Does Licence News Make Gulf Keystone Petroleum Limited Or Faroe Petroleum plc A Buy?

Shares in Norwegian-focused oil and gas explorer Faroe Petroleum (LSE: FPM) have come under pressure despite it releasing news of the award of six new licenses offshore Norway. The company has received them under the APA (Awards in Pre-defined areas) licence round, with three of them being in the Norwegian Sea and the remainder being inside the Norwegian North Sea.

The award of the licenses is good news for Faroe and strengthens its future prospects. Furthermore, it consolidates its position within core areas of the Norwegian continental shelf; an area in which Faroe has enjoyed significant exploration success in the past. Decisions on whether to drill or drop the prospects will be made in 2017 or 2018 depending on the specific licence, with no well commitments having yet been offered.

While the falling oil price has undoubtedly hurt Faroe’s outlook, the company remains relatively sound for a smaller exploration play. For example, it has a net cash position on its balance sheet and continues to benefit from a Norwegian tax system which allows 78% of all exploration-related expenditure to be eligible for a tax rebate in the following year. As such, for investors seeking out a small-cap oil and gas exploration business, Faroe could be a strong contender.

Also recently releasing news flow regarding licenses is Gulf Keystone Petroleum (LSE: GKP). It announced last week that its partner in the Akri-Bijeel block in Iraq had given up its stake in the project. This was apparently decided after a comprehensive assessment was made regarding the block potential, with Gulf Keystone signing the termination agreement. However, it remains unclear what the prospects for Gulf Keystone’s 20% stake in the project now are.

Looking ahead, Gulf Keystone remains focused on its key Shaikan asset which has a production rate of over 36,000 barrels of oil per day (bopd) and continues to benefit from an improved outlook regarding payments. Four consecutive monthly payments have now been received from the Kurdistan Regional Government (KRG), although it is unclear when the remaining monies owed will be paid to the company. Without them, there is a risk to Gulf Keystone’s financial future, since it has sizeable debt levels which must be repaid over the medium term.

As with Faroe, Gulf Keystone has suffered from a low oil price, with its shares having fallen by 73% in the last year. However, it faces the additional risk of operating in a very politically unstable region which realistically, looks set to remain uncertain over the medium term. As such, and while Gulf Keystone undoubtedly has a high quality asset base, the triple threat of a lower oil price, lack of payment and a highly challenging operating environment make Faroe the better pick for the long term.

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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.