There’s no doubt that investing in BP or Royal Dutch Shell would have served you better over the past few years than risking your cash on those operating in the Kurdistan region, as Gulf Keystone Petroleum shareholders know to their cost. But with oil prices on the mend, is it time to jump back into the region?
The turning point?
Genel Energy (LSE: GENL) investors clearly hope so, but they’ll be disappointed to see their shares dropping 11% this morning after the company released its latest trading and operations news.
The market is clearly unimpressed by an outlook update that now puts 2016 production “at the lower end of the previously communicated 53-60,000 bopd guidance range,” and the shares have tumbled to 83p. But I think that’s overdone, and we could be looking at a turnaround bargain here.
Capital expenditure should now be lower too, and the resulting expectation of 2016 revenue “at the lower end of … $200-230 million” still seems like very good progress to me. And the firm’s Taq Taq and Tawke wells have managed net production in the third quarter of 53,100 bopd — down 8% on the previous quarter, but looking good for the longer term.
Genel has received total cash of $163m so far in 2016, and had cash of $405m on its books at 30 September, with net debt of $241m — and there’s a further $437m owed by the Kurdistan Regional Government.
To me, that looks like a reasonably healthy financial position, and Genel should comfortably be able to see it through to the profits that are expected to lie ahead. Forecasts before today suggested a loss per share of 7.7p this year, but there’s positive EPS of 4.8p pencilled-in for 2017’s turnaround year.
A combination of profit next year plus any further oil price recovery, and that could provide the trigger for an upwards share price rerating. With the shares down 72% in just under a year, I see Genel as a turnaround bargain now.
North Sea profits
Shares in Cairn Energy (LSE: CNE) have performed better, and since a low on 20 January they’re up 63% to 207p — though that’s still down 43% since an early 2012 peak.
Again we’re looking at a lossmaking explorer, and in this case the City’s analysts aren’t predicting any profit just yet — but Cairn is getting there, with a relatively modest 12.5p loss per share forecast for 2016, falling to 7.3p a year later.
And 2017 could turn out to be the pivot year, after the firm floated its Indian assets to concentrate on areas closer to home. In particular, Cairn’s North Sea projects are expected to produce their first oil in 2017, with production cost estimates uncharacteristically low for the area.
In fact, Cairn’s 2016 full-year report puts production costs at its Catcher and Kraken wells at $20 and $14 per barrel respectively, and suggests it should reach overall peak production in 2018 with a weighted production cost of $17 per barrel. Those are very tasty figures even at today’s $50-per-barrel price levels, and any further strengthening in the oil market should gear up profits nicely.
Cairn reported $414m net cash at 30 June, and there are plenty of borrowing arrangements in place, so there should no problem in seeing things through to profit. As yet-to-be-profitable oil explorers go, I see Cairn as a low-risk one.
