Of all the early-stage oil & gas companies on the market today, Hurricane Energy(LSE: HUR) looks to me to be the best investment.
Unlike most of its peers, it has a relatively short timetable for the development and initial production of its North Sea assets.
Management is targeting the first production in early 2019, so 2018 is set to be an exhilarating time for the business. And the first stage of the project is already funded, further de-risking the stock for investors. Over the summer, the company raised $547m through a mix of convertible debt and equity.
Reward is worth the risk
Like all small-cap oil producers, Hurricane isn't a risk-free investment, but the potential gains to be had if everything goes to plan more than outweigh the risk. Last week, the firm published its highly anticipated Competent Person's Report (CPR) for its Halifax, Lincoln and Warwick assets, which showed that the company's Rona Ridge assets -- excluding the Lancaster field -- are now believed to contain 2.6bn barrels of oil equivalent. This estimate is an enormous 231% increase on the previous estimate of reserves.
Hurricane is targeting production from the Lancaster prospect first. Here it hopes to bring an early production system (EPS) on-line by 2019 with the goal of producing 17,000 barrels of oil per day to begin with, providing cash flow for further development.
As well as pushing ahead with the development of these projects, Hurricane is also looking for other ways to monetise its assets.
At the beginning of December, the firm reported that it is "committed to monetising" the assets in its portfolio via a farm-out deal and, eventually, "a sale to an industry partner, at the appropriate time."
According to management, there has been some interest from other parties, but it seems that interested parties are willing to wait for the Lancashire EPS to come on-line, thus confirming the viability of this prospect, before making a move. So, it's unlikely any deal will come to fruition before 2019, although when production starts, Hurricane will likely be able to strike a better deal than at its current stage of development.
Time to buy?
Trying to value a company like Hurricane is always tricky because there's so much that could go wrong over the next few years. That being said, there's also a lot that could go right for the firm, and as funding is already in place, the first production is set to commence in 2019, I'm inclined to believe that during the next few years, the firm will produce a positive return for investors.
Even if you assign a valuation of just £1 to each barrel of resource owned by Hurricane, it's easy to believe that as it unlocks value from its resource base, this could become a multi-billion pound business.
Not suitable for all
Hurricane Energy could still make you rich, but that does not mean that you should wager all of your wealth on this one business.
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Rupert Hargreaves owns no share 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.