It doesnt look good forEnQuest(LSE: ENQ) and Gulf Keystone Petroleum (LSE: GKP) right now, although the former is better placed to cope with lower oil prices, in my view. Both companies, however, remain very risky equity investments right now, regardless of whether oil prices rise or fall in the next few weeks. Heres why.
Shaikan Block
Gulf Keystone Petroleum () today provides an update on the companys operations at Shaikan, its key producing asset, the groups statement began on Friday, whenGulf Keystone stated that itremains in a dialogue with the Kurdistan Regional Governments Ministry of NaturalResources in order to receive outstanding payments and establish a stable payment cycle for export crude oil sales in future.
Gulf Keystonehas suspended more profitable oil exports from its assets in Kurdistan, while crude oil supply will be diverted to the local market, essentially driving Gulf Keystones margins down. The oil produceris not being paid by authorities for exported oil, and thats a big problem because less than two months ago in a move partly aimed at offsetting falling oil prices it hadnearly doubled production atShaikan to 40,000barrels of oil equivalent per day (boepd). Gulf Keystoneis burning cash at a faster pace, as its more lucrative crudedelivered by truck wont generate the projected level of sales.
Capital
So, revenues will unlikely fully cover Gulf Keystones cost base. As such, the company must hope that the situation inKurdistan swiftly changes, or oil prices skyrocket, or both. Still, higher oil prices wont make a big difference to the investment case, I reckon.
In fact, Gulf Keystones business model doesnt allow for much financial flexibility, and it looks very likely that it will have to raise very expensive debt capital or equity capital in the region of $150m-$200m, according to my estimates.Its partner, Hungarys MOL, could provide the funding or engineer a takeover, of course, but its too early to bank on that.
The good news perhaps is that oil and gas banker Sami Zouari was recently appointed as CFO. MrZouaris previous employer,BNP Paribas, is one of main lenders in the sector in EMEA, so prompt access to short-term bridge financing shouldnt not be ruled out, although Gulf Keystones CEO, John Gerstenlauer, said thata number of longer term financing options were being progressed by the board.
Personally, I doubt long-term financing options are available, though.
Friendly Lenders
Just likeGulf Keystone, EnQuest stock has been hammered in the last 12months. Is this an opportunity, though?
The oil and gas producer announced last month that, given changes in the oil price environment, its lenders had agreed to raise the net debt/Ebitda covenant to 5x on its core credit line and to reduce the ratio of financial charges to Ebitda to 3x both until mid-2017.EnQuest announced last week to have exited a small investment in Tunisia, and is expected to report Ebitda of more than half a billion dollars on revenue of about $1bn in 2014.
With anet debt position of approximately $1n, I dont believe EnQuest is in dire straits, and see 2015 as a key year for the company: production is expected to rise to up to 36,000 boepd from roughly 28,000 boepd in 2014 at its Alma/Galia and Kraken developments in the North Sea.
Is that enough to bet on EnQuest?
Well, while you may be tempted to bet on rising oil prices and snap up the shares, I would rather consider a dividend play in the oil sector or elsewhere for the time being. So, I suggest you learn more about a fewvalue candidates paying hefty dividends, which can are poised to deliver market-beating returns. Afree copy of our new report is available right now, so do not miss the opportunity to find out more about someundervalued stocks that will likely surprise investors in 2015and beyond. As a reminder: the Motley Fool research iscompletely freeand comeswithout further obligations!
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Alessandro Pasetti 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.
