Years don’t get much worse than the one Gulf Keystone Petroleum (LSE: GKP) has just endured. Shares of the company are down over 80% in the past 12 months, but the most pertinent question is whether or not bargain hunting investors should take a punt on the embattled Iraqi Kurdistan producer.
Well, GKP certainly appears to have arrested the decline and begun to once again plan for the future rather than race to save itself from bankruptcy. The key was a $500m debt for equity swap and concurrent rights issue in October that saw a gargantuan net debt position turn into a small net cash position.
The company also received a significant amount of government help, as an improving financial position for the Kurdish regional government has allowed it to make the requisite royalty payments to GKP for oil delivered every month since September 2015.
But major problems remain that I believe make the company one to avoid for all but the hardiest contrarians. For one, the region is still beset by violence in Syria and western Iraq. While Kurdistan’s borders are once again safe for the time being, history has shown that another violent flare-up is never too far away. This would likely mean GKP’s finances would once again be thrown into disarray should the Kurdish government not have the funds to pay for the oil it takes.
Second, oil from Kurdistan remains very cheap as the high costs of transporting it to international markets constrict the price buyers will pay. This has led to Gulf Keystone’s long history of bleeding cash from operations, with H1 2016 its first ever period generating net positive cash flow.
While operations turning cash flow positive and a much improved financial position are heartening, it would take a far more risk-hungry investor than myself to invest in a Kurdish oil producer with a long history of failing to reward shareholders.
You can’t hear shareholders scream in space
Shares of satellite operator Inmarsat (LSE: ISAT) are near three-year lows as suppressed demand for the company’s maritime sector satellites and an industry-wide explosion in supply dent profit forecasts. With shares of the company trading at a seemingly cheap 15 times forward earnings while offering a 6% dividend yield, should would-be investors bite?
A 4.9% year-on-year drop in revenue from the group’s most important segment, maritime services, can be chalked-up to external headwinds facing the industry due to low bulk shipping prices and a poor offshore oil & gas environment. But more worrying is the fact that increasing competition from rivals moving into Inmarsat’s traditional markets is leading to lower prices across the industry.
This has led many analysts to call for industry consolidation as a means of lowering supply and increasing prices. We’ve yet to see this though and until there is some evidence that the industry’s supply/demand dynamic will return to normal, I see little cause to buy shares of Inmarsat.
Furthermore although the 6% dividend yield on offer is tempting, investors should be wary that earnings aren’t expected to cover payouts this year. And with $1.9bn in net debt the company can’t afford uncovered dividends forever. A sector convulsed by over supply and weak demand is enough to keep me away from shares of Inmarsat for the time being.
