Could Gulf Keystone Petroleum Limited & Genel Energy PLC Collapse Like Afren Plc?

As I was writing about the collapse of Afren (LSE: AFR) for the Fool yesterday, I realised that I should have spotted the warning signs much earlier.

As a result, I decided to take a closer look at Kurdistan producers Gulf Keystone Petroleum (LSE: GKP) and Genel Energy (LSE: GENL). Could either of these firms suffer a financial meltdown like Afren?

Gulf Keystone Petroleum

Gulf Keystone appointed a new chief financial officer last week: Sami Zouari has considerable banking experience in the Middle East and worked with Gulf on its bond issues in 2012 and 2013.

I hope that’s not an omen of things to come, but I’ve got a feeling it might be. Here’s why.

At the end of June 2014, Gulf Keystone was owed $165m for oil sales by the Kurdish authorities. The firm made it clear that if a substantial amount of this money wasn’t received during the second half of the year, further funds would be required to continue operating.

Since then, the price of oil has fallen by more than 50%. My calculations suggest that Gulf Keystone is now probably only receiving around $25 per barrel sold.

Although Gulf’s cash costs per entitlement barrel produced are just $9 — suggesting it should be able to generate positive operating cash flow — this is no help if the firm is not paid promptly for its oil.

Gulf now has $520m of debt, on which $52.8m of payments are due by June 2015. In my view, the firm is likely to have to raise new funds during the next six months, and may even face an Afren-style cash crunch before then.

I would suggest that Gulf investors look very carefully at the firm’s accounts when its full-year results are published in March. I’ll certainly be commenting on them here.

Genel Energy

Genel has the same problems with payments for exported oil as Gulf Keystone, but there’s one huge difference: Genel has net cash of around $490m, and total cash of about $970m — probably enough to fund an entire year’s capital expenditure, if necessary.

This is why Genel is a far safer buy than Gulf Keystone in the current climate: Genel won’t be forced to go cap in hand to investors.

Buy Genel?

I would avoid Gulf Keystone until the firm can prove that its funding situation is sustainable.

In contrast, I think Genel looks reasonably cheap at the moment, and is fundamentally a fairly safe investment, although I don’t think there’s any rush to buy in just yet.