Seeing a small oil company’s stock trebling in a year takes me back to the old days when oil and gas was the hot growth sector. But the Hurricane Energy (LSE: HUR) share price climb has to be seen in context.
From the heights of 2019, we’re looking at a crash of around 85%. And that’s even after this year’s gains. But recent news looks positive to me, with the company’s latest operational and financial update just released on 11 August.
Whatever the nature of a company, the first thing I look at is its financial situation. It’s no good sitting on big assets without the cash to exploit them. No, many a small explorer has gone bust that way.
During July, Hurricane repaid its outstanding $78.5m convertible bonds, plus interest. That left the company debt-free, which used to be almost unheard of for an oil company of this size. In fact, at 31 July, the books carried net free cash of $89m.
Cash generation
The rising oil price has been kind to Hurricane and helped turn 2021 into a turnaround year. Cash production costs did rise a little, to $28.20 per barrel. But when the stuff sells for upwards of $100, that means the cash should be rolling in.
And roll in it did, generating $135.7m of free cash flow. That led to a profit after tax of $18.2m, compared to a whopping $625.3m loss the previous year.
As of 9 August, the firm’s Lancaster field was producing approximately 8,400 barrels of oil equivalent per day from its P6 well. That did have an associated water cut of around 47%, though.
The latest cargo of Lancaster oil raised net revenue of $60m, based on an average price of $111 per barrel.
Bumper year?
Things appear to be going very well at the moment. If profits and cash flow continue at these kind of levels, shareholders could be in for a bumper year. And I really think the Hurricane Energy share price could make further gains before the year is out.
So am I going to buy Hurricane shares now? No.
Warren Buffett has pointed out that investing in an oil company is effectively placing a bet on the oil price. That hasn’t stopped him investing in oil companies, and he appears to believe he understands the business.
But with Buffett, we’re talking about $10bn ploughed into Occidental Petroleum. Occidental should easily be able to withstand the next oil price dip.
Resilience?
But Hurricane Energy? I don’t see the cash there to cope with a sustained oil price slump. I don’t expect one any time soon. But I didn’t expect the previous couple of oil crashes either.
I doubt prices will remain above $100 for much longer. That said, Hurricane does have plenty of safety margin around its production costs. And I think it has a good chance of being one of the sector winners over the next couple of years.
But I just don’t see any need to take the risk. Not when there are so many established companies out there offering me juicy low-risk dividends.
