After a long slide that saw the price dip below $29 a barrel, Brent Crude has enjoyed a brief period of relative stability and has recovered a little to the $33-34 level. OPEC oil ministers are also starting to talk about the possibility of freezing production rates to try to add some support for prices, even if Iran is unlikely to agree, at least not before its even got its production properly restarted.
But todays prices are hurting a good few of the worlds producers, whose production costs are too high to to be sustained indefinitely, and a reduction in oversupply coupled with a price recovery is inevitable. The only question is when. So, has it already started and is it good news for oil investors?
Growing debt
For my sins I own shares in Premier Oil (LSE: PMO), and Im about 50% down on them. Thats actually quite good going, relatively, as the price has plunged by 80% in the past 12 months, to 38p. It was actually as low as 19p in January, before the firms acquisition of E.ONs UK North Sea assets gave it a much-needed boost.
Premier has been harder hit than the big players like BP and Shell, for a couple of key reasons. For one thing, it doesnt have the same downstream operations that help bring in cash even when oil prices are low. But more importantly, it has a lot of debt, around $2bn of it, and doesnt have the cash flow to service it indefinitely.
Against that, Premier has funding to last until mid-2017 and has implemented some deep cost savings. And it has some seriously tasty interests in the Falklands oil fields, which bode well for the long term. Oh, and it did get those E.ON assets at a knockdown price, and if you can afford to do that in a crisis period like this, then youre setting yourself up nicely for a price recovery.
Time running out
Over at Gulf Keystone Petroleum (LSE: GKP), the problems are of a different nature. Gulfs Shaikan field in the Kurdistan region of Iraq is pumping out more than 40,000 barrels of oil per day and its all being sold, and total 2P reserves estimates have recently been doubled to around 639 million barrels.
All well and good, but as exports, and the resulting cash, are going through the Kurdistan Regional Government, the company is not being fully paid for them. It is getting regular payments of $15m at a time, with the last one reported in early January, but there have been no payments yet towards the sizeable arrears still owed.
The payment scheduled, however, has changed this month and will include an extra 5% towards arrears, and the monthly amount will be calculated on a netback basis tied to the price of Brent Crude. Now for the bad news with Brent Crude at todays price, Gulf is going to get less money per month. And at that rate, my Foolish colleague G A Chester has estimated that its going to have trouble meeting its bond interest payments before very long and if hes right, theres likely to be some emergency debt restructuring.
If you dont like the heat
Both of these companies, in my view, could be on the cusp of a positive change of fortunes but it depends almost entirely on how the price of oil moves over the next six months or so, and things could still turn worse for both of them. But you never expected being an oil investor to be easy, did you?
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Alan Oscroft owns shares in Premier Oil. The Motley Fool UK has recommended Royal Dutch Shell. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
