The Motley Fool

Do Rallying Oil Prices Signal It’s Time To Buy Cairn Energy Plc & Gulf Keystone Petroleum Limited?

The breakdown of OPEC talks on restricting global oil supply may not be the deus ex machina oil producers were hoping for, but Brent prices are still up over 50% from January lows. Does this rally signal the last chance to buy small producers at the bottom of the cycle?

Iraqi Kurdistan producer Gulf Keystone Petroleum (LSE: GKP) has problems that extend beyond mere low crude prices. The Kurdish government owes the company significant payments for past exports it has been unable to pay for due to the security situation in the region and limited payments from the Iraqi Central Government. And its ageing field requires $71m of capital investment just to maintain production at current levels.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

The bigger issues looming over Gulf Keystone are the company’s balance sheet woes. The firm has a $575m debt repayment due in 2017 that it’s in no condition to pay, with a mere $69.5m in cash on hand and operating losses of $85m in 2015. Taking care of this debt repayment will likely require an equity swap with bondholders, which will significantly dilute the holdings of current investors. To further complicate the situation, interest payments of $26.4m due in April and October may not be made on time.

Some of the only good news for investors is that the Kurdish government has made regular monthly payments to the firm since September. However, with crude prices around where they are now the company is in a very poor position. Without a significant and rapid appreciation in crude prices, Gulf Keystone has little chance of meeting its debt obligations without significant pain for current shareholders. Given the myriad issues facing Gulf Keystone, I won’t be buying anytime soon.

Future focus

Cairn Energy (LSE: CNE) may not currently pump a single barrel of oil, but it’s undoubtedly in better shape than Gulf Keystone. After selling its Indian operations years ago, over which it’s still embroiled in a $1.6bn tax dispute with authorities, Cairn has been travelling the world looking for its next projects. The company appears to have found them, with significant deposits in Senegal to develop over the long term and several North Sea assets to develop in the short term.

These North Sea assets are due to pump first oil in 2017 and have very low break-even costs at around $14-$20/bbl. Cairn intends to invest the cash from these operations into developing new fields in Senegal, where it has drilled several successful test wells. However, Cairn’s rosiest projections don’t have first oil from Senegal being pumped until 2021 and will require billions in capital investments in the meantime.

That being said, at year-end 2015 Cairn had $603m in cash on hand, no debt, and access to $260m in credit to fund capex costs until North Sea assets are on-line. This healthy balance sheet and low-cost assets in the North Sea have set the company up well to benefit from potential blockbuster developments in Senegal. I believe investors who are looking for a long term play in the oil & gas industry could do much worse than an experienced, low-cost-of-production, no-debt producer such as Cairn.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Ian Pierce 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.