Earlier today, we reported that Prey 2 has not been cancelled, but rather delayed. Bethesda posted that the game development has not progressed satisfactorily within this past year, and that the game as it is fails to meet the company's quality standards.
In light of the report, an anonymous source from Human Head has contacted Shacknews to offer their side of the story. The source says that Human Head was not happy with the terms of its contract with ZeniMax/Bethesda, and made the decision to halt all work on Prey 2 last November to negotiate a better deal. The source continued to say that many who were working on the project were laid off, with the hope that they would get their jobs back in the future.
Sometime in January, Zenimax stopped speaking to Human Head and those at the studio wondered if the game would be cancelled as a result—hence the rumors last month.
As Shacknews comments, Bethesda's announcement that the game fails to meet their quality standards casts Human Head in a negative light. We don't really expect the two to kiss and make up beyond this point.