Stock of the moment – Hurricane Energy (AIM:HUR) Buy a Barrel of Oil for $1.60

Stock of the moment – Hurricane Energy (AIM:HUR) Buy a Barrel of Oil for $1.60

Stock of the moment – Hurricane Energy

Hurricane Energy (AIM:HUR) current stock price: £0.54. Intrinsic value: £1.85. Margin of safety: 243%

Buy a barrel of oil for $1.60

If I told you that you could buy 1 barrel of oil for $1.60 would you snap my hand off? Of course you would given that a barrel of oil is worth $52.

What if I offered you 523 million barrels of oil for $1.60 each? or £650 million. The arithmetic is identical but the opportunity is far greater. Obviously, you will still need to raise a wad of cash to drill for the oil and maintain your profitability which is where Hurricane stands today.

Keep talking and take my money gif

What is Hurricane Energy?

Hurricane Energy is engaged in the exploration of oil and gas properties in the United Kingdom so this is one of my riskier and more speculative investment tips.

hurricane energy stock tips

Hurricane focuses on large geological fractures which would ordinarily be too deep to drill but there are some features which have risen to levels due to tectonic movements which allows exploration firms like Hurricane to tap into them.

The company currently holds licences over six fields. These include; Lancaster basement discovery, Whirlwind basement discovery, Lincoln basement, Typhoon basement, Warwick basement, and Strathmore sandstone discovery prospects located to the West of Shetland. Hurricane has drilled and confirmed the commercial viability of Lancaster which is the main prospect and preliminary assessments over the other prospects including the newly acquired Halifax licence are positive. In fact, Lancaster and Halifax might be a whole larger field which would unlock further value.

Exploration firms are highly risky and they are usually an all or nothing investment. It takes a lot for me to recommend such a stock but I think the fundamentals for Hurricane Energy are stronger than the typical exploration firm.

The fundamentals

Hurricane Energy’s greatest strength which sets it apart from other oil exploration firms is that it owns 100% interest in all its resources – no debt or other parties with their own interests. This gives Hurricane the upper hand as it looks for funding to develop an early production system (EPS) which will generate 62m barrels of oil flow and subsequently $192m cash flow from Lancaster from 2019.

The Competent Person’s Report which is written by an independent and competent person suggests a net present value (the value today discounted at 10%) of about $11 per barrel for the Lancaster reserves. A conservative 50% of the 523m barrels could be recovered (although the CPR states 22%), in which case we get a potential value of $2.9bn, or around £1.85 per share. This is subject to oil price fluctuations of course. Remember though, this is one field! The opportunity from the other fields or even a joint Halifax-Lancaster field could mean further upside.

Investors revere the management team highly which adds stability to the future share price. Dr Robert Trice is a strong and capable CEO. He has thus far delivered on his promises and made strong leadership decisions based on his knowledgeable conviction.

Interestingly 97% of the company is owned by ‘smart money’ such as Hedge Funds, VCs and PEs, institutional investors and insiders whilst the general public only owns 3%. It’s the general public who usually distorts these opportunities to extreme heights.

The speculation

Hurricane’s share price is currently being discounted due to the EPS fundraise. This will be to the tune of £394 million. The market is rightly thinking

1) if Hurricane doesn’t raise money then there is no opportunity

2) how will the structure of the EPS financing affect my holding?

The fundraise will most likely be funded through the issuance of new stocks, leverage (remember they currently have none) and/ or by Hurricane selling a share of their field to the likes of BP or some other oil major. I personally believe that it will be a combination of the above which will cause some dilution to existing shareholders. The dilution to shareholders will be offset by the value-added created by de-risking the financials.

Hurricane represents a position of less than 5% of my portfolio due to the speculative nature of the stock. Small speculations with strong convictions and under certain circumstances are fine and this is one of them. It will be a volatile and bumpy ride so hold on tight.

gamble gif

Oil Prices though?

We could sit here and speculate about the price of oil until our nose bleeds. We could also look at the average 30-year inflation adjusted oil price which is $57. The margin between the cost to produce and the price of oil is currently large enough to add value to shareholders.

Whilst oil prices are looking sick at the moment they also offer us contrarian investors an opportunity. Oil prices will be weighing on investors minds so get off the fence and invest whilst prices are relatively low. According to HSBC, the lack of CAPEX and investment in oil will bite us in the ass in the long-term and I agree. If Hurricane can raise cash in a benign oil environment like today then it bodes well for its future.

Time to add Hurricane Energy (AIM:HUR) to your ISA and check back on it in a couple of years!  Disclosure: Long Hurricane Energy.

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