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Why I think the Hurricane Energy share price could fall off a cliff

Hurricane Energy (LSE: HUR) has always been a high-risk, high reward opportunity. If the company can bring its flagship Lancaster oil field, which management believes contains 523m barrels of oil (boe), into production successfully, investors could be well rewarded.

However, if the company fails as so many other oil exploration companies have done before it, then shareholders could lose everything.

So far, Hurricane’s operations have proceeded as planned (just). Earlier this month, the company told investors that the Aoka Mizu Early Production System had arrived on site and has been securely moored to the turret mooring system buoy after not one but two unsuccessful attempts.

Now the real work begins. Getting the Aoka Mizu into position was just the first stage of the long, and risky process of starting production from Lancaster. If anything goes wrong in the next few weeks, the share price could fall off a cliff.

Risks growing

Hurricane has designed its early production system to produce 17,000 barrels of oil per day (bopd) net of operating efficiency. The company hopes this will be a quick win, and provide much-needed cash flow to develop Lancaster further.

The fact that the company has already had two setbacks with the mooring of the Aoka Mizu is a warning to investors that Hurricane is still very much a risky prospect at this stage.

The firm first attempted to hook the vessel up in January, but “the rope being used to pull in the buoy became snagged and it was not possible to complete the hook-up operation.” The next attempt to complete the hook-up took place around two weeks later. This time “the pull-in rope failed.” There were no injuries, and after a thorough underwater survey, operators concluded that there was no damage to the Aoka Mizu.

Management still believes that the production system will be up and running during the first half of 2019, but after two setbacks already, if I were an investor, I would be starting to get worried.

The next few weeks will be crucial for the enterprise as it connects up the early production systems and starts pumping oil. Even a small mistake at this stage could lead to significant repercussions for the company and its investors. In the worst case scenario, Hurricane could lose the Aoka Mizu or accidentally cause a giant oil spill.

Too expensive

If everything goes to plan, and the company starts producing oil, City analysts have the stock trading at a forward P/E of 46.4. That’s a bit too rich for my liking and suggests to me that there is already plenty of good news baked into the stock price.

With this being the case, I think the risks to the Hurricane share price are growing and unless the company meets City expectations, there could be a big drop in the share price.

With so much risk and little potential reward now on offer, I think it might be best for investors to avoid the Hurricane share price for the time being or at least until the company has started production.

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Rupert Hargreaves owns no share 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.