Investing in oil operators and producersGulf Keystone Petroleum (LSE: GKP)andGenel Energy (LSE: GENL)was always going to be risky, given their focus on politically turbulentKurdistan, butthe rise of Islamic State and collapse of the oil price has raised the stakes to frightening levels.
Let It Flow
Things got really tense last year when payments from the Kurdistan Regional Government stopped flowing. The KRG could barelyafford to pay its frontline Peshmerga fighters leading the war againstIslamic State, so it is hardly surprising that it struggled to fund the millions of dollarsowing to Gulf and Genel. The money has since been coming through on a stop-start basis, for example, GKP banked $15m both in September and October, then the pipeline spluttered in November, before another $15m came through.
There was good news at the start of this year, when GKP reported another $15m payment forcrude oil export sales from itsShaikan Block, covering its December invoice. This is itsfourth consecutive monthly payment and lifts the companys current cash position toUS$58.4 million, up from $54.6m last month.
Shaikan All Over
GKP chief executiveJn Ferrier says its continues to focus on its flagship Shaikan asset with its local partners, where itended the year with stable average daily production rates of above 36,000 barrels of oil per day. He added:We continue to exercise the highest financial discipline across the organisation, whilst maintaining safe and reliable operations.Gulf is still waiting onarrears totalling $298.4m, which it hopes will bepaid in full at some point thisyear, but at least the recent payment showsgoodwill.
Genel Energy has also been banking some cash. Partners in itsTawke field co-production received a gross payment of $30m for oil exported through the Kurdistan Region of Iraq-Turkey pipeline at the start of January.Genels share of the gross Taq Taq payment was$16.5 million and this is also thefourth export payment made by the KRG since payments restartedin September 2015.
Future Of Fear
Despite the payments, both companies are still dramaticallybelow their 52-week high. Genel trades at 140p, down from a high of 713p, GKP is at 12.68p, down from 65.54p. Markets clearly dont trust that the cash-strapped KRGcan assure a regular flow of payments, let alone catch up with all those arrears.
Worse,the low oil price is only making life harder for everybody, by slashing the value of the oil they do bring to market, and the price couldplungelower still. Morgan Stanley has said oil could even hit$20 a barrel as the dollar strengthens and China flails.
Kurdish Peshmerga fighters have more than held their own against Isis, aided by Western air support. Even the Iraqi army seems to have got its act together, recapturing Ramadi. Isis is losing territory but the fight is far from over, and the plunging oil price is only making the struggle harder for GKP and Genel. Todays low share prices are highly tempting, but way too risky for me.
If the oil sector is too riskyforyou, there are farsteadier growth stocks to be found right now.
This mid-cap company has been putting on the style latelyand one of the Motley Fool’s top analysts reckons it’s the latest British brand with the potential to go global.
To find out its name all you need do is download our BRAND NEW reportA Top Growth Share From The Motley Fool.
Click here to read this no obligation report. It will be yours in moments and won’t cost you a single penny.
Harvey Jones 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.