Shares inGenel Energy (LSE: GENL) andGulf Keystone Petroleum (LSE: GKP), the two Kurdistan-focused oil explorers and producers, are falling today as concerns beginto mount that the Kurdistan Regional Government (KRG) will cancel its monthly payments to the companies.
Attimeof writing, Gulf Keystones shares have fallen 5%, while Genel is down 3% on the day, althoughneither company has issued a statement to explain the share price weakness.
However, over the past few days, news reports have suggested that the KRG is likely to cancel its monthly payments for oil to these producers as the governmentstruggles to make ends meet. According to NRT, Kurdistans leading independent news organisation, on Sunday the KRG announced that investment companies working with the government would be free to cancel their contracts due to the economic crisis in the region. The report says officials made this decision because the governmentsimply does not have enough money to pay salaries including for Peshmerga on the frontlines in the war against the Islamic State. Whats more, a court has ordered the KRG to pay Dana Gas and two other energy companies $2bn in a dispute over development rights for two oil and natural gas fields in the region. Its highly unlikely that the KRG will be able to make this payment anytime soon, and the total cost will be added to the sum already owed by the KRG to creditors.
With the KRGs liabilitiesgrowing, and the regions financial position becoming so dire that it is struggling to pay the salaries of itsPeshmerga fighters, its easy to see why the marketbelievesthat Gulf Keystone and Genel wont get paid this month. The last time Genel received a payment from the KRG for cash owed from oil payments was back at the end of October. Gulf Keystones last payment from the government was around the same time. And its clear that both Genel and Gulf Keystone will suffer if the KRG stops making its monthly payments. Both companies are owed hundreds of millions for oil already sold by the KRG, and as oil prices languish at all-time lows, it has never been more crucial for these companies to get back the money theyre owed to pay off their own creditors.
Gulf Keystone desperately needs cash to sustain its operations. The company has been able to sell some oil into the domestic market; it is still burning through cash reserves at an alarming rate. As of October 15 the companys cash position was $76.2m (including payments from the KRG), $26.4m of which was earmarked for debt interest payments. At the beginning of April, Gulf Keystone had a cash balance of around $127m, including the proceeds of a placing, which raised gross proceeds of $40.7m.
Meanwhile,Genel is busy positioning itself for a prolonged period of low oil prices. Capital expenditure has been slashed by 70% year-on-year and the company has merged two outstanding bonds to lower interest costs.Net debt at 30 September totalled $211m, $5m lower than the figure of $216m reported at the end of June. Genel is expected to report a pre-tax profit of 32.4m this year.
Ultimately, Gulf Keystone’s and Genel’s fortunes depend on the price of oil but trying to guess where the price of oil will be in a year, six months or even a week from now has turned out to be almost impossible for the past twelve months. Indeed, every analyst and industry insider that has tried has been proven wrong, often within days of their prediction. So, if you’re ready to give up on attempting to guess what’s in store for the oil sector, our analysts here at the Motley Fool have put togetherthis strategy.
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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.