Hyperdynamics Corporation (AMEX: HDY) can thank their inclusion in the recently reconstituted Russell 3000 for the massive trading volume spike on Friday as more than 20 million shares moved hands, significantly higher than the nearly 3.9 million shares traded on Thursday. While inclusion in the Russell 3000, which, according to Russell Investments, “is constructed to provide a comprehensive, unbiased and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected,” may garner HDY some additional notoriety and attract more interest the independent oil and gas exploration company with offshore interest in West Africa still has a ways to go before convincing investors they can actually produce some operating revenue.
Friday’s volume surge managed to push shares as high as 4.56 but by the end of the day HDY closed at 4.32 and in early trading on Monday they were already down around the 4.08 – 4.15 range and falling. That drop has put them about even with their 50-day and 200-day moving average of 4.11 and unless the company has some positive news to report when they conduct their investor conference call on Thursday the price could continue to tumble.
Up to this point HDY has said they have been “focused on the acquisition and interpretation of 3D seismic data for our concession in Guinea” and while that vision was enough to attract approximately $136 million from an over-subscribed equity offering in March it will likely take more than just data to generate additional investors. Fortunately for shareholders of HDY this could be coming in the fourth quarter as the company expects to spud their first well following a contract agreement signed in May between their well management company, AGR Peak Well Management Limited, and Jasper Drilling Private Limited, capable of drilling in up to 5,000 feet of water.
Based on an evaluation report from Netherland Sewell, an independent engineering firm and provider of reserve audits and exploration resource assessments, that concentrated on the 2D survey conducted for HDY in late 2009 an aggregate of “Best Estimates” for all assessed leads resulted in 3.7 billion barrels of potentially recoverable unrisked prospective oil resources along with risked resources of approximately 400 million barrels of oil. Since that report the data from the 3D survey has identified additional targets which have pushed the unrisked level to 6 billion barrels and 750 million barrels risked.
Given the fact that investors are desperately seeking an alternative to the instability of Libya and other oil producing countries West Africa could be the answer. Add to this mix the fact that HDY owns 77% of the largest concession in offshore West Africa and it’s easy to see why speculators are attracted to the company. While the oil estimates sound impressive the reality is for them to hold any real value they must be commercially viable. Much has been written about the greater percentage of successful test wells in West Africa compared to the rest of the world but until HDY produces concrete results there will remain serious concerns.
Those concerns could quickly turn to a share price boon if positive results are produced as oil demand continues to climb as consumption grows. There is a tremendous need for oil production, especially a producer that won’t be influenced by the political instability of a country or stricter government regulations on drilling permits. What makes HDY so risky, beyond the fact they haven’t generated dollar one, is the reality that they can’t control their own fate. The simple truth is that while they could profit from the current landscape things would turn ugly for the company if the price of oil were to fall sharply.
That may be putting the cart before the horse as HDY still needs to get that first well drilled and they appear to be in-line with their fourth quarter target. Earlier this month they announced that AGR Peak Well Management Ltd. had “signed contracts on their behalf for long-lead-time equipment, materials and professional services totaling approximately $12 million.” Those contracts, according to HDY President and CEO Ray Leonard, “are an important next step in our preparations for beginning Hyperdynamics’ exploration drilling program later this year.”
Leonard indicated that the contracts would “cover the majority of the long-lead-time materials and services that we will need to drill wells one and two, and they represent the majority of equipment and services that will be used offshore. Between now and the initiation of drilling, working through AGR, we plan to engage additional contractors to move people and equipment between the drillship and shore and to secure shore-based facilities, materials and services.”
There should be some update regarding their status on Thursday’s investors call but HDY remains a risky bet. Their inclusion in the Russell 3000 is noteworthy but certainly doesn’t guarantee any future success nor erase the fact that the company has yet to generate any revenue.