Investing in oil operators and producers Gulf Keystone Petroleum (LSE: GKP) and Genel Energy (LSE: GENL) was always going to be risky, given their focus on politically turbulent Kurdistan, but the rise of Islamic State and collapse of the oil price has raised the stakes to frightening levels.

Let It Flow

Things got really tense last year when payments from the Kurdistan Regional Government stopped flowing. The KRG could barely afford to pay its frontline Peshmerga fighters leading the war against Islamic State, so it is hardly surprising that it struggled to fund the millions of dollars owing to Gulf and Genel. The money has since been coming through on a stop-start basis, for example, GKP banked $15m both in September and October, then the pipeline spluttered in November, before another $15m came through.

There was good news at the start of this year, when GKP reported another $15m payment for crude oil export sales from its Shaikan Block, covering its December invoice. This is its fourth consecutive monthly payment and lifts the company’s current cash position to US$58.4 million, up from $54.6m last month.

Shaikan All Over

GKP chief executive Jón Ferrier says its continues to focus on its flagship Shaikan asset with its local partners, where it ended the year with stable average daily production rates of above 36,000 barrels of oil per day.  He added: “We continue to exercise the highest financial discipline across the organisation, whilst maintaining safe and reliable operations.” Gulf is still waiting on arrears totalling $298.4m, which it hopes will be paid in full at some point this year, but at least the recent payment shows goodwill.

Genel Energy has also been banking some cash. Partners in its Tawke field co-production received a gross payment of $30m for oil exported through the Kurdistan Region of Iraq-Turkey pipeline at the start of January. Genel’s share of the gross Taq Taq payment was $16.5 million and this is also the fourth export payment made by the KRG since payments restarted in September 2015. 

Future Of Fear

Despite the payments, both companies are still dramatically below their 52-week high. Genel trades at 140p, down from a high of 713p, GKP is at 12.68p, down from 65.54p. Markets clearly don’t trust that the cash-strapped KRG can assure a regular flow of payments, let alone catch up with all those arrears.

Worse, the low oil price is only making life harder for everybody, by slashing the value of the oil they do bring to market, and the price could plunge lower still. Morgan Stanley has said oil could even hit$20 a barrel as the dollar strengthens and China flails.

Kurdish Peshmerga fighters have more than held their own against Isis, aided by Western air support. Even the Iraqi army seems to have got its act together, recapturing Ramadi. Isis is losing territory but the fight is far from over, and the plunging oil price is only making the struggle harder for GKP and Genel. Today’s low share prices are highly tempting, but way too risky for me.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.