As oil prices continue to languish below $100 a barrel, the number of casualties in the oil sector is growing.
Small-cap oil companies, which once had bright prospects thanks to their impressive reserve bases, are now unable to find the investment or financing required to develop their reserves.
What’s more, as banks attempt to shield their exposure to the sector, many small-cap explorers are losing the support of their banks, which have traditionally provided financing when no investor could be found.
On the edge
Xcite Energy (LSE: XEL) is just one example of this trend. The company has some exciting prospects in the North Sea, but as oil prices have collapsed it looks as if potential partners for the company’s projects have backed away from any potential deal, leaving Xcite in a precarious position.
The company warned at the beginning of this week that it doesn’t believe it can repay bonds falling due at the end of June. With a cash balance of only $14.1m at the end of March, and bonds worth $130m falling due next month, Xcite’s ability to continue as a going concern hangs in the balance unless a white knight appears to save the company.
Management is already in discussions with bondholders and with a market capitalisation of only £36m, shareholders face significant dilution if the company taps the market for additional funds.
Steady progress
As Xcite struggles, Rockhopper Exploration (LSE: RKH) continues to chug along.
At the end of 2015, Rockhopper had cash resources of $110m, enough to keep the lights on for several years. Also, the group is producing oil and gas and has been on an acquisition spree to boost its presence around the world.
When oil prices return to $100 a barrel, the market should recognise these accomplishments and place a premium on Rockhopper’s shares. And the company has enough cash to keep the lights on until such a recovery takes place.
Running out of time
Unfortunately, Gulf Keystone Petroleum (LSE: GKP) is in the same position as Xcite. The company borrowed too much money when times were good, and is now struggling to meet its obligations. Management is already in discussions with bondholders regarding a restructuring of debt, and the company will need another cash infusion to maintain production this year.
All in all, Gulf Keystone needs several hundred million dollars just to keep the lights on over the next few years — that’s even if oil prices recover. The group’s towering debt pile and hefty capital spending bill will consume nearly all cash generated from operations if those prices do recover.
Unless Gulf Keystone pushes bondholders to accept a haircut or restructuring, this is likely to be the case for the foreseeable future. It’s highly probable that shareholders will be asked to foot the bill for the company’s mistakes and pay off bondholders.