Hurricane Energy (LSE: HUR) shareholders have had quite a ride over the last few years. The shares surged from lows of 10p back in 2014 to an all-time high of 65p in May this year, before crashing down to 28p at the time of writing.
The market got excited when the company discovered significant reserves in licensed areas on the Rona Ridge, west of the Shetland Islands, but expectations were tempered by massive funding requirements needed to access the fractured basement reserves. Some analysts claim the company is sitting on the largest oil discovery beneath UK waters this century.
I’ve no doubt the firm has incredible potential if it can get the oil flowing, but in my experience this is rarely a straightforward task. Hurricane estimates that first oil will be achieved in 2019, but that leaves two years of operational development that could go awry before investors begin to benefit from those massive reserves.
The company has already raised $547m to fund Lancaster and other discoveries. $220m of this was raised by bonds with 7.5% p.a coupon, amounting to a yearly $16.5m cost. The company spent a further $87.2m on “intangible exploration and evaluation assets” in the first half of this year alone. I worry this significant cash burn could erode that massive cash pile fast.
Furthermore, Edison Investment Research has estimated it will cost the company just shy of $200m to reach first oil via the Early Production System (EPS), although around $2.3bn could be needed for a full field development. A delay in the EPS could easily lead to another dilutive fundraiser.
I can’t justify investing in a £560m company that has yet to sell a barrel of oil, although I can understand why investors are willing to take on the risk given the best-case estimate of 2.326bn stock tank barrels at Lancaster. If all goes off without a hitch, riches will surely be there. I’m deeply sceptical that they will, however.
POS-GRIP potential
I’ll also be avoiding oil services specialists Plexus Holdings (LSE: POS).
The company has struggled in the low-oil-price environment and swung from a £5.4m operating profit in 2015 to a £6.8m loss last year. Unlike Hurricane Energy, the oil industry at large has toned down capital expenditure so its been tougher for Plexus to sell its proprietary POS-GRIP wellhead device.
The company recently sold its Jack-Up business to FMC Technologies Limited for £15m, with an additional sum of up to £27.5m payable dependent on the future performance during a three-year earn-out period, so its balance sheet looks secure despite high fixed costs.
Plexus also signed a Collaboration Agreement with FMS which “establishes a framework to work together both on the development of existing POS-GRIP IP for applications outside of jack-up exploration, as well as future new technologies.”
The company’s strategy rests on increasing awareness of its POS-GRIP system, which it says improves safety and saves on both time and cost for users.
The company has already sold the system to illustrious companies such as Shell, BHP Billiton, ConocoPhillips and a number of other blue-chip clients, but regardless has struggled to post impressive results.
If the company is struggling despite such clientele, I don’t really see how this strategy will pay off. That’s why I’m steering clear of the business.
