Is the Hurricane Energy share price a bargain right now?
Today, Hurricane Energy (LSE: HUR) has hit a key milestone in the development of its West of Shetland Lancaster field. The Aoka Mizu FPSO vessel, a critical part of the early production system (EPS) which the company is using to accelerate the development of the project, has left Dubai following sea trials.
The vessel will now sail to Rotterdam for the completion of final works before proceeding to the Lancaster field.
As well as reaching this milestone, Hurricane also reported today that its efforts to prepare the Lancaster field for the installation of the early production system have been completed, opening the way for production to begin in early 2019.
Hurricane is clearly making progress on its efforts to develop the field, and while the company still has a lot of work to do before production begins, I believe the shares could be an attractive investment at current levels.
Time to buy?
Running out of money is generally the most common reason why oil and gas companies fail to develop their prospects as planned, and Hurricane is no exception.
But so far, the company seems to have kept a tight grip on its finances, and it looks as if its remaining resources are enough to support it through to first oil.
As my Foolish colleague Alan Oscroft recently pointed out, at the end of June, the company reported $210.1m of cash equivalents and liquid investments on the books, after a net decline of $149.4m in the period. The acquisition and refitting of the EPS vessel was the most significant expenditure. Cash outflow from operations was stated at $2.7m.
Looking at these numbers, it appears as if the company has plenty of cash to fund itself through to first oil. That said, nothing should be taken for granted in the oil business. While the enterprise might look as if it has enough money to fully fund itself, a sudden misstep could land the firm on the rocks.
High risk, high reward
Considering the above, I’m not willing to dive headfirst into this opportunity, although I do believe as a speculative investment it does have great potential.
If everything goes to plan, City analysts estimate the business could produce a net profit of $133m by 2019. If it can reach this target, Hurricane should be able to offset any doubts about its long-term prospects. And it’s the company’s long term potential that really excites me.
Forecasts for 2019 only include production from the EPS system, which is limited to output of just 17,000 barrels per day. With more than 2.6bn of barrels of crude resources in the company’s asset inventory, I reckon long-term production potential is significantly higher.
So overall, while there’s still a very significant risk that Hurricane might struggle to get its EPS up and running in the next few months, I believe that this is a risk worth taking, considering the tremendous potential the company has to create value for shareholders over the next five to 10 years.
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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.