Why Are SOCO International plc And Gulf Keystone Petroleum Limited Falling Today?

SOCO International (LSE: SIA) and Gulf Keystone Petroleum (LSE: GKP) both fell heavily when markets opened this morning.

While Gulf’s share price has recovered somewhat, SOCO’s has not and its shares are down by 25%, as I write.

SOCO International

Like many oil investors, I’ve previously seen SOCO as a safe, cash-rich producer, with an attractive dividend yield — potentially a good way to play the oil recovery.

I was wrong: although SOCO confirmed today that it will pay a 10p per share dividend for 2014, the firm’s share price has been devastated following its admission that the company’s reserves have been cut by two-thirds, after being reappraised at lower oil prices.

SOCO announced this morning that the firm’s proven and probable (2P) reserves have been reduced by 84 million barrels of oil equivalent (mmboe), from 125.1mmboe at the end of 2014, to just 40.8mmboe.

This shocking news means that 84m barrels of oil and gas, previously thought to be available for production, are no longer considered commercially viable.

Today’s news may surprise investors, because SOCO has always stressed that it can breakeven with oil prices in the “low $20s”. Based on this, many shareholders will have assumed that SOCO’s reserve calculations were based on similar economics, when they were not.

With big spending cuts in the pipeline, I can’t see much near-term upside for SOCO shares.

Gulf Keystone Petroleum

Gulf Keystone announced this morning that it is considering issuing new shares to raise cash.

The firm also said that it will write down the value of its Akri-Bijeel block, which it has been trying to sell for years, in its annual results.

However, Gulf believes that doing this — perhaps in conjunction with issuing new shares — would push the company’s book value down to less than 0.4 times its market capitalisation. This would breach one of the lending covenants on $250m of Gulf’s bonds, potentially forcing the firm to repay them early.

To avoid this, Gulf is in discussion with lenders about removing this restriction. This is a sensible move, but to me it suggests that Gulf’s share price is quite high, relative to the net value of its assets.

The only bright spot today was that Gulf does plan to restart oil exports — although there was no update on the backlog of payments due from the Kurdish authorities.

In my opinion, Gulf shares are worth less than 30p, and remain a sell.

I reckon SOCO and Gulf Keystone are both too risky to buy, in today's market. In my view, there are better options elsewhere.

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Roland Head has a short position in Gulf Keystone Petroleum Limited. 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.