The Hurricane Energy (LSE: HUR) share price fell by more than 25% in early trading on Friday morning. The shares slumped after the firm warned that shareholders could lose everything if Hurricane isn’t able to secure new financing.
At the start of the year, Hurricane shares traded at 33p. As I write, the shares have fallen to just under 3p — a loss of 90%. Unfortunately, today’s news suggests shareholders could still face further losses.
Funding needed to maintain production
Hurricane’s share price crashed in September after the company cut its resource estimates for the Lancaster field from 486m barrels to just 58m barrels. Reserves that could be produced without further investment were estimated at 9.4m barrels — that’s just two years’ production at the current level of 12,000 barrels per day.
Today’s news goes one step further. The firm says that without new investment “further development activity at Lancaster might not be possible.” In this scenario, production would continue until it became loss-making. The field would then be decommissioned “with potentially limited or no value returned to shareholders.“
What needs to be done?
Hurricane’s new CEO Antony Maris said he’s identified two work packages that could strengthen future production and extend the life of the Lancaster field.
The first choice is to drill an additional “side-track well” from one of the existing wells. This would access oil that may not be recovered otherwise. Maris added that this work would cost around $60m and could increase oil production from late 2021.
The second option is to drill a water injection well in the northwest of the Lancaster field. By injecting water into depleted oil wells, an operator can increase the pressure in the reservoir and push oil towards existing production wells. This project would cost around $75m and could increase production from “late 2022.”
Hurricane Energy’s share price could keep falling
The total cost of these two projects would be about $135m. However, Hurricane Energy had net cash of $87m at the end of November. It’s also expected to report revenue of $173m for 2020, despite this year’s oil price crash.
You might think the company would be able to start work on these projects without extra funding. Unfortunately, it can’t. In July 2017, Hurricane issued a $230m convertible bond that’s due for repayment in 2022. Convertible bonds are a form of loan that can be converted into new shares when certain conditions are met.
The conversion price for these bonds is 32p per share. That’s a long way above today’s 3p price. Ordinarily, this would mean Hurricane would have to repay the bonds. However, the firm is looking at restructuring this debt to avoid a potential repayment crunch.
One option is that part of the debt will be converted into new Hurricane Energy shares. Given Hurricane’s depressed share price, the company warns that any such restructuring could result in “dilution to existing shareholders.” This means existing shareholders would be left owning only a small part of the company, reducing the value of their stock.
Maris is trying to find a way forward. But I’d expect that any new funding would have to be agreed by the company’s existing lenders. Without new investment, today’s warning is quite clear. Lancaster could be shut down. Hurricane Energy’s share price could fall to 0p.