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Is It Time To Double Down On Jubilee Platinum PLC And Gulf Keystone Petroleum Limited?

Two of the most closely-watched stocks by private investors are Jubilee Platinum (LSE: JLP) and Gulf Keystone Petroleum (LSE: GKP).

Both companies have delivered a roller-coaster ride for shareholders in recent months. Both firms could, arguably, deliver transformative news over the next few months.

Given this, is now the time to increase your holding or should you hedge your bets and take some money off the table?

In this article I’ll take a closer look at both stocks and explain the risks and opportunities which lie ahead.

Gulf Keystone Petroleum

The combination of falling oil prices, $527m of costly debt and around $100m of customer arrears has left Gulf Keystone in financial distress.

Last week’s news that the Kurdistan Regional Government (KRG) has promised to start paying contractors for oil exports from September onwards came in the nick of time, but most of the share price gains that were triggered by this news have already fallen away.

Why is this? I can see two possible reasons. One possibility is that the KRG won’t pay at all. I don’t think this is likely.

A second and more likely explanation is that with Brent crude trading below $50 once more, the market has judged that even if the KRG does pay up, the money won’t be enough to keep Gulf afloat without additional new financing, or a farm-out deal of some kind.

This is my view. The KRG has said it will allocate a portion of the revenue from oil exports to cover oil producers’ “ongoing expenses”.

It seems very likely to me that this won’t be enough to help fund the repayment of Gulf’s debts, or the investment required to build the facilities needed to expand Shaikan production towards its 100,000 bopd target.

I wouldn’t put new money into Gulf at the moment.

Jubilee Platinum

Jubilee has been raising cash by selling non-core assets and working to raise new debt funding.

The firm’s goal is fund the development of two surface tailings projects (extracting platinum from mining waste) which the firm said in February could generate annual operating cash flow of $14m.

The problem is that these calculations were based on a platinum price of $1,250 per ounce. Platinum is currently trading at just $970 per ounce. In the same presentation, Jubilee also said the platinum price [in February] was “currently lower than sustainable”.

At the time, platinum was trading at around $1,200 per ounce, 20% higher than today’s price. Given that the platinum market appears to be quite well supplied, there’s not necessarily any reason to expect a sharp rise in the price of platinum.

Another concern is that Jubilee has not yet completed the debt funding it will need to develop its surface projects, although the firm says a final decision is close.

My concern is that Jubilee could get the funding it needs, but like Gulf Keystone, be left with production revenues that are insufficient to repay its debt or fund future investment. This could leave shareholders out of pocket, while the firm’s lenders are repaid.

In my view, now would be a good time to take some money off the table at Jubilee, in case platinum prices stay low for longer than expected.

Ultimately, Gulf Keystone and Jubilee offer the potential for staggering profits -- and painful losses.

In my view, the best way to own these companies is alongside other, less volatile shares which offer more reliable returns.

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Roland Head 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.