Nobody said it would be easy drilling for oil in the troubled Kurdistan region but Genel Energy (LSE: GENL) and Gulf Keystone Petroleum (LSE: GKP) have tested even the most hardened investor.

Front line

As if operating close to the front line with Islamic State wasn’t tough enough, they’ve also had to contend with the shock crash in the oil price. This year’s post-January rebound offered some solace but with Brent crude treading water at around $46, the relief rally seems over for now. So why have both companies seen their share prices rise in recent weeks?

Since mid-March, Genel’s share price has climbed from around 73p to 113p, although it has stalled in recent days. Gulf Keystone’s share price more than doubled to 7.5p on Monday and Tuesday, although it has also retreated slightly to around 5.6p. The trend is broadly similar, but there are different factors at work.

Despite the recent pick-up, investors in both companies have had a nightmare. Genel is trading at roughly a tenth of the 1,100p it hit in January 2014, while Gulf Keystone has lost almost 97% of its value over the same period.

Cash trickles

The good news is that the cash-strapped Kurdish Regional Government (KRG) has been making regular payments for oil deliveries to both companies, with smaller back payments for “historical receivables”. At the end of last month, Genel reported a $39.28m settlement for May 2016 sales from its Tawke field, which followed the $15m paid on 21 June. Its Taq Taq field also now generates regular payments, which Genel has to share pro rata with its partners.

The downside is that production has fallen below earlier estimates, with Genel now expecting full-year 2016 production of 53,000-60,000 barrels a day, down from previous guidance of 60,000-70,000. It carries around $700m of debt and although estimated arrears of $365m would go a long way towards clearing that, payment is only trickling through. The company is in no immediate danger but anything can happen in this part of the world, and bargain seekers must understand the risks.

Weak and watered

Gulf Keystone’s proposed refinancing plan lifted its share price but investors have seen their stakes heavily diluted. The company will strengthen its balance sheet by slashing debt from more than $600m (repayable next year) to just $100m by converting around $500m into equity. This will leave existing investors holding just 14% of the oil explorer, and then only if they invest a further $25m at 0.82p per share.

A meeting to approve the resolution will be held on 5 August, but given that the alternative is insolvency and loss of the significant potential of its Shaikan field, shareholders have little choice. 

New investors will now be tempted to buy a company with just $100m of debt, $95m of cash, and 40,000 barrels of oil per day from its share of operations. Especially with the KRG making regular payments for Shaikan crude exports (it received another $15m in May). This share has suffered too many shocks for my liking, but some brave souls may be willing to give it one more go.

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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.