The Hurricane Energy (LSE:HUR) share price had a good run last week. Following the release of its half-year results, the stock popped by nearly 20% in a single day. This latest momentum has pushed its 12-month performance to almost 85%. And continues to move the company back to 2019 levels. So, what has investors so excited? And should I be considering this company for my own portfolio? Let’s take a look.
The rising HUR share price
I’ve previously explored this business. But as a quick reminder, Hurricane Energy is an oil exploration company. It ran into quite some trouble when a series of prospective projects turned out to be duds back in 2019. Slap the global pandemic on top of that, and within a few months, the HUR share price plummeted by over 85%.
Since then, operations have improved. And revenues for the first six months of 2021 came in at an impressive $124.5m versus $81.9m in 2020. But more excitingly, the firm became profitable. A total of $42.8m of after-tax income was reported. And given that’s up from a $307.8m loss last year, I’m not surprised to see the HUR share price rising on the news.
What’s more, oil prices reached a three-year high of $85/barrel last week due to forecasts of supply restrictions. By comparison, Hurricane Energy’s production costs currently stand at $24.8/barrel, granting it an impressive 70% profit margin. And with analysts at Goldman Sachs raising their oil price forecast to $90/barrel, it looks like this margin is going to get wider. As a result, the strong performance achieved so far may continue throughout the rest of the year and beyond.
Taking a step back
As impressive as these results are, the company still has plenty of hurdles to overcome. Most notably is its debt. As of the end of June, Hurricane Energy has approximately $250m of financial obligations to meet. This big debt pile is leading to quite a substantial interest bill. Management has begun tackling the issue by using spare cash to repurchase its outstanding bonds. However, as it stands, the balance sheet is not in the greatest shape. At least, that’s what I think.
Beyond this threat, it seems the primary driving force behind the resurgence of profits is rising oil prices rather than increased production volumes. In fact, production at its Lancaster oilfield actually fell by 24% due to one of its wells suffering from reservoir pressure decline. Why does this matter?
Oil prices are currently on the rise. However, this appears to be inflated entirely by short-term disruption in supply rather than an increase in demand. It means that once the problems are resolved, oil prices may begin to decline once more. In such a scenario, Hurricane Energy’s impressive 70% profit margin will likely get squeezed, adversely affecting the HUR share price in the process.
The bottom line
All things considered, it looks like Hurricane Energy is on the right track. With revenues and profits climbing, as well as debt levels being addressed, the HUR share price looks primed for a steady recovery. Having said that, I remain untempted by the business as its fate currently seems to be in the hands of external market forces beyond the management team’s control. Therefore, it’s staying on my watchlist for now.
Zaven Boyrazian has no position in any of the 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.
This post was originally published on Motley Fool
