Why Hurricane Energy plc stock could be worth more than 200p

Roland Head looks at the long-term outlook for North Sea high flyer Hurricane Energy plc (LON:HUR).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Oil and gas investors who latched onto Hurricane Energy (LSE: HUR) during last year’s lows have done very well — the stock is worth 378% more than it was one year ago.

Recent news releases from the firm have sent the shares skyrocketing higher. But news today that estimated recoverable resources have risen by 162% to 523m barrels of oil caused the shares to fall by 2%. Why was this?

As expected

Hurricane’s recent drilling results have made it clear that a significant increase to the company’s resource base was likely. So today’s good news was already reflected in the firm’s share price.

The company’s new Competent Person’s Report (CPR) for the Lancaster field assigns 2P reserves of 37.3m barrels to the planned six-year early production system (EPS). According to the CPR, producing this oil should generate a discounted net present value (NPV10) of $525m. That’s a measure of the cash profit expected from the production, discounted at a rate of 10% per year.

In my view, today’s report provides confirmation that Hurricane’s Lancaster field has genuine commercial potential over the medium term. However, it’s clear that this value is already reflected in the group’s market cap of £742m. I’d need to see significant additional value to consider investing at current levels.

$3bn upside potential?

Today’s reserves report and NPV imply a value of about $11 per barrel for Hurricane’s 2P reserves. If we assume that the firm’s best estimate recoverable resources of 523m barrels might be worth half this much, we get a potential value of $2.9bn, or around 185p per share.

There’s also the potential for a further upgrade to resources later this year. Today’s CPR only applies to the Lancaster field itself. But Hurricane’s recent drilling results appear to suggest that Lancaster is joined to another of the firm’s fields, Halifax. These could form the basis of a Greater Lancaster Area development. Resource figures for this and the remainder of Hurricane’s portfolio are expected later this year.

Although I’m only estimating the potential value of Hurricane’s resources, it seems plausible to me that in time — probably over several years — the firm’s stock could be worth upwards of 200p.

This slow burner could double

Offshore Africa specialist Ophir Energy (LSE: OPHR) made a name for itself with a series of big gas discoveries, totalling trillions of cubic feet.

The problem is that these giant gas fields can’t be developed on a small scale. It’s all or nothing. Each development is likely to cost billions. For example, the firm’s Fortuna FLNG Project is expected to cost $2bn to reach first gas. Final sign-off on this project is expected later this year, but no gas will be pumped until 2020.

The market for further big LNG projects is uncertain. Supplies have increased over the last couple of years and investor appetite has cooled. Ophir faces a big challenge in finding development partners or buyers for its remaining gas fields.

In the meantime, the group’s shares trade at a 50% discount to their net asset value. For long-sighted investors, this could prove to be a value opportunity. But it’s worth remembering that the potential returns and timescales involved are highly uncertain. In my view, Ophir remains fairly speculative and is only attractive as a small part of a long-term portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any 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.

More on Investing Articles

Young black man looking at phone while on the London Overground
Investing Articles

Investing £3.33 into an ISA every day from 22 could result in a £60,000 passive income

Millions of Britons use the Stocks and Shares ISA as a way to build wealth and generate an income. However,…

Read more »

Investing Articles

2 resurgent cheap shares that could skyrocket in 2025

Cheap shares can take our portfolios to the next level. Here, Dr James Fox highlights two stocks that appear to…

Read more »

Investing Articles

How much does an investor need in a Stocks and Shares ISA to earn £1,000 a month in passive income?

A Stocks and Shares ISA's a valuable asset for investors. Not having to pay dividend tax can be a big…

Read more »

Investing Articles

9% dividend yield! Could buying this FTSE 250 stock earn me massive passive income?

Assura looks like an outstanding stock for dividend investors to consider. But is the 9% dividend yield the passive income…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Why I think this month could be critical for the Lloyds share price!

Our writer explains why he thinks the bank's 2024 results will have a significant impact on the short-term direction of…

Read more »

British Pennies on a Pound Note
Investing Articles

This former penny share has soared 168%. Is the best yet to come?

When Christopher Ruane saw a penny share as a potential bargain last year, he was spot on. So having not…

Read more »

Mature couple at the beach
Investing Articles

£20k in an ISA? Here’s how it could generate £1 of passive income every hour — forever

With a long-term approach, Christopher Ruane explains how an investor could aim to earn a pound per hour in passive…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

FTSE shares: overpriced or still a bargain?

Christopher Ruane reckons a storming FTSE 100 performance of late doesn't tell us much about whether there are still possible…

Read more »