Total. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (9) | Recommend This Article (10)

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 May 13, 2012, at 10:36 AM, grandpas6 wrote:

    Do you even pay attention to this company or do you just like to write uninformed pieces of trash. The company doesn't have a liquidity problem, they have enough cash to operate for well over 4 more years. Forming a joint venture by turning over 1/2 their concession to an operator is a great idea and a common practice.

    Also get some facts on why the drilling cost of Sabu were so high...they will be getting some of that cost returned to them.

    As for the law suits, those vultures are always around and to my knowledge, I don't think they've found a lead plantiff yet.

    Things may look dark right now, but if you invested in this company for a quick gain, then you are the fool. This story has another 2-3 years to run.

  • Report this Comment On May 13, 2012, at 12:40 PM, Lvl99 wrote:

    Reading your article, it was nothing short of a giant waste of time. Do you ever do your DD before writing an article? If you had any knowledge or common sense for that matter you would think the opposite on the company. Smart money is dumping millions into this stock and I have no doubt that this stock is going to double digits very shortly- within a year from now. When it does- I hope you have the courage to write a piece on the company explaining how badly you misjudged this company and that next time you will put some thought and research into the articles that you write.

  • Report this Comment On May 13, 2012, at 1:36 PM, brchad wrote:

    Based on past Fool articles concerning HDY, it comes as no surprise that this one is so obviously and pathetically biased. What IS somewhat surprising is that a pitiful piece of reporting like this could actually make publication when the author's information dates back to February of this year.

    Simon writes: "The last operational update was back in February, and it was depressing: The company had encountered oil in the only well drilled so far -- but it was in non-commercial quantities."

    An idiot could have read Yahoo news:

    "Hyperdynamics to Hold First Quarter 2012 Business Update Investor Conference Call May 10PR Newswire(Mon, Apr 23)"

    And while you're at it.... you may want to actually read this as well: HYPERDYNAMICS CORP Files SEC form 10-Q, Quarterly Report EDGAR Online(Wed, May 9)

    How long did it take Simon to write this crap? About 10 minutes?

  • Report this Comment On May 14, 2012, at 2:55 PM, gatzbp wrote:

    Whilst I agree the article has as much depth as the HDY wells have oil, the comments are as bias as they are wrong.

    HDY is a dead company. Oil reserves in the area are far away from their territory. The first well showed nothing but except oil was once there, as it was on most of the planet.

    Management has done nothing but destroy capital. I hazard a guess the above posts are from management as longs should be as long gone as the oil where HDY drilled.

  • Report this Comment On May 16, 2012, at 6:26 PM, Patastic wrote:

    Did they purposely drill an area they knew had a less than desirable probability of containing oil merely to meet their PSA and hold on to their concession? That is the million $ question for HDY management.

  • Report this Comment On May 18, 2012, at 10:20 AM, kent4519 wrote:

    Some of the facts left out are:

    HDY has a dozen or more drilling prospects that are 3D delineated with potential for world class reserves. They have proven petroleum systems, source, beautiful resevoir rocks. With a Super Major Partner, which I think will happen within next 6 months, Analog turbidite targets both south off Sierra Leon and the prolfic transform margin and across the ocean.. there probability for success is far greater now than when the stock hit $7 a share. IT IS A GREAT SPECULATIVE BUY....and like someone else said 4yrs of cash+++

    Additionally, like so many other smallcap companies over the years their market volitility and woes are severely worsened by NAKED SHORTS, FAILURE TO COVER. HDY IS A VICTIM BUT HAS SURVIVED NONE THE LESS!!!!! If Motley Fool wants something to really talk about. Get a copy of the documentary "Wallstreet Conspiracy". The movie says it all. By the way, Jim Cramer doesn't look good in this.

  • Report this Comment On May 28, 2012, at 2:22 PM, JPCrespo wrote:


  • Report this Comment On May 29, 2012, at 1:03 AM, bobbydudley wrote:

    Hyperdynamics is toast. They drilled their safest prospect and it failed. They drilled three Cretaceous seismic amplitude anomolies that were supposed to direct indicators of oil reservoirs. The amplitude anomolies were wet. They contained water; not oil. This significantly raises the risk profile for the portfolio; if amplitudes do not work then there is no direct method to rate and assess the remaining prospects. Why should the undrilled amplitudes contain oil? Hyperdynamics has little technical capabilit to model amplitudes and do fluid substituion analysis. Hyperdynamics has no capability to coduct AVO analysis. Hyperdynamics took there best shot and they lost. Ray Leonard is not an oil finder; he is a promoter. He will flog this to the bitter end. Hyperdynamics is toast. Burnt toast.

  • Report this Comment On June 01, 2012, at 12:44 AM, jsIRA wrote:

    This is a speculative play.

    Stock went from $0.22 to $3.50 from 2003 to 2004. From $0.22 to $7.50 from 2009 to 2011.

    It may repeat the process for the third time. This month low was $0.57, not far from $0.22.

    If they do find some oil, you win. If not, you lose. Place your bet.

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