When I last wrote about Hurricane Energy (LSE: HUR) in June, I warned things could get worse. But I have to admit I didn’t think the Hurricane Energy share price would fall by another 50%.
Unfortunately that’s what happened on Friday, when the company said its Lancaster oil field may contain nearly 90% less oil than previously thought. Hurricane shares have now also fallen by 90% in 2020. Is there any hope for this former market darling, or should shareholders bail out now to avoid the risk of a total loss?
Lancaster: worse than expected
Hurricane now expects to produce 16m barrels of oil from the Lancaster field over the six-year life of the current two-well production system. That’s less than half the original estimate of 37m barrels.
The company also thinks that the wider Lancaster field probably contains much less oil than previously expected. The firm’s estimate of contingent resources — oil that may be recoverable with further development — has been cut from 486m in 2017 to just 58m barrels. That’s a reduction of 88%.
Resource estimates for the nearby Lincoln field have also been slashed, falling from 565m to just 45m barrels.
The numbers are worse than most analysts expected. The main problem seems to be that Lancaster and Lincoln both contain less oil and more water than previously thought.
What happens next?
Unfortunately, I don’t think Hurricane Energy’s share price is ever likely to recover to the levels seen late last year. However, there could still be some value here — Hurricane is producing around 15,000 barrels of oil per day and still has some undeveloped assets.
The firm also has a very experienced new chief executive, Antony Maris. His previous role was as chief operating officer of Pharos Energy (formerly Soco International). Maris has a lot of experience with fractured basement reservoir oil fields similar to Hurricane’s assets.
I think Maris will have the technical abilities needed to maximise the value from Hurricane’s assets. But I’m worried he may not have the financial flexibility he’ll need.
Hurricane reported a cash outflow of $26.5m for the first half of the year, which pushed net debt up to $123.8m. With oil prices seemingly stuck around $40, I think cash will remain tight during the second half of the year.
I’m worried about Hurricane Energy’s share price
The firm warns that lower oil prices and reduced production expectations will “negatively impact anticipated future cash flows.” To address this, Maris plans to review the firm’s financing arrangements with key stakeholders.
I suspect that this means that Hurricane’s lenders — who are owed $230m in July 2022 — will have a strong influence on the firm’s future plans. Shareholders, not so much.
Maris’s appointment is one reason to be optimistic about Hurricane. But the group has problems with its assets and a big debt repayment due in less than two years. I think this business could become another zombie oil producer whose only purpose is to service its loans.
Hurricane shares are too risky for me. I’ll be staying away.