Hurricane Energy (LSE: HUR) shocked investors Friday morning by slashing the valuation of some of its key assets. As a result, the Hurricane Energy share price crashed 50% in morning trading, knocking £60m off the valuation off the AIM-listed oil explorer.
The shares are now down 90% so far in 2020, having been hammered by the oil price slump following the arrival of Covid-19. And since a peak in May 2019, the loss is 95%. Back then, Hurricane Energy was looking like a very exciting prospect. But it all shows just how risky an investment in a small oil explorer can be.
With Hurricane shares so low now, are we looking at a recovery growth opportunity? Before I think about that, what has actually just happened?
The company has been conducting a technical reappraisal of its resources, particularly of its Lancaster field near Shetland. In the words of chairman Steven McTiernan, “the Technical Review has so far resulted in significant reductions in reserves and resources.“
Resource estimates slashed
The company now puts its best estimate of remaining contingent resources at Lancaster at 58m barrels. Back in 2017, a Competent Person’s Report put those contingent resources at 486m barrels, so that’s not a lot left. I’m not surprised the Hurricane share price has been hit so hard.
Similarly, at the firm’s co-owned Lincoln field, best-estimate contingent resources have now been put at 45m barrels. That’s down from a 565m barrel estimate in 2017.
After earlier warnings, Hurricane had suspended production guidance for Lancaster. And in a Technical Review update on 6 August the company warned that it “believes there is a risk of a material downgrade to estimated reserves attributable to the Lancaster Early Production System, and that there will also be a material downgrade to estimated contingent resources across the West of Shetland portfolio.”
So, bad news was clearly on its way. But judging by the hammering the Hurricane share price has now taken, it’s worse than investors had feared. And it’s not over yet. Hurricane does not yet have updated assessments for its Warwick or Halifax fields. But it says we should expect significant downgrades at both of them.
Hurricane share price recovery?
To turn to the big question, what should investors do now? Back when these oil prospects looked plentiful, the outlook for Hurricane appeared risky but very promising. We’re several years on now, there’s a lot less oil than both the company and investors had hoped, and losses are widening.
Hurricane did report $81.9m revenue for the first half, with $21.9m in operating cash flow. Losses after tax, however, came in at $307.7m (from an H1 2019 loss of $21.4m). A fair chunk of that is accounted for by a $238.9m impairment due to the Lancaster field reassessment, which is hopefully a one-off.
Free cash stood at $106.2m at 30 June, with net debt at $123.8m. I’d say Hurricane is in a good enough position to keep the lights on for a good while yet. But will it be enough to get the company into profit? And is the Hurricane Energy share price now too low even with all the latest bad news?
Those questions indicate far too much risk for me, so I’ll steer clear and leave it to braver investors.