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Why Hyperdynamics doesn't live up to its name

Sunday - 5/13/2012, 11:30am  ET

Independent oil and gas explorer Hyperdynamics 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 and Royal Dutch Shell 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.

This article was originally published as Why Hyperdynamics Doesn't Live Up to Its Nameon Fool.com

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