Having fallen to a low of 24p towards the end of last year, shares in North Sea oil explorer Hurricane Energy (LSE: HUR) have more than doubled in value over the past 10 months.
Excitement is building over first oil recovery at its Lancaster field in H1 2019. After years of waiting, the company is finally on the verge of commencing production. But before you buy into this growth story, I believe there are several factors you should be aware of.
No revenues
My first concern is that at this point, Hurricane is not generating any revenue. This should change in the first half of 2019, if all goes to plan, and the company can begin production from its flagship Lancaster field.
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However, if production is delayed, without any income, Hurricane’s options are severely limited. Most early-stage oil and gas companies fail because they run out of money, and there’s still a chance Hurricane could succumb to the same fate.
Growing risk
Secondly, the closer Hurricane gets to production the higher the chance that something will go wrong. So far, the construction of the Early Production System (EPS) has been relatively uneventful.
During the next few weeks, however, Hurricane and its partners will be working on the construction of subsea infrastructure to connect development wells when it arrives. The risk of something going wrong in these later stages of well construction increases exponentially because there are just so many moving parts.
Limited funds
If something does go wrong, there’s a chance the group could run out of cash. Even though Hurricane is well funded, after the $547m fundraising it completed last year, a significant problem in the final stages of development could quickly absorb any additional funds.
Although the risk of insolvency is unlikely at this stage, it’s always a possibility for a small oil company.
It’s not all bad news
I’m a naturally cautious investor and the risks above all outline the worst-case scenarios for Hurricane. In reality, however, it is unlikely the company will run out of funds or encounter a significant problem over the next six to 12 months. The firm is run by a highly experienced management team. Together the CEO, chairman and chief operations officer, have 100 years’ experience in the oil and gas industry, implying they have planned for every possible eventuality.
And when the company finally gets it EPS in place, the shares could rocket. Initial production is targeted at 17,000 barrels of oil per day, enough to provide cash flow for further field development.
Until today, management was planning to split any cash flow generated from Lancaster between the further development of the well and the development of other prospects in the company’s portfolio. But this morning, the firm has announced a $387m deal with Spirit Energy. That will see Spirit fund Hurricane’s share of costs for an exploration and appraisal well programme to deliver first production from a second development area in the West of Shetland region (the Greater Warwick Area).
Put quite simply, this is fantastic news for the business and de-risks Hurricane as an investment. Drilling on this prospect is expected to begin in 2019. It looks as if next year is going to be a hectic period for Hurricane Energy.
