Im not saying the oil price WILLrecover in 2016: calling the bottom of a cycle is as difficult as spotting the top. Brent crude has slumped again to$45 a barrel and some claim it could fall as low as $20 in the Spring. But if you reckon the sell-off of the worlds top commodity has been overdone, the next question is how to play the recovery.
Cheap oil has hit explorer Premier Oil (LSE: PMO) as hard as any, with its share price down 55% in the last six months alone. The recent saleof its Norwegian divisionPremier Oil Norge AS to Det Norske for $120m has given it a little respite. The money is going straight into payingdown its debt pile, but will still only cover around 5% of next years$2.70bn forecast debt total, according to Canaccord. Worryingly, that hefty debtfigure is based on oil at $58 a barrel. It could rise evenhigher.
Premieris exceeding production targets and making cost reductions of 25%. Liquidity is holding up, with cash and undrawn bank facilities of $1.2bn and forecast year-end covenant headroom in excess of $700m. Its criticalSolan project is on track for first oil by year-end weather permitting while the Catcher project is also on schedule. This years expected110m pre-tax loss is forecast toconvert into a 38m profit next year, and Premier does seem set up to survive another year of cheap oil (although that depends on how cheap). A serious oil price rebound and Premier could fly up the league.
Gulf In Class
These are tense times at Kurdistan-based oil explorer Gulf Keystone Petroleum (LSE: GKP). Gulf has the reserves notably its world class Shaken field and is getting oil to market, the problem is getting paid by the Kurdistan Regional Government. A $15m net payment on 15 September and another exactly one month later soothed investor nerves but November came and went without further payments.
While it waits,Gulfis running down its cash reserves. Last month, chief finance officerSami Zouari, assured investors that although its cash balance had fallen below $50m for five consecutive business days, it had still met its debt obligations and continues to manage expenditure prudently. Management must feel pretty helpless as it waits for the money to come through, as monthlycosts of around $8m eat through its reserves, while it looks to fundinterest payments of US$26.4m to bondholders.
This is squeaky bum time at GKP as it falls victim to labyrinthine Iraqi politics. If it doesnt get a regular flow of cash soon, things could quickly turn ugly. Even an oil pricerecovery wont help if it doesnt get the money. The operational side is fine, but its future is largelyout of managements hands. That makes it far too risky for me.
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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.