Hurricane Energy (LSE:HUR) is an oil exploration company. The two main licenses are Lancaster and Halifax sites. These are based on the Rona Ridge, in the West of Shetland region of the Continental Shelf. The company has endured a tough few years with a lack of solid traction from previous exploration sites. However, we see value in Hurricane Energy shares looking forward, for several reasons.
An indirect play on oil
The first reason to like the stock is due to the rising price of oil. It hit a three year high today, with Brent crude trading just under $80 per bbl. Several major banks are forecasting for this move to continue. For example, Goldman Sachs are targeting $90 be year end.
This additional upside, and even the current prices, allow Hurricane Energy to sell the end produce from sites for a higher price. Much in the same way that mining stocks rise when the gold price rallies, I think we could see a good play on Hurricane Energy shares if the oil price does continue to move higher.
Clearly, this benefit is not specific to Hurricane Energy shares. Investors could buy other oil stocks to make a play here, but we feel this stock looks undervalued fundamentally as well.
Are Hurricane Energy shares undervalued?
The second reason to like Hurricane Energy shares is the potential undervaluation. As mentioned above, disappointments over the past couple of years at the Warwick deep well and Lincoln crestal sites have seen the share price move lower. Expectations were priced in to discover oil to an extent that it would be commercially viable to commit to these projects. This did not happen, meaning the company spiraled to a loss last year and without much of a compelling reason to hold shares.
This means that shares trade for just under 4p currently, down from 42p two years ago. We don’t think that 42p is an achievable level to target this year (or even next), but this does indicate the scale of which the stock has been unloved from the market. High short interest also has profited from this move.
So currently we feel that any good news from new projects, or better performance from Lancaster, has the ability to materially shift the share price higher.
Positive trading updates
The final reason Hurricane Energy shares should be considered is due to the recent updates. Firstly, the company has utilized free cash to buyback outstanding 34% of outstanding convertible debt. This shows confidence in the ability to generate cash to make up for this, but also that a long-term view has been adopted. Buying back debt now reduces further coupon payments down the line.
A recent trading update also showed that production levels at the Lancaster site are back at pre-shutdown levels. For us, this is an important marker.
Overall, we think that momentum could carry Hurricane Energy shares higher in coming months, so would consider buying in.