90% of your initial cash back before Q2 and up to an 85% return!

A tasty acquisition deal

Hurricane Energy (HUR.L) 21/03/23

90% of your cash back before Q2 and up to a 85% return on initial investment distributed over next few years!

SSGE just took a position in what looks to be a very low downside (c.10%) and decent upside equity position (c. 85%). The crazy part is 90% of the initial cash invested will be returned within 2 weeks of the deal completing (before Q2 2023 expected)!

Hurricane Energy is a UK oil company in the process of accepting an offer to be acquired (high probability given backing from majority shareholders and board).

We paid 6.75p per share. Two weeks after the deal is agreed, 6.02p cash per share will be distributed to shareholders.

After that each shareholder will receive Deferred Consideration Units (DCUs) which will pay out 17.5% of net revenues (not net profit) on a half yearly basis in cash, until 2027.

The DCUs will pay up to 6.48p over their lifetime. However we only require 73p to be distributed to have all our initial investment returned in cash. The rest as they say, is free upside!

Total max distribution is 12.5p per share, which is c. 85% return on a cost of 6.75p per share.

It looks to me like the full DCU’s 6.48p payout is likely given current oil prices… but there are of course many risks and I don’t claim to be an oil expert at all! However, I do think the chance of having the full initial investment returned in cash by the end of the year is very likely and after that the upside is free.

I’ll leave it up to you to do the full DD on this. The simple math above and management guidance was enough for me to take a position. I was already familiar with the background.

Risks:

The key risks being the deal falls through, which is low since it is backed by the board and majority shareholders after a full sales process with 4 other offers considered.

The DCU’s don’t produce any income, if say the oil fields stop producing for some reason and /or price of oil falls dramatically to ensure unprofitable production. This would produce a maximum 10% loss, given the majority of the initial investment will have already been returned in cash.

Links to relevant press releases from the company:

Q&A session – See Q10 and Q11 for details on the deal. Q27 says DCU’s will be tradable!

The Q&A can be read in full here.

Acquisition recommendation doc:

Recommended Acquisition of Hurricane Energy plc | Hurricane Energy plc (design-portfolio.co.uk)

Disclaimer: Nothing here is financial advice. The investment presented here is high risk. Do your own due diligence

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