An anonymous source who is apparently close to Human Head told Shacknews that the developer hasn't worked on the game since November.
The studio reportedly halted development in hopes of renegotiating its contract with Zenimax. Negotiations gained momentum until January, when Zenimax apparently stopped communications.
More progress was made in the negotiations up to early March, at which point events quickly took a downward turn. The insider claimed said that they are unable to provide a first-hand account after March 2.
Earlier today Bethesda announced that Prey 2 will be delayed to 2013, saying that "game development has not progressed satisfactorily this past year, and the game does not currently meet our quality standards".
The alleged troubled negotiations between Human Head and Zenimax could explain why rumours of the game's cancellation surfaced.
With the announcement that Prey 2 is only delayed, it is currently unknown whether that means Human Head will resume development or if the game will be moved to a different studio.
Prey 2, a follow-up to the 2006 first-person shooter, was announced in March 2011. The game is being developed using an engine supplied by id Software.
Watch a trailer for Prey 2 below: