If I’d bought Hurricane Energy (LSE:HUR) shares a year ago, I’d be up around 10%. Yet if I’d invested two years ago, I’d be holding a large loss. Two years ago, the stock was trading at 42p. Currently, it trades at 3.2p. During the period of the share price falling heavily, I stayed well clear. But with the price having now stabilised (along with some green shoots emerging), I’ve recently bought some shares. Here’s my thinking.
A tough few years
Hurricane Energy is an oil exploration company, mainly targeting areas on the offshore continental shelf, west of Shetland. More specifically, the company aims to “discover, appraise and develop hydrocarbon resources from naturally fractured basement reservoirs”.
The collapse in the share price back in 2019 was caused by the usual optimism followed by the kind of lack of results that can plague oil and gas stocks. The shares were bought on the expectation of finding viable outputs from drilling projects, but this unfortunately didn’t materialise.
For example, the Warwick deep well didn’t flow at commercial rates, meaning it was plugged and abandoned by Hurricane. A similar situation happened at the Lincoln Crestal site. Even the flagship Lancaster field site was seen underperforming in 2020.
A new CEO was appointed in the summer of 2020, with co-founder and previous CEO Robert Trice stepping down. The damage for the year was already done, with the 2020 report showing that the company was loss-making. A mixture of all of the above points saw Hurricane Energy shares fall to 2.5p as we entered 2021.
Why I’ve bought Hurricane Energy shares
I feel that the worst news is now in the past for the business. A few positive recent events are leading me to think this way.
For example, earlier this month it was announced that the firm would buy back some of its outstanding convertible debt (around 33%). This is positive for several reasons. Firstly, it gives me confidence that the business can afford to do this. Second, repurchasing such bonds means future interest payments won’t need to be made. This will reduce costs further down the line. Hurricane Energy shares jumped when this was made public.
Another point that highlights progress was from the recent trading update. It showed that production levels at the Lancaster site are back at pre-shutdown levels. With us only being a month away from the interim results, I think this update was a positive note for the company to issue. It gives me confidence in the outlook, something that could be cemented by strong results in October.
The main risk I see to the company is future failures for exploration at new projects. It needs multiple sites to perform if it really wants to become a viable player, and unfortunately this is still unproven.
For the moment, Hurricane Energy shares remain calm. If we do have good results, along with strong free cash flow levels, then I think the shares could rally from here into 2022. That’s why I’ve bought them.
jonathansmith1 has shares in Hurricane Energy. 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.