Should investors strap themselves in for Hurricane Energy?

Shares in Hurricane Energy slid sharply in the last few days, does that create a buying opportunity?

Article updated: 3 December 2019 12:00pm Author: Michael Baxter

It is important to remember stuff. Shares in Hurricane Energy have fallen 22 per cent in the last few days, but to determine whether the falls are justified, we need to go back and remember why the share price has been higher in the past.

I wrote about Hurricane Energy in June 2017. Back then I said: “Hurricane has hit oil off the coast of Scotland, the big doubt relates to whether it can raise the money it needs to fully exploit the asset.”

When I wrote those words, shares were at 32p. Roughly 30 months later they are at 36p. So, not much then. Not much to say.

Except, shares moved up to 58p in September last year, fell to 39p three months later, rose back to 58p in May this year, and right now the share price is at a 20 month low. If you watch someone enter a roller coaster and then see them get off a few minutes later at exactly the same point, you could say ‘not much has happened then,’ but you would be wrong, because you missed what happened in between.

The Hurricane Energy share price might be at roughly the same price today as during the spring of 2017, but look at the company and you soon see an awful lot has changed.

For one thing, its latest half yearly results, released in September, revealed an operating profit of $1.2 million compared to a loss of $4.7 million this time last year. So that seems promising.

On the other hand, thanks to a “non-cash fair value loss on the embedded derivative element of the Convertible Bond,” it made a loss after tax of $23.5 million. "As at 30 June 2019, the Group had an unrestricted cash position of $81.4 million,” this compared with $83.0 million a year ago. So that is a pretty slow burn rate.

More to the point, oil is flowing.

But the markets got really excited about Hurricane Energy when oil from its Lancaster field started flowing — and now around 14,000 barrels a day is forthcoming from the site.

In the last few days, the company had more news this time from another site. It confirmed a maximum stable flow rate of 1,300 bopd (barrels of oil per day) on natural flow from its West Warwick field. Although Hurricane had never suggested that the flow could be greater, the markets were disappointed, that is why shares fell.

Back in September, Dr Robert Trice, Chief Executive of Hurricane said: “Whilst the financial security gained from production is crucial, the ultimate goal of the Lancaster Early Production System is to improve our understanding of the reservoir to aid planning of future phases of development of Hurricane's significant Rona Ridge resource. Throughout the start-up phase and following first oil, the reservoir has performed at the higher end of expectations. However, we remain cognisant that it will take at least six months of steady state production before we are able to evaluate the validity of our reservoir model.”

Or to put it another way, we don’t know, and we won’t know for six months. Until then, shareholders are playing a guessing game.

The company has a market cap of £723 million, so to justify that it needs to make a profit greatly in excess of its recent operating profit.

Then again, as Dr Trice said: “Achieving first oil on schedule and on budget is a remarkable achievement and a huge credit to our operating team, our partners and contractors.”

I find it hard to disagree with such sentiments, but an investment in the company is a bet on the true value of oil lurking in the assets Hurricane operates. It is also a bet on whether Hurricane has the scale and resources to exploit these assets. Then again, its track record is not so bad and if you believe in the company, the current share price might make it seem tempting.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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