However, fast-forward to today and the situation couldn’t be more different. Both companies have weathered the storm and are now starting to emerge from the cloud of uncertainty that has shadowed them for the past few years.

Profits rising

Gulf Keystone’s turnaround is particularly impressive. At the end of 2016, it looked as if it was heading for bankruptcy and only a colossal debt restructuring helped save the business, although it almost completely wiped out shareholders.

Now, after several years of hard work, the company has not only completely recovered, but it looks to be one of the most well-funded and profitable oil businesses trading in London today.

According to its full-year 2018 results, Gulf Keystone ended 2018 with a net cash balance of $191m, up $135m year-on-year. Profit from operations hit $78m and earnings per share came in at 26p. On this basis, shares in the company are trading at a P/E of around 10, that’s without adjusting for cash which currently makes up around 17% of the group’s £580m market capitalisation.

Management also declared a $25m dividend alongside Gulf Keystone’s 2018 results, which gives a yield of around 3.3% on the market-cap, according to my calculations. That’s quite an attractive return for a company that was facing bankruptcy only a few years ago.

Further to go

And I think this could be just the start of Gulf Keystone’s comeback. Based on its current production and expansion plans, the City believes the firm’s revenues will hit $409m in 2020, up from 2018’s $251m. Earnings per share are expected to more than double to $0.66, putting the stock on a 2020 P/E 5.

These numbers indicate that investors buying today could see an upside of 100% or more on their investment in Gulf Keystone over the next two years.

Undervalued

Genel’s comeback hasn’t been quite so impressive, but that shouldn’t detract from the fact that the stock appears to be undervalued by around 65%. At the time of writing, shares in this Kurdistan-focused oil producer are dealing at a forward P/E of just 5.3 (compared to the industry average of 8.7).

The business is also highly cash generative. After accumulating $241m of net debt by 2016, at the end of 2018, the group’s balance sheet had moved into a net cash position of $37m. Management is planning to use much of these resources to increase the company’s annual production, underpinning earnings growth over the next two years.

The drilling and exploration programme in 2019 has gotten off to a solid start with the business announcing today that the testing of its TT-20z well in the Taq Taq field (of which Genel has a 44% working interest) is complete. Production at the well has started at an initial rate of 2,000 barrels of oil per day. Production is also projected to increase over the coming weeks and months.

If the company continues to issue positive trading updates like these, I think it could only be a matter of time before the market rewards the stock with a higher valuation.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, despite its improving fundamentals, the share price has languished. But I think it’s only a matter of time before the market realises this mistake and Amerisur shares wake up.

Pushing ahead

Since 2014 Amerisur, like all its peers in the sector, has been hobbled by low oil prices. But this hasn’t deterred management. The company has continued to push ahead with its plans for growth. It’s made select acquisitions where it believes there’s value to be found, and opened a key oil transport pipeline, which has significantly increased the average profit margin on each barrel of oil produced and sold by the enterprise.

City analysts believe Amerisur will report earnings per share (EPS) of $0.023 for 2018. That might not sound like much, but it indicates year-on-year earnings growth of 110%, and puts the stock on a forward P/E of just 8.5.

In my opinion, this low valuation seems to suggest that the market has given up on the business and leaves no room for positive surprises. In fact, after adjusting for the £29m (2.4p per share) of net cash on Amerisur’s balance sheet, the cash-adjusted P/E falls to just 8. This bargain basement valuation appears to give a wide margin of safety for investors, and any slight improvement in Amerisur’s fortunes could result in a substantial increase in the share price.

Double in value 

Another oil stock I think is set to outperform in 2019 is Gulf Keystone Petroleum (LSE: GKP).

It’s an understatement to say that this company has a mixed history. The business was forced to conduct a major restructuring in 2015 as, drowning in debt, falling oil prices crippled the business. However, after the reorganisation, Gulf Keystone is now better positioned for growth than it has ever been. The balance sheet is flush with cash ($121m at the last count), and a focus on streamlining operations has helped improve profit margins. 

City analysts believe the company is set to report EPS growth of 341% for 2018, indicating EPS of $0.27, and a P/E of 8.6. Further growth is expected in 2019. Analysts believe EPS could hit $0.40 by the end of the year, up 46% and giving a forward P/E of 5.9. Once again, I think this multiple is too conservative. 

Considering that the rest of the oil sector is trading at a median forward P/E of 11, Gulf Keystone looks to be undervalued by around 50% compared to peers. If the company can hit City forecasts for 2019, and successfully put its mistakes behind it, I see no reason why the shares cannot double from current levels.

If Gulf Keystone outperforms expectations, then the shares could rise even further. With such a large margin of safety on offer, I think investors will most likely see a positive performance from this stock in 2019.

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It’s soared

The recovering oil price has helped most oil companies, and almost certainly saved a few from going bust. With a barrel breaking the $80 barrier last week for the first time since 2014, share prices are up across the sector.

But few have done anywhere near as well as Gulf Keystone’s gain of 165% since the start of the year. If you’d invested right at the end of 2017 (when oil was still only just above $60), you’d have doubled your money, and then some, in just nine months. Who says investing for the short term doesn’t work?

Over the past couple of years, we’ve seen the Kurdistan Regional Government making good on its promise to keep up regular payments for oil shipments. Earlier failures, coupled with mounting arrears, added to Gulf’s debt problem and almost brought it to its knees, before a major rescue package bailed it out.

And first-half results made Gulf sound like the successful small oil company it now is.

It’s crashed

But before you rush out and buy into any old oil explorer in the expectation of getting rich quick, here’s a sobering thought. Investors who bought Gulf Keystone at its peak price in February 2012 have lost a full 99% of their money — even after 2018’s impressive rise.

The rescue deal saw existing investors pretty much wiped out, with pre-existing equity prior to the crunch becoming close to worthless. But that’s what happens if you invest in a company that essentially becomes insolvent — its assets become the property of whoever stumps up the cash to drag it back from the brink.

Other oilies, notably Premier Oil and Tullow Oil, came close to serious financial trouble and needed some degrees of financial restructuring to stay afloat. But they were never as close to the edge as Gulf Keystone.

It’s boring

Perhaps the most striking thing about the Gulf Keystone share price today is that it’s getting a bit boring — and I see that as a very good sign.

The company finally turned a profit in 2017, with forecasts for the current year putting the shares on a P/E of 13 — which would drop to 8 if 2019 forecasts prove accurate.

And the debt problem is history, with $240m in cash on the books at 7 September. That makes the firm’s refinanced $100m debt (consisting of five-year notes) look like a mere formality.

There’s still risk associated with Gulf’s geographic location in the Kurdistan Region of Iraq, but the deal with the government seems to be holding up — and the government needs it to work, too.

On the whole, Gulf Keystone Petroleum is looking to me like a decent investment, on an attractive valuation.

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Alan Oscroft owns shares of Premier Oil. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

After undergoing a momentous restructuring at the end of 2016, the company’s management spent much of 2017 trying to stabilise the business. A low oil price has hampered efforts to rebuild, but now that the price has recovered to levels not seen since the end of 2014, Gulf Keystone’s outlook has improved considerably. 

Putting the past behind it 

Today, the company announced that in 2017 production hit 35,298 barrels of oil per day, which was in the middle of last year’s guidance of 32,000 to 38,000 bopd. However, for 2018, management is expecting production to come in at a slightly lower rate of between 27,000 to 32,000 as it continues to work on a delayed investment plan for the year.

The company is looking to “significantly increase investment in Kurdistan to step up gross production to 55,000 bopd in the near to medium term, a material step towards development of the full potential of the field and production around ca.100,000 bopd,” according to CEO Jón Ferrier. 

There’s plenty of headroom available on the balance sheet to pursue this production plan. At the end of June, the firm had net debt of $2m with cash reserves of more than $100m. Since this date, Gulf Keystone has continued to receive payments from the authorities for oil exports and its net cash position has improved to $47.2m. 

Gulf Keystone has a plan in place to grow and has the cash to pursue development. However, the firm will only be able to succeed if the political situation in Iraq stabilises. Unfortunately, it does not look as if this is going to happen anytime soon. So, while the company’s outlook has improved dramatically over the past 12 months, I’m hesitant to say that it’s in the clear just yet. 

Production stability 

A better oil price recovery play for your portfolio might be Amerisur Resources (LSE: AMER). Focused on South America, specifically the relatively politically stable regions of Ecuador and Colombia, Amerisur has a much brighter outlook than Gulf Keystone. 

For the past few years, the company has been consolidating its position in the regions it operates, buying new prospects and investing in operations to improve efficiency. 

These efforts are starting to pay off. It exited the year with production of 7,000 bopd, compared to the average daily production for the year of 4,862 bopd. Based on this higher output, coupled with higher oil prices and fatter margins thanks to the commissioning of a new pipeline, City analysts expect Amerisur’s net profit to hit £3.1m for 2017, rising 11-fold to £38m for 2018. Based on these forecasts, the shares are trading at a forward P/E of just under 10. There’s also $20m of net cash on the balance sheet. 

Overall, if you’re looking for a small-cap oil producer to add to your portfolio, I’d choose Amerisur over Gulf Keystone, thanks to its rapidly growing production and profitability.  

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Amerisur Resources. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, after its dramatic restructuring last year, it looks as if the group now has what it takes to stage a comeback. 

Better, stronger

Last year’s restructuring was devastating for Gulf Keystone’s investors and bondholders, but the deal had to be done. If bondholders had blocked a restructuring, it’s likely the firm wouldn’t be here today and all of its stakeholders would have lost out. 

The deal reduced its debt burden from more than $600m to ‘just’ $100m and today the company is sitting on more than $100m in cash as well, making it one of the best-capitalised oil businesses around. At the same time the group is still producing and collecting payments for its oil production and now the crippling debt interest burden no longer exists, Gulf Keystone stands a chance of making sizeable profits. 

Indeed, City analysts are currently expecting the company to explode into profitability during 2018. A pre-tax profit of £83m is expected for 2018, up from a loss of £35m for 2017 and £85m for 2016. 

Time to buy?

For many investors the prospect of buying shares in Gulf Keystone may be too much, considering the company’s history, but the business today is nothing like it was this time last year. The group’s balance sheet is clearly cash rich and oil payments are now taking place on a fairly regular and predictable basis, although the company admits there’s no certainty this will continue. Nonetheless, unlike before, today it has the cash on hand to weather a payment drought for several months without sparking bankruptcy chatter. 

Based on current City growth estimates, shares in the firm are currently trading at a 2018 P/E of 4.9, which looks exceptionally cheap. But considering the company’s past, I’m wary of these estimates. The City has been trying to guess when Gulf Keystone will break into the black ever since its creation and so far, all forecasts have turned out to be wrong. 

With a cash-rich balance sheet, this time around things might be different though. If it can keep on its current path without any serious operational or political problems, the group could hit City forecasts. A positive cash balance will certainly help the company achieve this goal.  

The bottom line 

It’s clear that Gulf Keystone is a different company today than it was this time last year, and for the first time since the company’s inception, the outlook is bright for the group. So, if you’re willing to trust its management again, now could be the time to buy. 

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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.

Gulf Keystone is currently struggling to keep its head above water as the business is reliant on sporadic payments from the Kurdistan Regional Government for its oil, while high operating costs and low oil prices are also biting. 

Standstill Agreement 

Management signed a Standstill Agreement with the owners of 75% of the company’s bonds earlier in the year to help relieve it from the bonds’ onerous interest demands. While the Standstill Agreement is in place, Gulf Keystone doesn’t intend to make the April 2016 coupon payments on its bonds. Technically, such a refusal to pay the interest due constitutes a default. 

However, under the terms of the Standstill Agreement, signatories to it have promised not to push the company into bankruptcy if it doesn’t meet its interest obligations. Signatories have agreed not to vote in favour of any resolution that would request the relevant trustee to declare the principal amount of the bonds due and payable — usually the next step after a failure to make interest payments. 

Can kicking 

At first glance, this renewal of the Standstill Agreement seems to be good news for Gulf Keystone and the company’s shareholders. Yet the deal only seems to be kicking the can down the road. Gulf Keystone will still have to meet its obligations at some point in the future.  

With this being the case, it’s impossible to assess whether or not Gulf Keystone is an attractive investment. The company has a mountainous pile of debt to deal with and as long as oil prices remain depressed, then it won’t be able to deal with these liabilities. Moreover, Gulf Keystone needs another massive infusion of cash this year to continue operating at its current capacity. 

To maintain production at 40,000 to 55,000 barrels of oil per day, management has warned that 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. Just because Gulf Keystone has managed to defer its April interest payment doesn’t mean that the company won’t have to honour its obligations. 

The bottom line

Overall, a rough back-of-the-envelope calculation shows that Gulf Keystone will need around $120m or £85m just to stay in business this year. Some of this cash will come from oil payments but it’s likely shareholders will have to foot the bill for the rest of the company’s spending. Considering that Gulf Keystone’s market capitalisation is only £44m at time of writing, its liabilities for 2016 could be almost double its current market value.

Simply put, it might be wise to avoid Gulf Keystone. 

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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.

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.

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Mothercare (LSE: MTC) is one such out-of-favour stock that’s been sold down by investors this year after publishing yet another set of dismal trading figures. 

Year-to-date the company’s shares have lost around 50% of their value, taking declines over the past 11 months to around 60%, the kind of fall that would scare off even the most experienced investors. 

Still, these declines have left Mothercare’s shares trading at a forward P/E of 10.7 for the year ending 31 March 2017. If the company meets consensus growth forecasts, then earnings per share are set to grow by another 28% in the year to the end of March 2018, implying that the group is trading at a 2018 earnings multiple of 7.4. 

Nonetheless, Mothercare’s success is dependent on the company’s ability to return to growth overseas. UK sales are still growing, and this part of the business should support the rest of the group while it pulls through these turbulent times. UK sales rose 2.1% during the first quarter, marking Mothercare’s eighth consecutive quarter of like-for-like UK sales growth. And online UK sales grew by 5.6% so Mothercare looks unlikely to fold in the near future.

Management mistakes 

Shares in Sepura (LSE: SEPU) have lost around 66% of their value since the end of March after the once-high-flying critical communications services company announced that it was in talks with its lenders.

According to the company, order delays have hurt its working capital position putting short-term constraints on cash and forcing the group to consider raising fresh equity. After acquiring the Teltronic business last year, Sepura has been left with net debt of €119m and slower-than-expected receipts from customers have also put the company in a precarious position. As a result, Sepura is subject to those short-term cash constraints that it expects will require an extension to its banking facilities and a waiver of a possible covenant breach at the end of June. Talks are under way with major shareholders to raise around £50m through an equity fundraising.

This whole scenario is quite a clear warning to investors that they should stay away from Sepura. Management has shown that it’s unable to run the business effectively, and it has fallen on the shoulders of shareholders to foot the bill for the company’s mistakes. Sepura might be able to buy itself some time with a placing, but poor management means that it might be wise to avoid the company.

Running out of cash 

Similarly, Gulf Keystone (LSE: GKP) has proven itself to be a poor steward of shareholder capital over the years and now shareholders face significant dilution if the company is forced to restructure its debts. Unless there’s a sudden dramatic increase in the price of oil, then Gulf Keystone is likely to run out of cash and headroom on its borrowing facilities this year. Once again, it will fall to shareholders to foot the bill for the company’s excess. Another firm it might be wise to avoid for the time being.

The post Is there any equity value left in Mothercare plc, Sepura plc and Gulf Keystone Petroleum Limited appeared first on The Motley Fool UK.

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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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Double trouble

The company sets out details on potential interim investment scenarios to build what it describes as “a common foundation for stakeholder discussions” regarding the firm’s need for near-term fundraising, upcoming debt obligations and possible restructuring of the Company’s balance sheet.

The reaction of the firm’s shares this morning suggests that many investors were hoping that such news would never come and that Gulf Keystone petroleum might be able to trade out of its financial difficulties without raising further funds.

However, the double troubles of high debts and poor cash flow have long plagued the firm.  Although the company’s Shaiken oil field in Kurdistan is producing lots of oil, the company has struggled to get the Kurdistan Regional Government (KRG) to actually pay for it. The KRG has contractual obligations to pay up, but the cash has been piecemeal in its delivery and the KRG owes Gulf Keystone for past production.

Maintaining operations

The company explains today that without additional capital expenditure the Shaikan wells may begin decline later in 2016. The potential interim investment scenarios that the firm sets out in its announcement aim to maintain Shaikan production at 40,000 barrels of oil per day (bopd) with an option to increase production to 55,000 bopd.

The firm first communicated these investment proposals with its full-year results on 17 March and says it developed the scenarios to bridge and complement its revised Shaikan Field Development Plan (FDP), which the company’s partners are reviewing.

The firm’s chief executive, Jón Ferrier, said:

“The additional detail on the potential interim investment scenarios being released today ensures an orderly market and represents an important step as we prepare to embark upon detailed discussions with stakeholders.  We are working to achieve the best possible way to restructure our balance sheet.  Addressing our funding needs will ensure the Company’s longer term future and ability to continue developing the Shaikan field for the benefit of all our stakeholders.”

 A rock and a hard place

As we are seeing with Gulf Keystone, the challenge of finding oil can be the least of an oil companies’ problems. Getting the stuff out of the ground, especially when it’s located in challenging locations, can be just as problematic. Now that the firm is involved with the Shaiken field, going forward seems like the only way out of financial difficulty.

Despite the firm producing plenty of the black stuff, Gulf Keystone has been a poor stock market investment so far, which underlines the uncertainties of playing the speculative small-cap space in the oil and gas sector.

The post Gulf Keystone Petroleum Ltd Drops 30% On Balance Sheet Restructuring Plan appeared first on The Motley Fool UK.

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Kevin Godbold 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.