I’ve always said that whenever you look back on a stock purchase that hasn’t gone well, you should re-examine your assumptions at the time and your reasons for buying. And if those have turned out to be wrong, it’s probably time to sell.
It can be hard to be that objective and to let go of a stock in which we’ve made an investment, both financial and personal. When I buy into a company, I tend to think of it as my very own, but that can create some problematic emotional attachment.
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I got it wrong when I bought Premier Oil (LSE: PMO) shares in 2015, and I’ve finally admitted what I should have decided before now – it’s time to sell.
A 2% uptick Thursday in response to the latest trading update isn’t going to change my mind, even though full-year production now looks set to come in at the upper end of the company’s earlier 75–80,000 barrels of oil equivalent per day (boepd) guidance.
The flagship Catcher asset is on for 69,000 boepd with an operating efficiency of almost 100%, and has already reached cash payback just 22 months after first oil. The UK Tolmount field is on for first gas by the end of 2020, and the firm’s other prospects all sound like they’re progressing well.
But for me it’s all down to debt, and my erroneous assumption that oil prices would quickly get back to around $75 per barrel and that Premier would have paid down a lot more of its debt by now. Admittedly, a further reduction has brought that figure down to $2.03b at 31 October, but that’s still more than twice the company’s market cap.
I know it’s only a month ago that I was still seeing Premier Oil as a buy, but when I decide I’ve got something wrong, it’s only right that I put my hands up and say so.
While I do have a short list of top stocks I’d like to buy, I still fancy the idea of having one of the smaller oil companies in my portfolio, and the more I look at Gulf Keystone Petroleum (LSE: GKP) the more I like what I see.
I’ve previously examined the transformation that’s taken place at Gulf Keystone. At one point it looked like it could go bust over lack of payment from the Kurdistan Regional Government for the oil it was producing. Today, we see a company that’s receiving regular monthly payments, is on a modest price-to-earnings valuation, is in a healthy state of solvency, and is even paying dividends.
There are two key things I like about Gulf Keystone. One is that it does not carry net debt, unlike Premier Oil in particular and many other oil explorers in general. In fact, at the interim stage at 30 June, the firm reported net cash of $198.3m.
The other is that, despite falling oil production this year (due to things like maintenance), the company plans to raise its output to a new level of around 55,000 bopd by the second quarter of 2020 (from the 30–33,000 bopd expected this year). If that comes off, we could see a P/E dropping below eight.
Oh, and some of the lowest production costs in the business, so that’s three.