Time is running out for Premier Oil plc and Gulf Keystone Petroleum limited

Time is running out for Premier Oil (LSE: PMO) and Gulf Keystone Petroleum (LSE: GKP) according to an article published in last weekend’s Sunday Times, which cites figures and statements from both companies’ annual reports and investor correspondence.

For example, in a circular sent to investors at the beginning of this month regarding the proposed acquisition of UK North Sea assets from E.ON, Premier warned that if it’s unable to agree an amendment with its banks or find other ways to raise money its “financing arrangements could become repayable, which would be likely to result in administration or other insolvency proceedings.” With a market capitalisation of £360m at the time of writing and $2.6bn in debt, Premier’s equity holders face being wiped out if the company is forced to tap the market for more funds by way of a placing or rights issue.

However, since Premier issued the above warning, the company’s newest non-executive director Anne Marie Cannon has acquired 10,000 shares in the company at 51.93p. This is Cannon’s first purchase since being appointed in January and indicates Premier’s management is confident that the company’s banks will continue to support it throughout this difficult trading period.

There are other reasons to believe that the company won’t disappear any time soon. 

Premier is targeting oil production of 65,000 to 70,000 barrels a day this year, up from 57,600 barrels a day in 2015. The group’s flagship Solan field in the UK North Sea produced its first oil a few weeks ago and is expected to produce 20,000 barrels of oil per day during the second half of the year. It’s taken years and cost billions to get the Solan field to the production stage, so the field’s start-up is a highly important event for Premier and should help improve the group’s operating cash flows. 

Decidedly worse

While Premier could be able to negotiate an extension of its credit facilities with banks, Gulf Keystone’s situation is decidedly worse. Two weeks ago the company announced that it would be delaying the payment of $26m to bond investors, to allow the company more time to restructure its balance sheet and secure funding. The repayment grace period on bond coupon payments related to its convertible bonds and guaranteed notes extends from April 18 and expires on 2 May and 3 May, respectively.

Technically, by forgoing interest repayments Gulf Keystone is already in default but the company remains convinced that it will be able to make a comeback, although how much this comeback will cost shareholders remains to be seen.

The figures clearly show how much of an uphill struggle Gulf Keystone faces. To maintain production at 40,000 to 55,000 barrels of oil per day, it needs $45.4m to $56.3m as the company’s flagship Shaikan field will show natural output declines towards the end of 2016 without additional investment. Administration costs this year are expected to total $19m and interest expense (including the April payment) could come to more than $50m.

Some of the required cash ($44m net) will come from the Kurdish Regional Government in the form of back payments but it’s unlikely this will be enough. Gulf Keystone has a mountain of spending it needs to finance this year and it’s not clear where the lossmaking company will get the cash from.

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Rupert Hargreaves 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.