The Hurricane Energy (LSE: HUR) share price is up 20%, as I write. Shareholders seem to be celebrating after the firm’s restructuring plan was rejected by the High Court.
Today’s news appears to have received a positive reception from investors, despite management warning that there’s “a significant risk” that the shares will go to zero. I’m going to try and explain this unusual situation and set out what I think will happen next.
What today’s news means
To briefly recap, the disappointing performance of Hurricane’s Lancaster oil field means the company isn’t expected to be able to repay $230m of debt by July 2022, when it becomes due.
Hurricane agreed a restructuring plan with its lenders. This would have given them a 95% shareholding in the company in exchange for $50m of debt relief. The lenders would then have hoped Hurricane would be able to repay the remaining $180m of debt, over time.
Shareholders voted against this plan in June. However, Hurricane hoped that court approval would allow the firm to push through the plan anyway. The court has rejected this plan, so unless the company appeals successfully, it won’t now go ahead.
What happens next?
According to the company, Hurricane’s lenders may be legally entitled to force the company into “an insolvent liquidation” if the restructuring plan doesn’t go ahead.
I’d guess this would mean producing as much oil as possible from Lancaster and then winding down the company. Hurricane’s lenders would use the cash to repay as much as possible of the company’s $230m debt.
Hurricane says “there is a significant risk of no value being returned to shareholders” if this happens. I’d expect the shares to be suspended immediately and eventually delisted, leaving them worthless.
Shareholders aren’t happy. They think the company could be worth more and that they should retain a larger share of Hurricane shares.
After voting against the restructuring plan, shareholders are now planning to vote against the re-election of some, or all, of Hurricane’s directors at two forthcoming general meetings.
Depending on how things turn out, there’s a risk that if the company loses all of its executive directors, the shares might be suspended, or even delisted, for not complying with stock market rules.
Hurricane Energy share price: buy, sell, or hold?
Hurricane’s lenders have legal rights that put their interests ahead of those of shareholders. I’m not in a position to judge the likely liquidation value of this business. But I expect the firm’s lenders to take a conservative view. Their duty is to maximise their chances of getting their money back.
My view on this is pretty clear. Although it’s possible that shareholders might be able to secure a better deal that will still be acceptable to Hurricane’s lenders, I think it’s very unlikely.
Hurricane Energy’s share price has risen from 0.6p in May to 2.5p, as I write. In my view, the most likely outcome is that the shares will fall again, potentially to zero.
If I owned Hurricane shares, I’d sell them in today’s rise.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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