Is this the best small explorer around today or is there a better buy for my portfolio?

Solid results

Hurricane Energy’s assets are focused in the West of Shetland region of the UK. The first oil flowed from its flagship Lancaster field in June 2019.

In its 2022 half-year results, the company announced $159.5m in revenue compared to $124.5m in the same period last year. This generated $110.1m of operating cash flow, rising from $75.9m in H1 2021. Profit after tax was $67m.

Earlier this year, Hurricane repaid its outstanding $78.5m convertible bonds, plus interest. This left the company debt-free, and management is certainly bullish on the future: “With our strong balance sheet, no debt, and our decommissioning liabilities being fully funded… Hurricane, with our committed and capable team, is well placed to be able to create additional value for our shareholders.”

Risks

The main risk I see with Hurricane is the same that all smaller oil companies face, which is a sudden and/or sustained slump in the price of oil. Or even a crash.

For example, the pandemic and nationwide lockdowns caused a sharp decline in demand for oil and pushed refineries into production cuts. The price of oil collapsed, and at one point in 2020, a record 160 million barrels of excess oil were sitting in tankers around the world.

But oil demand rebounded strongly and Hurricane emerged in a relatively strong financial position. The problem is that nobody can predict what’s going to cause the next oil price crash and how long it will take to recover.

Safer options

Personally, I’d prefer one of the big players that has large cash reserves and can survive prolonged slumps in oil prices. Both BP and Shell, for example, look better options to me, with bucket loads of cash and assets.

These companies haven’t survived decades of tricky geopolitical situations and oil crises without being resilient. But needless to say, investing in such oil giants isn’t going to double my money overnight, like investing in Hurricane Energy could (in theory).

I’m looking elsewhere

However, beyond the safer oil giants, I do believe a better option for me could lie elsewhere. Jadestone Energy (LSE: JSE) is another small oil and gas producer, although focused on the Asia Pacific region. It has assets in Australia, Indonesia, Malaysia and Vietnam, but has been hit by operational problems in recent months. This has left the shares down 23% since January. But these issues should be transitory.

Jadestone Energy’s market cap is only £309m, just over double that of Hurricane’s. Its cash balance remains healthy and the company is also debt-free.

The risk with Jadestone is that operational problems may persist, eating away at its free cash flow at a time when oil prices are high. Still, I like Jadestone’s diversification of assets and the region it operates in, so I’m considering investing in the company over Hurricane Energy.

The post The Hurricane Energy share price is up 80% in 2022. Time to buy in November? appeared first on The Motley Fool UK.

Hurricane Energy share price soars

As a quick reminder, Hurricane is an oil and gas exploration business. It focuses on making discoveries in naturally fractured basement reservoirs. These are usually prolific producers of oil and gas globally, however, they are a new play on the UK Continental Shelf, which is the region of waters surrounding the UK.

So what’s the current state of play with Hurricane Energy shares? Well, as I write, they’re trading for 8p. At this time last year, the stock was trading for just 2p, which equates to a return of 300%!

So why has the Hurricane Energy price soared? I believe the current market for oil, coupled with the company’s impressive performance in recent times has definitely boosted shares. In July, Hurricane repaid an outstanding convertible bond worth £78.5m, which made the firm debt-free. This is a rare occurrence for small oil and gas firms like Hurricane to be totally debt-free. Furthermore, as of 31 July, it had $89m worth of net cash on the books.

The investment case

The recent oil and gas markets have been kind to many businesses in the industry, and this includes Hurricane Energy. As part of the operational update it provided earlier this month, all signs pointed towards 2021 being a transformative year for the business.

Hurricane reported that, due to stable oil prices and rising demand, it managed to generate $135.7m of free cash flow. This helped to post a profit of $18.2m after tax. This is a major turnaround when comparing figures to the previous year when Hurricane posted a mammoth loss of $625.3m.

It is worth noting that despite a bullish oil market, macroeconomic factors are playing their part. Soaring inflation, and the rising cost of materials, has had an impact on costs for Hurricane. Despite the impressive figures noted above, costs to produce a barrel of oil did increase to $28.20 this year. These issues could affect profitability moving forward.

What I’m doing now

Things look good right now for Hurricane Energy. The results I’ve noted above have boosted the Hurricane Energy share price in recent months. Existing shareholders could be in for a lucrative year ahead if this upward momentum continues.

After taking everything into account, I’ve decided I would be willing to open a small position in Hurricane shares. They look decent value for money on a price-to-earnings ratio of just eight. Furthermore, at 8p per share, the risk to reward ratio looks very low for me.

If Hurricane shares were to struggle, I wouldn’t have lost much money based on current levels and my investment. A big part of my investment strategy is to look for small-cap stocks doing well that could turn into major players in the long term. I wouldn’t be surprised to see the Hurricane Energy share price continue on an upward trajectory, at least in the short term.

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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.

The post The Hurricane Energy (HUR) share price has trebled in a year. Time to buy? appeared first on The Motley Fool UK.

[fool_stock-chart ticker=LSE:HUR]

Oil prices

Hurricane Energy is a UK-based oil and gas exploration company. Both the EU and the UK import oil and gas from Russia. Concerns over supply following the dreadful Russian invasion of Ukraine has pushed up the price of oil significantly. It has also caused the UK government to assert the need to increase domestic oil production. As a result, the Hurricane Energy share price has shot upwards.

According to the company’s interim filing, Hurricane produced just over two million barrels of oil in the first half of 2021. It did so at a rate of around 11,000 barrels per day. It cost the company around $25 per barrel to produce and it sold the oil it produced at an average cost of $62 per barrel.

As I write, the price of oil is just over double the price the level at which Hurricane was selling it last year. Obviously, the immediate future looks bright for the company. Moreover, news that Warren Buffett has been buying shares in an oil company emerged earlier this week. There’s clearly a lot going for investors in oil businesses at the moment.

Investing in oil

Despite this, I don’t anticipate adding shares in Hurricane Energy to my portfolio any time soon. According to Buffett, an investment in an oil company is a bet on the price of oil over the long term. And I personally don’t have a clear view on the price of oil in the years and decades ahead. 

Until recently, I thought the market was undervaluing the prospects for oil companies going forward. Renewable energy companies seemed to me to be in fashion, oil companies were out. Against this backdrop, I took the view that fossil fuel companies generally had better prospects than the market was anticipating. 

Now, however, sentiment seems to have shifted. Oil companies seem to be back in fashion, but in my view, the pendulum has swung too far. The Hurricane Energy share price is reflecting a price for oil that’s unlikely to be sustainable over time. That’s why I don’t see it as an investment opportunity for me at the moment.

I share Buffett’s view that the future prospects of oil companies are tied directly to the price of oil. If the price of oil comes down and brings Hurricane’s share price down with it, then I might well be interested in buying shares for my portfolio. But I’ll wait until I think that the market is undervaluing the company’s prospects before making an investment. At the moment, I think that there are better undervalued opportunities elsewhere.

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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.

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The rising HUR share price

I’ve previously explored this business. But as a quick reminder, Hurricane Energy is an oil exploration company. It ran into quite some trouble when a series of prospective projects turned out to be duds back in 2019. Slap the global pandemic on top of that, and within a few months, the HUR share price plummeted by over 85%.

Since then, operations have improved. And revenues for the first six months of 2021 came in at an impressive $124.5m versus $81.9m in 2020. But more excitingly, the firm became profitable. A total of $42.8m of after-tax income was reported. And given that’s up from a $307.8m loss last year, I’m not surprised to see the HUR share price rising on the news.

What’s more, oil prices reached a three-year high of $85/barrel last week due to forecasts of supply restrictions. By comparison, Hurricane Energy’s production costs currently stand at $24.8/barrel, granting it an impressive 70% profit margin. And with analysts at Goldman Sachs raising their oil price forecast to $90/barrel, it looks like this margin is going to get wider. As a result, the strong performance achieved so far may continue throughout the rest of the year and beyond.

Taking a step back

As impressive as these results are, the company still has plenty of hurdles to overcome. Most notably is its debt. As of the end of June, Hurricane Energy has approximately $250m of financial obligations to meet. This big debt pile is leading to quite a substantial interest bill. Management has begun tackling the issue by using spare cash to repurchase its outstanding bonds. However, as it stands, the balance sheet is not in the greatest shape. At least, that’s what I think.

Beyond this threat, it seems the primary driving force behind the resurgence of profits is rising oil prices rather than increased production volumes. In fact, production at its Lancaster oilfield actually fell by 24% due to one of its wells suffering from reservoir pressure decline. Why does this matter?

Oil prices are currently on the rise. However, this appears to be inflated entirely by short-term disruption in supply rather than an increase in demand. It means that once the problems are resolved, oil prices may begin to decline once more. In such a scenario, Hurricane Energy’s impressive 70% profit margin will likely get squeezed, adversely affecting the HUR share price in the process.

The bottom line

All things considered, it looks like Hurricane Energy is on the right track. With revenues and profits climbing, as well as debt levels being addressed, the HUR share price looks primed for a steady recovery. Having said that, I remain untempted by the business as its fate currently seems to be in the hands of external market forces beyond the management team’s control. Therefore, it’s staying on my watchlist for now.

The post The Hurricane Energy (HUR) share price jumps on earnings. Time to buy? appeared first on The Motley Fool UK.

Rising uncertainty around the share price

The firm has completed a further analysis of its Lancaster reservoir. And has predicted that wellhead flowing pressure will reach bubble point by the first quarter of 2021. Bubbling is caused by a release of highly flammable gas (mainly consisting of methane). If it escapes the reservoir, it could pose a significant safety risk. And as a consequence, production may be required to slow down or even stop.

The issued guidance has taken this risk into consideration. But it was made under the assumption that full-year production uptime comes in at 90%. In the scenario that gas escapes and drilling operations need to slow down or completely cease, it’s unlikely the firm will hit the production target.

This has created an increased level of uncertainty for investors, triggering the drop in the Hurricane Energy share price.

Now what?

Despite this potential setback, production volumes at its Lancaster reservoir have reached an average of 11,467 barrels, according to the latest operational update. Given that this is currently higher than the issued full-year guidance, it’s possible that targets will still be met, providing that these production levels continue to remain elevated.

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A tough few years

Hurricane Energy is an oil exploration company, mainly targeting areas on the offshore continental shelf, west of Shetland. More specifically, the company aims to “discover, appraise and develop hydrocarbon resources from naturally fractured basement reservoirs”.

The collapse in the share price back in 2019 was caused by the usual optimism followed by the kind of lack of results that can plague oil and gas stocks. The shares were bought on the expectation of finding viable outputs from drilling projects, but this unfortunately didn’t materialise.

For example, the Warwick deep well didn’t flow at commercial rates, meaning it was plugged and abandoned by Hurricane. A similar situation happened at the Lincoln Crestal site. Even the flagship Lancaster field site was seen underperforming in 2020.

A new CEO was appointed in the summer of 2020, with co-founder and previous CEO Robert Trice stepping down. The damage for the year was already done, with the 2020 report showing that the company was loss-making. A mixture of all of the above points saw Hurricane Energy shares fall to 2.5p as we entered 2021.

Why I’ve bought Hurricane Energy shares

I feel that the worst news is now in the past for the business. A few positive recent events are leading me to think this way.

For example, earlier this month it was announced that the firm would buy back some of its outstanding convertible debt (around 33%). This is positive for several reasons. Firstly, it gives me confidence that the business can afford to do this. Second, repurchasing such bonds means future interest payments won’t need to be made. This will reduce costs further down the line. Hurricane Energy shares jumped when this was made public.

Another point that highlights progress was from the recent trading update. It showed that production levels at the Lancaster site are back at pre-shutdown levels. With us only being a month away from the interim results, I think this update was a positive note for the company to issue. It gives me confidence in the outlook, something that could be cemented by strong results in October.

The main risk I see to the company is future failures for exploration at new projects. It needs multiple sites to perform if it really wants to become a viable player, and unfortunately this is still unproven.

For the moment, Hurricane Energy shares remain calm. If we do have good results, along with strong free cash flow levels, then I think the shares could rally from here into 2022. That’s why I’ve bought them.

The post I’ve bought Hurricane Energy (HUR) shares. Here’s why appeared first on The Motley Fool UK.

The collapse of the HUR share price

A few years ago, the share price stood as high as 64p. Today it’s trading at 3.4p. What happened? A lot of investor anticipation and hype had built up over the years surrounding its Warwick Deep well. This offshore site located in the North Sea was estimated to contain up to 935 million barrels and would transition the business from an explorer into a producer.

Needless to say, the project was a complete failure. After 2,000 metres of drilling, the company discovered the well was economically not viable due to poor ground structure conditions. This shifted all investor hopes to its Lincoln Crestal well. However, this site, which was estimated to contain 604 million barrels, suffered a similar fate.

There’s limited information as to what exactly happened at Lincoln Crestal. But for some reason, the company was unable to connect its floating production storage and offloading (FPSO) vessel to the well. And a few months later, it was sealed and abandoned.

Combining this series of unfortunate events with the collapse of oil prices in early 2020, meant that seeing the HUR share price plummet was hardly surprising.

Time for a comeback?

As frustrating as the failure of the two wells is, it seems Hurricane Energy has finally managed to start delivering. According to last week’s operational update, the company is now actively producing an average of 11,467 barrels per day from its P6 well. This enabled it to deliver its 24th shipment, consisting of 505,000 barrels, in late August from its Lancaster oil fields. And the next shipment is due to be delivered in October. This brings the total number of barrels produced to around 10 million.

The proceeds have been used to strengthen the company’s balance sheet. Net free cash now stands at $144m versus $122m in July. Meanwhile, management has decided to repurchase 34% of its outstanding convertible bonds. In other words, debt levels have been significantly brought down.

With revenue finally flowing and the financials improving, the rising HUR share price makes perfect sense to me. But it will take a lot more to get it back to pre-crash levels, I feel.

The bottom line

It seems the worst is finally over for this business. And with oil prices already exceeding pre-pandemic levels, I wouldn’t be surprised to see the financial performance of Hurricane Energy continue to improve throughout the remainder of 2021 and beyond.

The company still has numerous hurdles to overcome. And it remains exposed to the risks associated with fluctuating oil prices. But overall, the HUR share price does look like it’s primed to make a comeback, in my opinion. For now though, I’m keeping the stock on my watchlist until the full-year results are released.

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Hurricane rocketed yesterday after the High Court rejected the energy play’s restructuring plan. And enthusiasm for its shares has ballooned again as news emerged that chairman Steven McTiernan — in addition to non-executive directors John van der Welle, Sandy Shaw, Beverley Smith and David Jenkins — had all resigned their positions on Tuesday.

The UK oil share added that Alan John Wright and David Ian Craik had been appointed to the board as non-executive directors, with the former assuming the role of interim chairman.

Crystal Amber withdraws requisition

Hurricane Energy said activist investor Crystal Amber Fund had also withdrawn its requisition notice calling for a general meeting of shareholders on Monday, 5 July. Furthermore, resolutions proposing that McTiernan and Shaw be re-elected to the board at today’s AGM have been pulled.

Crystal Amber Fund had sent a requisition in May asking for the removal of McTiernan, Jenkins, van der Welle, Shaw and Smith as directors. It also called for the appointment of Wright and Craik as non-executive directors.

The fund claimed then that Hurricane’s board had “demonstrably failed to protect shareholders’ interests” in an explosive announcement. It also accused it of “[failing] to reconcile its earlier estimates of the value of Hurricane’s West of Shetland portfolio with its latest, downbeat assessment.”

Re-elections proposed

Finally, Hurricane Energy said it had re-elected Antony Maris and Richard Chaffe as directors of the company. That follows discussions between its largest shareholders and new non-executive directors. It said it would immediately re-appoint them as directors if re-election proposals aren’t passed at Thursday’s AGM.

These appointments “[would] ensure that the company is able to maintain its ability to safely and effectively operate as a listed business,” Hurricane said.

Should I buy Hurricane Energy?

Hurricane Energy has been in choppy waters in recent times. It has experienced significant production issues at its Lancaster offshore field in West Shetland. This left it with a whopping $230m worth of debt, which was due for repayment next July.

The company’s board proposed a plan for lenders to lop $50m off in exchange for 95% of Hurricane’s shares. But shareholders shot down the plans earlier this month. That led to the board’s failed attempt yesterday to get the High Court sign them off.

Would I buy Hurricane Energy shares today? No is the short answer. The UK oil share still has an enormous amount of debt that could eventually force its value to zero.

Shareholders might be hoping this week’s news represents a new dawn for the company. Or at least allow them to get a half-decent return on their investment. But the company is loaded with far too much risk for my liking.

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