Hurricane Energy (LSE: HUR) shares are up 10% as I write on Monday, after hitting 13% during earlier trading. The oil price breaking the $115 level is boosting oil shares generally. But the HUR share price was already on a run before the Russian war on Ukraine started.
Over the past 12 months, Hurricane shares are up 170%, but that hides the fact that they didn’t really start picking up until May 2021. From its low point that month at a meagre 0.6p per share, HUR has now spiked by a massive 1,400%. I can’t help thinking that momentum might finally have turned.
Hurricane has been dogged by a number of problems. Some prospects turned out bad, and then the Covid-19 pandemic hit. From November 2019 to that low of May 2021, we saw a the HUR share price collapse by 98%.
But it looks like things are turning around. Importantly, Hurricane is now profitable. At the 2021 interim stage, it recorded $124.5m revenue from its Lancaster field, offshore Scotland.
Hurricane profits
That generated $75.9m in operating cash flow, and profit after tax of $42.8m. At 30 June 2021, the company had $132.3m in net free cash on its books. But possibly the biggest cause for optimism is Hurricane’s cash production cost, which came in at $24.80 per barrel. When oil crashed to $20 in 2020, that was not great. But at today’s price, it suggests a hefty margin of close to 80%.
But it brings me to what I see as the biggest risk. The soaring oil price looks to be the main factor behind the HUR share price acceleration, rather than growing production.
The company’s latest update, in February, showed the Lancaster field producing 299 Mbbls during the month, at an average rate of 9,639 bopd. That’s not a bad rate of production, but it’s not accelerating. In the first half of 2021, Lancaster production averaged 11,100 bopd.
HUR share price pressure
I expect to see pressure on the HUR share price when the oil price falls back again. There’s still potential for very healthy margins, mind. And if oil should stabilise in the $50-$70 range, I’d be optimistic about Hurricane’s long-term prospects.
That brings me to the debt situation. In its February update, Hurricane told us that following early problems, “the regulator has now formally requested that the company lodge additional funds as decommissioning security.” The firm expects that will “increase the amount of funds placed into trust, and which are therefore classified as restricted cash, from £28m to £33.7m.”
Cash squeeze ahead?
Some cash has come in from tax rebates, and net free cash at 31 January reached $85m ($77.3m after the anticipated security effect). That’s up from $50m at 31 December, which is a pleasing trend. But the company does note that “not all of the net free cash would be available for repayment of the remaining outstanding Convertible Bonds at their maturity in July 2022.“
I do think I see an oil exploration company on the verge of making it into sustainable profits here, and I’m tempted to buy. But on the other hand, I think the HUR share price is likely to depend heavily on the oil price. And I fear there might be a financial squeeze ahead. I will keep watching.
