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Which Is The Best Oil Recovery Play: Gulf Keystone Petroleum Limited, Frontera Resources Corp Or Xcite Energy Limited?

My end-of-2015 fears that oil could drop as low as $20 a barrel look like they might be coming true as the black stuff started the year by plummeting below $30. It seems to have settled a little at around $31.60 for now, though where it goes next is still anybody’s guess. The price will eventually recover, and higher-risk smaller oil explorers could provide significantly better geared profits for the brave.

Look at Gulf Keystone (LSE: GKP), which was in serious trouble back when it wasn’t actually getting paid for the oil it was delivering to the Kurdistan Regional Government. But since a schedule was agreed and the company received its first installment of $15m in September, payments have been coming in steadily.

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These payments aren’t sufficient to cover Gulf Keystone’s medium-term debt commitments, and there’s no sign yet of when payment for back-supplies will be made. Still, should a repayment crunch be not too far beyond the horizon, Gulf does have a very impressive asset on the table in the shape of its 36,000-bopd Shaikan field, and I can see investors keen to take part in a shorter-term refinancing.

It’s clearly a big risk investing in Gulf now, but after the share price has lost nearly 80% since February 2015, depressed by those horribly low oil prices, it could be a perfect time to buy in — if (and it’s a big one) the payments tide really is turning.

Tiny cap

Frontera Resources (LSE: FRR) seems a popular one among small cap investors right now, with its market cap of £16.5m and share price of just half a penny — down from the heady heights of 1.2p back in March 2015. So what’s the story?

Frontera is exploring in Eastern Europe around the Black Sea. And in an update released on 14 January, chairman and chief executive Steve Nicandros told us that “Frontera is now able to advance early in 2016 to continue to unlock the giant oil and gas potential that is contained within the South Kakheti Gas Complex” in Georgia.

There’s a lot of work to be done, and Frontera is still in its equity-issue stage to raise the funding it needs — 46.2 million new shares were issued in November as part of its debt repayment schedule. So it’s an unquantifiable risk right now and those are not for me — but when they come good, they can come good big.


My third smaller cap possibility is Xcite Energy (LSE: XEL), which is a bit bigger with a market cap of £39.5m. But the share price is down 70% since its recent peak in May 2015. And it’s down a massive 97% since February 2011, which really underlines the enormous risks associated with investing in oil explorers — those that are successful reward their investors handsomely, but how many crash to nothing for every big winner?

Xcite’s weakness now is that it operates in the North Sea at its Bentley field assets, and that’s far from the cheapest region in the world in terms of extraction costs. However, Xcite puts its costs at around $35 per barrel, and though that’s below today’s price, it could look good when oil gets back above $50 as it surely will.

Again, debt is the big problem — will oil prices recover in time? I don’t know, and that counts me out.

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Alan Oscroft 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.