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3 small caps in BIG trouble? Gulf Keystone Petroleum Limited, Xcite Energy Limited & Fastjet plc

Investors in Gulf Keystone (LSE: GKP), Xcite Energy (LSE: XEL) and Fastjet (LSE: FJET) have endured a great deal of suffering. All three companies have been reduced to the unenviable status of ‘penny shares’. And, sadly, I believe there’s every likelihood of further falls in their shares.

Gulf Keystone

Gulf Keystone operates in the Kurdistan Region of Iraq, where a refugee crisis and the battle against ISIS have first claim on the regional government’s funds. Monthly payments to Gulf Keystone are barely enough to maintain production, let alone enable it to repay $250m of guaranteed notes and $325m of convertible bonds, which mature next April and October respectively.

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In a strategic update on 29 April, the company said it had entered into a standstill agreement with noteholders and bondholders regarding a biannual coupon payment of $26.4m, which was due that month. The outcome of Gulf Keystone’s ongoing negotiations with debtholders is critical, because, as the directors say, there is a need for near-term fundraising and the restructuring of the Company’s balance sheet” (my bold).

In these situations, a big part of that need is often met by the lenders swapping a substantial part of their debt for equity, these new shareholders leaving the existing shareholders with only a fractional proportion of the enlarged equity.

At what share price would such a debt for equity swap take place? Well, the current market pricing of the notes, bonds and equity suggests at a substantially lower share price than the current 4.6p. In this light, I believe selling the shares would be the most prudent move, as there is the potential to buy back into a stronger, re-financed company at a lower price.

Xcite Energy

High noon with debtholders is even nearer for North Sea oil firm Xcite Energy than for Gulf Keystone. Xcite has $135m of bonds that are due for repayment at the end of the current month and only $14m of cash available at the last reckoning.

As the company said on 24 May: “These circumstances indicate the existence of material uncertainty in relation to the Group’s ability to continue as a going concern”. Like Gulf Keystone, Xcite is locked in negotiations with bondholders.

Also like Gulf Keystone, there is no sign of a cash-rich partner coming to the rescue at this stage or any whispers of bondholders being prepared to simply roll over the debt without a balance sheet restructuring. Again, Xcite’s shareholders appear hugely vulnerable to being diluted in a debt for equity swap as part of a restructuring of the company’s balance sheet. As such, I have to rate the shares a sell at their current 10.75p.


Legendary investor Warren Buffett absolutely despises airlines as investments, seeing no merit whatsoever in them. It’s a tough business to make sustainable profits from at the best of times, but trying to establish a budget airline in Africa, as Fastjet is doing, seems a particularly tough task.

The company has been burning cash at a rate of knots, and appears to have been over-ambitious in its expansion to the extent that major shareholder and brand owner Sir Stelios Haji-Ioannou has successfully campaigned to oust a number of directors, and now has the chairman in his sights to complete the clearout.

Fastjet is another small cap in big trouble, but one thing in its favour is that it has no debt (thanks to a £50m placing in April 2015). However, cash is running out. In its results last week, the company said its cash flow projections are sensitive to such things as a tough trading environment and aviation fuel prices which are currently not hedged; and that it “expects to raise further funds in the near future to provide additional headroom”.

A discounted placing at below the current share price of 25.75p would be no surprise, and I believe the shares are best avoided until the company’s future is clearer.

Of course, there are plenty of businesses where the future is less muddy, and where there is still a great opportunity to make excellent returns.

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G A Chester 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.