Could Hurricane Energy be set to smash the Sound Energy share price?

Here’s why I’d invest in Hurricane Energy plc (LON: HUR) ahead of Sound Energy plc (LON: SOU).

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Today’s higher oil prices have sparked new interest in oil exploration companies, as the price of a barrel hovers around the $76 level.

The risks are still there, for sure, but a stronger oil price lessens them a little while significantly boosting the potential rewards. But which companies might I go for?

Profit next year?

I’m increasingly liking the look of Hurricane Energy (LSE: HUR), as recovering oil has helped push the share price up by 50% since the start of 2018 — though it’s fallen back a little since oil has declined from its $86 peak.

Hurricane’s operational update this month showed that its progress is very much on track, with first oil from its Lancaster field now targeted for the first half of 2019. Together with other assets, we’re looking at total 2P reserves and 2C contingent resources attributable to Hurricane of around 2.8bn barrels of oil equivalent.

Commercial viability

Potential reserves aren’t enough, though, as others have come unstuck in being unable to extract them commercially or just not having enough cash. But though there’s a modest loss on the cards for this year, Hurricane is forecast to turn in a pre-tax profit of £98m in 2019, followed by £185m the year after.

Forecasts for 2019 also suggest a P/E of only around 15, and I see Hurricane Energy shares as good value at that level.

There’s still a question of whether the oil price will hold up, and the recent reversal is very likely holding some investors back. But it might just be giving us an extra buying opportunity at bargain prices before the price of a barrel steadies — and even a stable price around today’s $76 makes Hurricane look attractive to me.

No profit yet

One thing Sound Energy (LSE: SOU) doesn’t have that Hurricane does is profit forecasts — and that’s surely the reason the shares have lost more than 35% of their value so far this year while Hurricane shares have gained.

Earlier I explained why I wouldn’t buy Sound Energy shares, but is that just me being conservative and risk-averse in my old age? Successful oil explorers were all once in a similar position, and just because some won’t make it doesn’t mean they all won’t.

The cash situation looked pretty reasonable at the halfway point at 30 June, with £14.7m on the books — and that was boosted by a new equity issue in July which raised a further £11.4m before costs. But that has to be seen in the context of a total loss in 2017 of £34m — admittedly £22m of that was from discontinued operations, but it’s still a high cash-burn rate.

Prospects look good

The company does have some tempting-looking prospects, with exploration progress at its sizeable acreage in Morocco coming along nicely. 

But though I really don’t mind a bit of uncertainty and I often see it as presenting buying opportunities, there are two big classes of risk here. One is that we still have no idea of how much of Sound’s estimated hydrocarbons will make it to the surface. The other is that we don’t know how much it is going to cost to reach first profit and how much dilution current shareholders will endure along the way.

Sound Energy is still at too early a stage for me, even if oil exploration prospects are improving.

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.

Alan Oscroft has no position in any of the 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.

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