The decision by Gulf Keystone (LSE: GKP) to suspend oil exports and divert its oil production to the local market was perhaps not a major surprise. After all, the Kurdistan-focused operator continues to be owed $millions by the Kurdistan Regional Government (KRG) for oil that has already been exported and, looking ahead, no company can sustain production without payment in perpetuity, thereby meaning that the decision was somewhat inevitable.
So, by selling to the local market, Gulf Keystone will now receive prompt payment, but will only receive a price that is around 20% below the export price. As a result, the decision may improve cash flow in the short term and mean that Gulf Keystone remains a trading entity, but it will do little to help the companys medium-term outlook for profitability.
As such, and while the chances of Gulf Keystone going bust this year have reduced considerably following the decision, the appeal of the company as an investment also seems to have declined. As a result, now does not seem to be a great time to buy a slice of Gulf Keystone, with the risks to the business being significant and likely to mean that its share price continues to come under pressure in the months ahead.
Also struggling financially at the present time is Enquest (LSE: ENQ), with the North Sea oil company being forced to renegotiate its debt covenants a couple of weeks ago in response to a lower oil price. In fact, Enquest has now agreed with its lenders to raise the net debt/EBIDTA ratio on its credit facility to 5 times and also reduce the ratio of interest payments to EBITDA to 3 times, with the new agreement set to last until mid-2017.
This should provide Enquest with more breathing space, which is clearly good news for its short term outlook. And, with the $23m deal to purchase interests in the Didon oil field in Tunisia having fallen through, Enquest now has a short term cash boost, since the money has been returned to the company. This should help it to navigate the challenging next few months and, in addition, its impact on long term production is minimal, with it reducing daily production by just 1.3%.
Therefore, with Enquest forecast to return to profitability in 2016 following what is expected to be a challenging current year, it seems relatively likely to survive its present challenges and emerge a leaner and more efficient entity.
So, as with Gulf Keystone, it seems unlikely that Enquest will go bust this year. However, with investor sentiment being so weak its shares could come under further pressure in the short term. As such, it may be worth watching, but not buying, at the present time.
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