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Hendrix and HEX Reinject Life into Furie

by Oct 22, 2021Magazine, Oil & Gas

When John Hendrix’s company, HEX, acquired Furie Operating Alaska in July of last year, after much negotiating and an almost dead deal, the longtime Alaska resident had a lot to contend with.

Furie had filed Chapter 11 bankruptcy after a few years of losses, and Hendrix planned to revive it by cutting costs and hiring an Alaskan workforce. Furie owed lenders about $440 million but was owed about $103 million in refundable Alaska tax credits.

Hendrix had already bought Furie Operating Alaska’s Cook Inlet Kitchen Lights Unit at a December 2019 bankruptcy auction with a winning bid of $15 million, financed in part by money from Hendrix’s own retirement savings in addition to a $7.5 million loan from the Alaska Industrial Development and Export Authority, though the deal almost fell through because of a dispute over the structure of the sale.

Why is Hendrix making such a significant investment? In 2011 after international assignments in the UK and Egypt, Hendrix had an opportunity to return to Alaska and work for Apache. When Apache exited Alaska, he felt like there was some business he still had left to do. “Picking up this company makes me feel like I’m giving back,” he says.

Making Furie Alaskan Again

At the time of the acquisition in July 2020, Furie was employing mostly contract workers originating from outside of Alaska, their transportation costs, insurance that the company didn’t need, and other inflated costs. In addition, three of the company’s four wells weren’t producing as much gas as they should—a fourth wasn’t open at all.

The past year has been a busy one for Furie, as Hendrix and his team have completely rebuilt the company. From creation of a Health, Safety, and Environmental manual to the crystallization of data—the work has paid off. All four wells are now up and running, and the company has experienced a 15 percent increase in production in the year since the purchase. “Right now, our production is down because we’re trying to clean up some messes left from our predecessors and we’ll be down for a few weeks, but hopefully what we’ve done will extract more reserves over time,” says Hendrix.

Upon taking ownership of the company, the first thing Hendrix did was to fulfill his promise to hire Alaskans to work at the now Alaskan-owned company.

In August 2020, Hendrix brought on Kevin Smith, a long-time resident of the Kenai Peninsula Borough, as operations superintendent of the Kitchen Lights Unit onshore processing facility and the offshore Julius R production platform. Smith was just the start of the Alaskan team Hendrix would hire. The workforce on the peninsula is now made of primarily of Alaskan employees. “This company had only one Alaskan employee, and now we have twenty-three,” says Hendrix.

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HEX also spent significant time and effort over the last year cutting operating costs. “We had a reality check,” he says. Where the company had previously been paying $1.9 million a year for insurance, it’s now paying $800,000. The company had been paying for oil-spill insurance but doesn’t currently have oil production. “We had to make everyone understand that we’re not an oil company, so we shouldn’t be saddled with insurance made for oil,” says Hendrix. “If you’re a gas company, there’s no spill, but we were paying $380,000 for spill response, and now we don’t.” Hendrix was also able to reduce the company’s helicopter expenses by $282,000 and cut other costs and fees as well.

HEX also worked on improving efficiency at the company’s four wells. Workers established a hydrate flow envelope to prevent restriction in gas flow. They reconfigured compressors to extend the life of the wells and boost production output. They completed a pipeline survey. And they pigged the gas lines.

“Pipelines should be pigged to push any debris out,” says Hendrix. “Up until we took over, the pipeline had never been pigged. We do it all the time now to keep it clear and running.”

In 2020, Furie applied for a wastewater permit from the Alaska Department of Environmental Conservation to treat produced water at the platform and discharge it to the surrounding Cook Inlet receiving waters. Given space constraints, Furie found a unique treatment system that could fit tight confines and produce exceptional quality effluent. The system includes a separator to remove free-phase oil and sediment followed by a two-stage filtration process. The Alaska Department of Environmental Conservation’s issuance of the permit has allowed the facility to maintain sustainable production rates while minimizing the risk of a repeat of the 2019 hydrate blockage.

Hendrix also worked on changing the view of Furie in Alaska. Unable to change the name, instead he focused on changing the culture at the company. “We call ourselves the blue Furie: we’ve committed ourselves to the state,” says Hendrix, noting the company’s previous color was red. “Now, we have people who don’t allow the word ‘no’ to take place.”

Pandemics and Taxes

HEX’s acquisition of Furie hasn’t been without its challenges. Royalties and overrides eat up 25 percent of Furie’s profits right off the top, with the state getting 12.5 percent and predecessor owners getting another 12.5 percent. And with only four wells, it’s crucial to keep them all operating and in good condition, says Hendrix.

COVID-19 also proved to be an issue, though more so in 2020 than 2021. In addition to the pandemic impacting the ability to get supplies last year, Hendrix had several workers contract the virus. Luckily, the symptoms remained flu-like and the workers were able to isolate together at the site.

Another unexpected challenge had to do with the property tax bill the company received. The $1.6 million bill Hendrix received was much larger than what he had been expecting. “The state taxed on the original cost of the company less depreciation. There were no adjustments for the sale,” says Hendrix, who is contesting the assessment. “I believe the property tax bill should be no more than $400,000. As the owner of a company, I want to make sure we have enough money to put back into the company so we don’t die. So when we have money for capital improvements and the state makes us pay unfair taxes with it, that’s wrong. Behaving like that will kill the company and eliminate jobs and reduce royalty payments to the state.”

One of John Hendrix’s first priorities for Furie was to focus on hiring Alaskans instead of out-of-state contractors.

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The most recent challenge Hendrix and the company have faced is a $100 million lawsuit filed against Furie in mid-August. The lawsuit alleges that the prior officers of Furie diverted money out of the company into their own businesses, drilling for gas that didn’t exist and selling gas the company did have at a loss, which caused the company to go into bankruptcy and be sold for far less than they claim it was worth. Hendrix believes the company’s previously inflated value was a result of the prior operators’ attempt to make the company look better to investors. “That’s one reason we were paying so much in property taxes,” he says. “I’m suffering the consequences of that.”

This recent development is causing Hendrix to reevaluate the decision not to change the name of the company, even though it could trigger more taxes. Hendrix is now thinking of changing the company to HEX Operating Alaska in order to gain distance from the lawsuit against the predecessor owners.

“We call ourselves the blue Furie: we’ve committed ourselves to the state. Now, we have people who don’t allow the word ‘no’ to take place.”

—John Hendrix, President/CEO, HEX

What’s Next?

While Hendrix is focused on the Kitchen Lights Unit, he still has his eye on other future growth opportunities. “I’ve always liked challenges,” he says, “but I wouldn’t have bought the company if I didn’t see room for growth.”

Furie and HEX have acquired onshore leases as well as additional offshore ones, totaling 19,800 acres among five new leases. Four of the leases are offshore, adjacent to the Kitchen Lights Unit, and the fifth is onshore on the Kenai Peninsula. If they pan out, production would be significantly increased over the 5.2 billion cubic feet currently produced. “Now we have both offshore and onshore leases, which helps with our development strategy,” says Hendrix. “I saw an opportunity, and we tried to get into where we could do something we can build from, good positioning in the Inlet.”

Production platforms in Cook Inlet.

P.A. Lawrence, LLC. | Alamy Stock Photo

And even though the company is currently focusing on its gas assets, that doesn’t mean oil isn’t a possibility for the future. “Right now, this year, all we’re focused on is getting the basics right and building a company that will last,” says Hendrix. “But we have to continue to save our money and build our war chest to invest and develop places. Doing this provides stability and sustainability to the company and the state. Oil might be in vogue next year. Who knows?”

One thing is for sure: Hendrix’s purchase of Furie benefits Alaska and, more specifically, Cook Inlet.

“They came in and basically saved a company from bankruptcy,” says AIDEA Executive Director Alan Weitzner. HEX was able to create an Alaskan-centered company in the Cook Inlet, so there are multiple people supplying gas in the area, and diversity of supply benefits everyone. Also, moving the company out of bankruptcy allows the state to continue to receive the royalties that benefit all Alaskans, and the Kenai Peninsula Borough continues to receive tax revenue from the company.

Weitzner says, “It’s a very complicated process when you’re looking to take a company out of bankruptcy, and HEX and the team have done an outstanding job in a very complicated situation.”

Enjoy this story? Check out other in-depth articles in our October 2021 Digital Edition.

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In September Alexandru Lapadat became the first recipient of the two-year Schaible Geophysical Institute Fellowship, established by Grace Berg Schaible, a former Alaska attorney general and benefactor of the University of Alaska. In 2018, the fellowship’s endowment received a $2.2 million gift from Schaible’s estate, which provided enough of a financial base that the awarding of fellowships could begin.

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