Should you pile into Hurricane Energy plc, down 15% over a month?

Over the past month, shares in North Sea oil business Hurricane Energy (LSE: HUR) have tanked, falling 15% in around four weeks. However, while this decline is disappointing for existing holders, it could present a great opportunity for investors to buy ahead of what could be a transformational year for the group as it progresses towards first production in 2019.

Nearing the lows

Recent declines have pushed shares in Hurricane down to 31p, which is around 30% above the 52-week low of 24p printed in November of last year, and it is more than 50% below the all-time high of 66p per share recorded in May 2017.

Shares in the company have declined even though there has been little in the way of negative news flow from the business over the past few months. In fact, the news over the past six months has been overwhelmingly positive. 

At the beginning of December, management announced that repair, upgrade and life extension works on the Aoka Mizu floating production and offloading vessel (part of the group’s critical early production system) were progressing well in Dubai and this was followed by an announcement in mid-February that the company had completed a buoy ‘dry’ trial fit test on the system, marking a key project milestone. Following this development, the early production system is now on track to leave Dubai in the second quarter of 2018, with installation set to occur in the third quarter. This means the firm is well on its way to start producing oil from its flagship Lancaster oil well in the first half of 2019.

Risks ahead 

It would be wrong to say that it’s going to be plain sailing for the company over the next 12 months, but the fact that Hurricane is progressing so well is highly encouraging.

Nonetheless, building the early production system is the easy part. The firm still has to prove that it can actually produce oil, and until then, the shares will remain a high-risk investment. The list of things that could go wrong between now and initial production is enormous, so is the list of companies that have failed at this crucial juncture.

With this being the case, I would be wary of Hurricane for the next 12 months. Even though the firm has proven that the Lancaster field, its most appraised asset, has combined 2P Reserves and 2C Contingent Resources of 523m barrels of oil. Until it can extract value from this prospect, its outlook is unclear.

On the other hand, if the company does fail the downside could be limited as peers could decide to launch a takeover before the group collapses, which would allow them to grab a world-class oil asset in the North Sea at a knockdown price.

The bottom line 

So overall, patient investors may be well rewarded as Hurricane pushes towards production over the next year, and if things don’t go to plan, investors may still receive a return in the event of a buyout.