Early last month independent oil explorer Gulf Keystone Petroleum (LSE: GKP) was buzzing. Its shares gushed on news that the Kurdistan Regional Government (KRG) would soon start to repay hundreds of millions of dollars in back payments. The cash-strapped KRG owes around $300m in total and has also committed to pay $15m a month for crude exports from the Shaikan field. The sixth consecutive payment hit Gulf’s account on 4 March, improving its cash position to $56m. Fortune favoured the brave.
Growing concern
Its fortunes sharply reversed last week when management admitted it needed to secure new funding and restructure the company’s balance sheet “to ensure it is able to continue as a going concern“. These are words to strike dread into any investor, especially with significant coupon payments due in April and October 2016, followed by debt repayments of $250m in April 2017 and $325m in October 2017.
It completely overshadowed signs of progress in its 2015 results, with Gulf almost doubling full-year revenues from $38.6m to $86.2m and slashing losses after tax from $248.2m to $135. Gross production rose 71% to 11.1m barrels, with an average of 30,500 per day.
Chief executive Jón Ferrier tried to accentuate the positive, looking forward to “delivering a stronger business in 2016 with stable production, commercial discipline, value realisation and growth,” but it was too late. The stock fell almost 22% on Thursday and another 19% on Friday. You might see this as a buying opportunity, with Brent crude now creeping above $41 a barrel. I see it as an opportunity to lose your shirt.
Tic-Taq-Toe
Fortunes at fellow Kurdistan oil producer Genel Energy (LSE: GENL) have swung in the other direction. It ended February in the red after downgrading assumptions for its largest field, Taq Taq, from 683m barrels to just 356m. Management also warned of a $1bn impairment due to a lower carrying value for the Taq Taq field, around 28% of its equity value at the time.
Then on Friday it announced that it would buy back at least $50m of its own bonds and ended the day more than 13% higher. The bonds traded at 95 cents on the dollar in May last year but have since slumped to 52 cents, so the buyback will lock-in an accounting profit and put some of its $450m cash reserves to profitable use. Investors were in a forgiving mood when Genel’s partner on the Tawke field, DNO, announced that the project’s reserves were 14% below initial estimates. Many were relieved: they had expected worse.
Always bet on black
So Gulf Keystone Petroleum loses, Genel Energy wins. In the long run, both are well down. Gulf Keystone Petroleum now trades at just 7.6p, a fraction of its year high of 42p, while Genel Energy’s 89p is down from a year high of 648p. The wheel of fortune may have turned in Genel’s favour but investors in both oil stocks will be taking a major gamble. Always bet on the black stuff? I think I’ll pass.
