Theres nothing more tempting than a once flying-high share price that crashes to the ground.
Straight away, we think of picking up a potential bargain and hope that business problems prove to be transient so that the shares can take off again carrying our investment with them.
Such is the apparent attraction of shares in Gulf Keystone Petroleum (LSE: GKP). The oil company traded at 220p in September but now the shares fetch 57p should I fill my boots?
Whats the problem?
Naturally, the business faces a few issues.
A major problem is that it operates in the troubled Kurdistan region of Iraq. With Islamic State insurgents banging on the back door, its safe to say that there are plenty of other oil firms with more comfortable operating set-ups to invest in.
The geographical circumstance of operations is off-putting for sure, but Gulf Keystone Petroleums biggest challenge is that it faces a potential cash-crunch, which threatens the firms solvency thats even more off-putting.
After a long period of exploration and discovery, the company has recently started producing oil. Thats good, but there seems to be a problem being paid for the oil.
During the first half of 2014, Gulf Keystone Petroleum reckons it received revenues from domestic sales (to the Kurdistan region) and increased oil production for export. However, while the firm received regular payments for its domestic production, it didnt get its full entitlement for exports. The Kurdistan Regional Government (KRG) has a contractual obligation to pay for the oil Gulf Keystone trucks for export, some 70% of the firms production, but the process for receiving consistent settlement is not yet established oh dear! Thats not helpful at all.
Its no surprise that the directors see the matter as their main priority and they are pushing the KRG for talks on the issue. Reading the recent half-year results statement, its clear to see the urgency. The firm says over and over again that receipt of cash revenues from export sales is critical to the on-going business. Get that? Critical.
The directors say the firm depends on existing cash resources, which came in at $177 million on 26 August, together with production takings. The receipt of revenues from export sales is, in their own words, critical for the Groups ability to continue as a going concern dont you just hate it when directors use the GC words!
There is clear risk that another cash call could hit investors, which would squash the share price further still if it happens. But if you are still unsure about the potential dangers of investing in Gulf Keystone Petroleum right now, lets consider this extract from the firms own statement on risk.
The directors reckon the firm faces these principal risks and uncertainties:
- political and regional risk;
- liquidity and credit risk;
- capital availability;
- meeting shareholder expectations;
- organisational capability;
- risks associated with infrastructure and export market;
- business conduct and bribery act;
- field delivery risk including a successful delivery of the Shaikan Field Development Plan;
- health, safety environment and security; and
- prohibition on flaring and undeveloped options for monetising natural gas discoveries.
Its a big list with some heavy duty items on it, and its the main reason Im staying away from the shares for now.
What I like to see in an investment proven profits and cash generation above anything else. Our team of dedicated analysts at The Motley Fool’s Champion Shares Pro Service agrees, and they’ve assembled a promising stable of companies to buy now.
You’ll find the perfect blend of dividend- and capital-growth work horses designed to power your portfolio forward without the need to gamble on famine-or-feast ‘story’ stocks that are short on actual earnings.
Long-in-the-tooth investors know that they earn the best total returns by backing solid firms with proven business models and steady profits. The Fool’s selections seem set to beat the returns available from many index-tracking alternatives over the long-term.
If you are serious about growing your capital, you are in the right place. It’s free and without obligation to find out more. Just click here.
Kevin Godbold 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.