The Motley Fool

Could the Hurricane Energy share price be the bargain of the year?

There’s no shortage of loss-making-but-high-potential companies on the stock market. Oil explorers and developers and pharmaceuticals and medical technology firms offer the prospect of particularly big gains for investors who identify the right company at the right price.

Of course, this is easier said than done. For every millionaire-maker there are dozens of duds. Today, I’m weighing up the potential of oil stock Hurricane Energy (LSE: HUR) and pharma player Circassia (LSE: CIR), which released its annual results today.

Collapse

Heavily backed by cornerstone investors Neil Woodford and his protégé at former employer Invesco, Circassia pursued the development of a whole platform of allergy treatments that were said to build immunity quicker than existing remedies and without the risk of anaphylactic shocks. When its lead cat allergy failed a Phase III study, the entire programme collapsed.

At the height of investor confidence, Circassia was a member of the FTSE 250 index, with a share price of 350p and market capitalisation of over £1bn. Today, it’s on the AIM market, its share price is 31.5p (down a little on the back of its results) and its market cap is £118m. Its accounts show an accumulated loss of over half-a-billion quid.

However, it now has a small portfolio of revenue-generating products, including via a commercial collaboration with AstraZeneca, which has also become a 19% shareholder in Circassia. Could the stock be set to rise like a phoenix?

Recovery?

Just over a year ago, I wrote that I wouldn’t touch Circassia with a bargepole, noting also a 5.42% short position in the stock held by hedge fund Mangrove.

Today’s results showed a £37.2m operating loss on revenue of £48.3m. There are signs of promising revenue growth, and with the share price much lower than a year ago, the valuation picture has improved.

However, continued losses are forecast into next decade and Mangrove has maintained its chunky short position. I’m not convinced the risk/reward proposition with Circassia is compelling, and so continue to see it as a stock to avoid at this stage.

Share price to double?

By contrast, when I last wrote about Hurricane Energy (November 2017), I felt its progress to date, potential to become a major player in the West of Shetland region, and share price of 26.75p (market cap £524m) represented an attractive risk/reward proposition. The shares are currently trading at around 47p (market cap £921m), but I continue to see a compelling investment opportunity.

The company is on track to deliver first oil from its 100%-owned Lancaster discovery before the end of June. Planned initial production is 17,000 barrels a day, and management expects to generate over $200m in operating cash flow on a full-year run-rate basis at a $60 a barrel Brent oil price.

Meanwhile, a 50% farm-in to its Warwick and Lincoln fields by Spirit Energy, providing up to $387m, has enabled an acceleration of activity, including the drilling of three wells this year, one of which was spudded last month.

If we see the company successfully executing on this year’s work programme, I think the share price could easily double from its current level. And with total 2P reserves and 2C contingent resources across the asset base standing at 2.3bn barrels net to Hurricane, there’s potential for the value of the company to continue increasing as time goes on.

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca. 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.