Oil exploration and development is a grisly business at the best of times. By some twist of fate most of the worlds untappedfields are located either ininhospitable climates or war zones, making a tough job even tougher. Throw in a plummeting oil price, and you have risk upon risk upon risk.
Welcome To Kurdistan
There are few more politically fraught places on the planet than Kurdistan right now as investors inGulf Keystone Petroleum (LSE: GKP)andGenel Energy (LSE: GENL)know too well. GKPs share price has plummeted from 69p to around 20p over the last year, while GENL has followed a similar trajectory, limiting from 702p to around 250p.
Both have been drilling for oil in the region and anxiously watching their cash reserves dwindle while waiting for the Kurdistan Regional Government (KRG) to stump up the cash for their efforts. Payments have been erratic, but it isnt hard to have sympathy for the KRG, because it has a lot on its plate right now. The cost of fighting Islamic State is placing a major burden on its coffers, forcing the KRGto delay its target of producing 1 million barrels of oil a day (bpd) by a full year, from this December to the end of 2016. Official estimates suggest it produced just 636,000 bpd in November.
Front Line
Kurdish Peshmerga fighters have been the most effective force on the ground against ISIL and withthe KRG struggling to pay their wages, it is hardly surprising that GulfKeystone Petroleum and Genel Energy also have to wait in line.
The KRG is keen to keep foreign oil companieson side.Kurdish deputy premier Qubad Talabani has said itwill continue to pay arrears to the oil companies despitebeing tested by a series of crises. Paymentswere forthcoming in September and October, but a November no-show frazzled investor nerves once again.
Gulf Keystone has refused to boost output untilarrears totalling $298.4mare settledbut management may be feeling more positive afterthe company has just banked $15m forNovember, taking its current cash position to $54.6m. It is hoping the full arrears are paid in full at some point next year, which would give it a major boost.
Money Flows
Genel had also cut output due to payment frustrations, but on October 23 itreceived around $9m net from its share of the Tawke fieldfor oil exported through the Iraq-Turkey pipeline. That was on top of a $16.5mnet payment for exports from the Taq Taq field on October 20. It should receive another $10m from thesale of its 20% participating interest in the Chia Surkh Production Sharing Contract to Petoil Inc.
Genels third quarter revenues totalled $77m, including $20.5m of local sales, and as Kurdistan production hits record levels and pipeline times improve, management is more optimistic that the KRG will make more reliable payments in future.
What both companies urgently need now are higher oil prices. Genelgotjust $37 a barrel in Q3, down 52% year-on-year. If they get that, both stocks could enjoy a rather less grisly 2016. But there is still that small matter of the war with ISIL. Expect further battles ahead.
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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.