Shares in Hurricane Energy(LSE: HUR) are falling today after the company announced post-close yesterday that it is looking to raise $520m to finance the development of its Lancaster field offshore licence, west of the Shetland Islands.
Management is raising funds through both a share placing and the issue of new bonds. The first part of the fundraising is a placing that will take place via an accelerated book-build. The company is looking to raise $300m via the placing issuing shares at 32p each.
The next part of the deal will involve a $220m convertible bond issue. These bonds will fall due during 2022 and will be issued at par bearing an interest rate of between 7% and 7.5%. The bonds will be convertible into shares with the initial conversion price set at a premium of between 22.5% and 27.5% above the 32p placing price.
This financing package is designed to bring the Lancaster project into production by the first half of 2019. Hurricane expects it can produce 17,000 barrels of oil per day from this well.
Are Hurricane's shares cheap or expensive?
Hurricane's shares are falling today thanks to the placing mentioned above. The increased number of shares in issue will dilute existing holders' interests in the business. This will impact the company's net asset value per share which was estimated at over 200p, according to activist investor Crystal Amber Fund.
Crystal Amber is Hurricane's largest shareholder with a 12% stake in the firm and has been encouraging Hurricane to monetise its assets which, as noted above, it believes are worth 219p per share (before dilution). This estimate is based on a nominal oil price of $55 per barrel and a 50% discount to reserves on contingent resources -- a relatively conservative estimate.
However, the ultimate value of Hurricane depends on the company's ability to unlock value from its oil fields. The amount of value the company can unlock will depend on oil prices, which are completely outside of management's control. And now the company has decided to issue debt to finance its well development, Hurricane has to get a move on, or it could find itself swamped by interest costs.
Luckily, with oil prices where they are today the cost of building an oilfield has come down significantly from where it was just a few years ago, and this should work to the company's advantage. Nonetheless, all the usual risks of oil well construction remain, and plenty could go wrong for Hurricane between now and first oil.
The bottom line
So overall, based on an estimate of its resource base, shares in Hurricane currently look undervalued but the company still has plenty to do before first oil from the Lancaster prospect. As a result, the company might not be suitable for investors who don't have a high risk-tolerance.
Make money, not mistakes
Hurricane could be sitting on one of the North Sea's largest oil finds in recent years but the company still has a huge amount of work to do before it can make it into the big league. With this being the case it's best to own the shares as part of a well-diversified portfolio.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.