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Is Falkland Oil And Gas Limited A Better Buy Than Gulf Keystone Petroleum Limited?

Shares in Falkland Oil and Gas (LSE: FOGL) are up by as much as 10% today, which means that since the turn of the year their value has risen by a whopping 60%. In contrast, shares in Gulf Keystone (LSE: GKP) are down by 6% today, which means that they have declined by an incredible 46% year-to-date.

Looking ahead, though, could Gulf Keystone now be a better buy than Falkland Oil and Gas? Or, should you stick with the latter due to its brighter prospects?

Different Situations

Although both companies have considerable long term potential, their current situations are markedly different. For example, Gulf Keystone is facing a very challenging problem in terms of it being owed £millions by the Kurdistan Regional Government (KRG). Although the first payment has been made and a plan is in place for further payments to follow, Gulf Keystone has decided that it cannot afford to take the risk of delayed or defaulted payment anymore, and so has now ceased exporting oil in favour of internal sales.

This means that, while its cash flow situation may improve, it will receive around 20% less for the oil it sells than it would have done if it had exported it. As such, Gulf Keystone’s profitability has taken a hit and this has undoubtedly made its shares seem much less appealing.

In contrast, Falkland Oil and Gas has no such cash flow challenges. It recently stated that it has sufficient cash through which to fund the drilling of the first of four wells and, with no debt on its balance sheet (and around £65m of cash) its financial future appears to be relatively certain when compared to that of Gulf Keystone. Furthermore, the outcome of the drilling process should provide guidance on the potential resource available, thereby making the present time a highly exciting one for investors in Falkland Oil and Gas.

Looking Ahead

While the Falkland Islands are a disputed territory and there is considerable political risk for Falkland Oil and Gas, it appears to be in a much more stable situation than Gulf Keystone. As well as having a better cash position, Iraq/Kurdistan (in which Gulf Keystone operates) remains very uncertain and the company’s operations could be set back by the ongoing military operations in the surrounding area.

As a result, Falkland Oil and Gas seems to be a much more appealing investment at the present time than Gulf Keystone. Certainly, its future is highly dependent upon the outcome of the planned drilling operations but, with a sound financial position, relatively manageable political risk, and improving investor sentiment, it could prove to be a rewarding, albeit risky, purchase right now.

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Peter Stephens 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.