Category Archives: Oil & Gas

Oil platform in North Sea

Four simple reasons to avoid Premier Oil plc

Oil platform in North SeaDisclosure: I have no financial interest in Premier Oil.

Premier Oil’s interim results confirmed my view of this stock: this company has good assets and is operating well, but its debt situation means the stock remains a sell for equity investors.

Here’s are four reasons why I think big losses are likely for Premier Oil shareholders.

1. Covenants would be breached if tested

Net debt rose to $2.6bn during the period and is expected to peak at $2.9bn during Q3. The firm’s net debt/EBITDAX ratio was an eye-watering 5.2x at the end of June, significantly above the firm’s covenant maximum of 4.75x. This is why covenant tests have been suspended while refinancing discussions are ongoing — Premier and its lenders don’t want the firm to fall into default.

However, the significance of this situation is that Premier’s lenders have the firm over a barrel. Premier can’t walk away and find a better deal elsewhere. It has to reach an agreement with its lenders, otherwise it will default on its loans and risk being put into administration.

2. “A full refinancing”

Premier isn’t just tweaking the terms of its loans. In the results webcast yesterday morning, Premier’s FD Richard Rose said that the current debt negotiations are “effectively akin to a full refinancing of the group”.

Mr Rose also explained that the firm has “four or five” lending instruments, each of which has multiple lenders behind it. He estimates Premier is dealing with about 50 lenders in total. So the complexity involved in the negotiations is considerable. Reaching agreement won’t be easy and the lenders have the upper hand.

Premier is hoping to agree revised covenants and longer maturities on some of its loans. In return for this, management expects to accept higher interest rates and to use the firm’s assets to secure its debts.

Management also indicated that during the deleveraging process, Premier is likely to have to get lender approval for any major new investment plans. CEO Tony Durrant indicated that no major new investment spending is likely for the next couple of years.

Details of the refinancing should be finalised during the second half of the year. Shareholders may feel that they are safe, because Premier’s current 78p share price equates to a discount of about 40% to the group’s net asset value.

However, my view is that if Premier’s lenders are having to make compromises and wait longer for their money, then shareholders are also likely to face losses. One possibility is that lenders will get a slice of Premier’s equity, perhaps through the issue of a large number of warrants for new shares.

3. $5 per barrel

One interesting figure from yesterday’s call is that Premier’s interest costs currently amount to about $5 per barrel. This could rise as a result of the refinancing. This figure gives a real taste of the burden the group’s debt pile is placing on its cash flow.

At $50 per barrel, 10% of Premier’s revenue would be absorbed by interest costs alone. Repaying the capital on these loans at sub-$60 oil prices won’t necessarily be easy or quick, especially as the group’s cash flow faces an additional risk in 2017.

4. Hedging risk?

During H2, Premier’s existing hedging positions means that the group will be able to sell oil at an average of $65 per barrel. But in 2017, this coverage tails off. Premier’s figures indicate that current hedging will only provide an average oil price of $45 per barrel in 2017.

If the oil price doesn’t make progress above $50, then this lack of hedging could have a significant impact on Premier’s cash flow.

Only one conclusion

Premier was tight-lipped about the likely terms of its refinancing in yesterday’s call. But it’s clear from management comments that other potential sources of cash — such as pre-pay agreements for oil and gas sales — won’t be viable until the firm’s lenders have agreed a new deal.

I think there’s a reasonable chance the refinancing package will include some kind of dilution for shareholders.

Even if it doesn’t, shareholders should remember that both growth and shareholder returns will effectively be off the cards for the next couple of years. Furthermore, if oil stays low, Premier’s financial difficulties could become even more severe.

I can’t see any reason to own the shares at this point in time.

Disclaimer: This article represents the author’s personal opinion only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Onshore oil installation

What does the DNO bid mean for Gulf Keystone Petroleum Limited shareholders?

Onshore oil installationDisclosure: I have no financial interest in any company mentioned.

I’ll update this post when Gulf’s board issues a statement or any further news emerges.

Update 29/07/16 @ 1945: Gulf Keystone issued a response to the DNO proposal after the market closed today.

The firm says that as the DNO proposal is for a post-restructuring takeover, the firm’s focus remains firmly on executing the restructuring successfully. Significantly Gulf emphasises that:

“we will not engage in any additional process that causes the Company to be distracted from that objective” [the restructuring]

In my view this implies support for the DNO proposal. But even if I’m wrong, this story can only end one way. Gulf Keystone shares remain dramatically overvalued, in my opinion.

Update 29/07/16 @ 1010: Gulf Keystone has issued a holding statement saying it is reviewing DNO’s proposal.

Update 29/07/16 @ 0945: Gulf Keystone shares continue to trade up on the day at about 4.2p versus the restructuring share issue price of c.0.83p and the DNO offer price of 1p.

This is crazy in my opinion. Although the DNO bid arguably undervalues the long-term upside from Shaikan, it certainly doesn’t undervalue it by a factor of 300 per cent or more. I remain confident that Gulf Keystone shares have much further to fall.

DNO makes $300m offer for GKP

Norwegian operator DNO ASA has launched a $300m takeover bid for Gulf Keystone Petroleum Limited (LON:GKP).

The cash and shares deal is intended to be implemented after Gulf’s proposed refinancing has been completed.

DNO’s offer is priced at a 20% premium to the equity value of USD 0.0109 at which Gulf Keystone plans to issue new shares under its refinancing plan.

DNO appears to have designed the offer to attract Gulf’s bondholders. This makes sense, as with Gulf in default on its bonds, the firm’s bondholders are in de facto control of Gulf Keystone.

According to this morning’s release from DNO, here’s what’s on offer:

  • For the Gulf Keystone guaranteed noteholders, the DNO terms reflect 111 percent of par value compared to 99 percent under the contemplated restructuring;
  • For the convertible bondholders the DNO terms reflect 18 percent of par value compared to 15 percent under the contemplated restructuring;
  • For ordinary shareholders, the offer represents a 20 per cent premium to the share price of USD 0.0109 at which Gulf Keystone is planning to issue new shares as part of the planned restructuring.
  • $120m of the offer will be in cash, with the remainder in shares. This will provide bondholders who don’t want to hold equity to make an immediate exit in cash (rather than having to try and dump their equity into a soft market).

There’s no response yet from Gulf Keystone’s board. I’d imagine that this is because they need to consult with their bondholders before issuing a statement.

My view is that this offer is likely to be attractive to Gulf Keystone’s bondholders.

Will anyone outbid DNO?

DNO is the largest of the Kurdistan producers in terms of both production and reserves. This morning’s statement made it clear that DNO is top dog in Kurdistan, and points out that Gulf Keystone is already dependent on its pipeline connection facilities.

I particularly liked the way that DNO emphasised that its oil is better quality (higher API number = lighter oil) than that of GKP. Here’s an extract from DNO’s proposal:

DNO has been active in the Kurdistan region of Iraq since 2004 and ranks number one among the international oil companies in oil production (50 percent), oil exports (60 percent) and proven oil reserves (50 percent).

DNO holds a 55 percent stake in and operates the Tawke oil field at a current production level of around 120,000 barrels of oil per day (bopd) of 27 degree API crude. Gulf Keystone holds a 58 percent stake in and operates the Shaikan oil field at a current level of around 40,000 bopd of 17 degree API crude.

Production from Shaikan is transported daily by road tanker to DNO’s unloading and storage hub at Fish Khabur for onward pipeline transport to export markets.

In my view, this is an opportunistic but pragmatic and fair offer from DNO. The reality is that companies in financial distress — like Gulf Keystone — can’t pick and choose. Gulf may not have the luxury of waiting until the market improves before selling up.

Gulf Keystone bulls will presumably believe that today’s offer from DNO is the opening salvo in a bidding war. Personally, I doubt this. My view is that other Kurdistan firms are unlikely to make a competing offer. DNO’s deep connections in the region give it an advantage. I can’t see an outsider wanting to get involved given the complexities and risks of operating in Kurdistan.

Disclaimer: This article represents the author’s personal opinion only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Onshore oil installation

Answering questions about Gulf Keystone Petroleum Limited

Onshore oil installationDisclosure: I have no financial interest in any company mentioned.

I’ve received a couple of emails from readers regarding Gulf Keystone Petroleum (GKP.L).

The bulletin boards are awash with complaints suggesting that the board of directors have failed in their duty to shareholders — and that a takeover bid at a ‘fair’ price may be just over the horizon.

Rather than responding to emails individually, I thought I would comment on some of the points raised here.

For what it’s worth, I think a takeover bid is unlikely.

I think the real problem is that shareholders have misunderstood the significance of Gulf Keystone’s debt. The interests of the firm’s lenders rank above those of shareholders. Because Gulf is in default, shareholders are not entitled to anything until the firm’s lenders recover both the money they’ve lent and the interest due on it.

This is  how corporate financing works — debt is senior to equity.

It’s exactly the same as when a homeowner is in arrears on their mortgage. The mortgage lender can repossess and sell the home without any regard for the interests of the homeowner (who is the shareholder in this scenario).

A takeover would be expensive

The other point is that Gulf’s debt would inflate the true cost of any takeover.

For example, in a regular takeover situation, a buyer would have to accept and fund Gulf Keystone’s $575m of bonds, plus interest. In April, Gulf said that $71m of expenditure would be required just to maintain production at 40,000 bopd. So that’s $646m in total, plus interest, without any production increase and with the shares valued at 0p.

Adding interest payments plus a notional (and very generous) 20p per share would take this total close to $1bn.

And that’s without considering the investment needed to increase Shaikan production to Gulf Keystone’s medium-term target of 100,000 bopd. We don’t know what the cost of this would be, but Gulf said earlier this year that $71m would be needed just to maintain production at 40,000 bopd, while $88m would be needed to increase production to 55,000 bopd.

It’s probably fair to assume that the total needed to get to 100,000 bopd would be significantly higher, or else the firm would have mentioned it in April’s update.

Given the low oil price and the difficulties that Kurdistan producers have in collecting payment for oil exports, an upfront investment of $1bn+ in Shaikan may not be a very attractive opportunity. The return on investment could be lower and slower than expected.

What next?

As I write this on Monday morning (18 July), the shares have spiked up by 20% to 3.8p. In my opinion, this is a good selling opportunity. I expect them to fall to the refinancing price of 0.82p and perhaps below in due course.

Disclaimer: This article represents the author’s personal opinion only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Onshore oil installation

Lamprell delivers solid results but faces uncertain outlook: what should I do?

Onshore oil installationDisclosure: I own shares of Lamprell.

Yesterday’s results from Dubai-based oil rig builder Lamprell reported a net profit of $66.5m, ahead of forecasts for $59.4m. The firm’s balance sheet remains strong, with year-end net cash of $210.3m.

As I discussed in December, my concern is over what happens when the firm’s current order book starts to empty. Yesterday’s results provided a bit more detail on this.

Lamprell currently has an order backlog of $740m, of which 90% is attributable to 2016. That’s a big decline from a backlog of $1.2bn one year ago, but I can live with that in the context of the industry-wide downturn.

A more serious concern is that just $74m of revenue is attributable to 2017 and beyond. Investors need to pin their hopes on Lamprell’s bid pipline, which the group says is marginally higher than last year at $5.4bn (2014: $5.2bn).

Lamprell says it has massaged and reshaped the bid pipeline to focus on opportunities closer to home in the Middle East. As I’ve suggested before, Middle Eastern producers with low cost production (mainly NOCs) have not cut back as much as the supermajors and indepedent E&P companies.

Lamprell has modernised its facilities and is currently busy. The group is playing to its strengths, and focusing on core customers close to home. Despite all of this, I fear that 2017 could be painful. However, having halved my position in December, I’ve decided to sit tight and continue to hold.

But I’m still a little nervous.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Offshore oil or gas platform

7 oil stocks with long-term recovery potential?

Offshore oil or gas platformDisclosure: I have no financial interest in any company mentioned in this article.

This isn’t an article calling the bottom for the oil market — although I do expect this to happen at some point in 2016.

Instead, what I thought I’d do would be to suggest a few small and mid-cap oil stocks which appear to me to be well-positioned to ride out the storm and have attractive fundamentals for a long-term recovery.

This post was prompted by an article I wrote for the Motley Fool last week, in which I commented:

With oil now trading below $28 per barrel, I believe investors looking to invest in oil stocks need to ignore revenue and profit forecasts and focus on assets.

I’m looking for companies with cheap oil and gas reserves and enough cash to ride out the slump. I believe this approach has the potential to deliver big gains when oil prices do recover to more sustainable levels.

That’s the premise for this post. I’m looking for companies with three key qualities:

  • Net cash and minimal debt
  • Low valuations relative to their 2P (proven and probable) oil and gas reserves
  • Low production costs

To help create a short list, I used Stockopedia (disclosure: I work as a freelance writer for Stockopedia) to screen for oil and gas companies with net cash, as this is non-negotiable for me*. With hedging benefits fading away and debt becoming scarce and expensive, any company that may need refinancing in the next 18 months is a non-starter, in my view.

*With one exception, see below!

Here’s the short list of UK-listed companies I came up with. This isn’t a complete list — I manually filtered it to remove obvious junk, micro caps and companies with no significant production:

  • Amerisur Resources
  • Cairn Energy
  • Exillon Energy
  • Faroe Petroleum
  • Genel Energy
  • Ophir Energy
  • SOCO International

This is intended to be a fairly mechanical process. I’m not speculating about any of these firms’ future exploration/appraisal successes nor about their bid potential.

Company EV/2P Production Op. cost/boe Net cash/gross debt Market cap
Amerisur Resources $8.50/bbl 4,524 bopd $16/boe $55.6m/none £184m
Cairn Energy $6.60/boe 0 boepd n/a $603m/undrawn £740m
Exillon Energy $0.36/bbl 15,298 bopd $6.50/bbl $6m/$54m £130m
Faroe Petroleum $2.10/boe c.10,350 boepd $22/boe £81.7m/£21m £117m
Genel Energy $1.55/bbl 75,900 bopd $2/boe Gross cash $455m/Net debt due 2019 $230m £309m
Ophir Energy $7.62/boe 13,400 boepd $7.36/boe Est. 2015 Y/E: $250m/$325m £593m
SOCO International $12.46/boe 12,000 boepd $9.88/boe $96.6m/none £459m

Based on share prices at 24 January 2016. I can’t guarantee the accuracy of these figures: they were compiled after a quick trawl through each company’s latest results/website to gather the relevant information. DYOR.

A few comments:

  • Operating cost/boe are not comparable between companies as they are not all calculated the same way. I’ve relied on company provided data or made my own estimates, but the methodologies vary.
  • Operating cost/boe is not an analog for cash flow breakeven (which is far more important). For example, SOCO says it can achieve operating cash flow breakeven with an oil price in the “low $20s”. Genel says it can breakeven with Brent at $20. Yet both companies have much lower production costs per barrel.
  • Obviously some of these companies have specific political risks. For example Exillon (Russia) and Genel (Kurdistan/Iraq/ISIS). Funnily enough Exillon and Genel are the cheapest two in the list, based on a sum of operating cost/boe and EV/2P.
  • Ophir’s valuation should probably also take into account its 900mmboe of 2C gas resources — but who knows when they will be commercialised or how much equity the firm will give away to fund their development? I suspect this could be a great long-term asset play, though.
  • Cairn doesn’t yet have any production. We also do not really know what the operating costs for its North Sea developments will be when production does start in 2017.

Overall, it’s clear that even some oil companies with strong balance sheets and exceptionally low costs are currently valued very cheaply, relative to their 2P reserves.

I’d hazard a guess that at least some of the companies in the list above will deliver multi-bagging recoveries over the next 2-5 years. But I suspect one or two may not do, or will perhaps be forced to do heavily dilutive fundraisings.

Finally, I’d like to reiterate that these aren’t buy tips and I am not suggesting we’ve seen the bottom. I have no near-term plans to buy these stocks myself, although I do intend to monitor how they perform.

It’s worth remembing that even if we have seen the bottom for oil, it would be unwise to bet on a rapid recovery.  In my view, there’s a strong likelihood that prices will to stay below $50 for an extended time. Certainly I think it’s likely that companies which still have hedging protection, such as Faroe, will see theses hedges expire while oil remains well below $50. This is likely to have a very significant effect on cash flow.

Indeed, I suspect hedging expiries could trigger something of a shakeout among the more indebted North Sea operators, whose costs remain relatively high.

Disclaimer: This article represents the author’s personal opinion only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Offshore oil or gas platform

Lamprell Plc: Solid numbers, but why the review?

Offshore oil or gas platformDisclosure: I own shares in Lamprell.

This week’s 2015 interim results from Lamprell (LON:LAM) contained no nasty surprises.

A net profit of $20m and revenue of $341m is consistent with the firm’s guidance for a result heavily-weighted towards H2, due to the timing of construction cycles.

Cash flow looks strong and net cash was up slightly to $316m, representing 44% of the firm’s market cap.

Although the level of net cash varies with working capital requirements, this balance sheet strength must provide a good chunk of downside protection for investors.

The only problem is that the unexpected retirement of CEO Jim Moffatt has coincided with the firm deciding that it needs a strategy review. Should shareholders be concerned?

Just a precaution?

Thus far, Mr Moffatt appears to have done a good job of turning around Lamprell and sorting out the firm’s finances. As far as I can tell, the firm is on a sound footing both financially and operationally.

This is what Lamprell had to say in this week’s interims about its decision to launch a strategy review:

In the context of the prolonged market weakness, the Board is undertaking an in-depth review of the earlier announced strategy to ensure that it is sufficiently robust to withstand the current industry challenges. The Board remains confident the Group is well positioned to leverage growth opportunities in the medium to long term, whilst maintaining a competitive position in the short term.

The message seems to be that the firm has revised its view of market conditions and now expects them to remain softer, for longer, than expected.

There doesn’t seem to be an obvious problem. The firm’s order backlog was unchanged from the year end at $1.2bn at the end of June, while revenue coverage was 90% for 2015 and 60% for 2016, slightly higher than comparative figures from 2014.

Margins appear to remain reasonable. Lamprell reported a gross margin of 11.6% for the first half of the year, down from 13.6% last year. That translates into an operating margin of 7.6%, down from 8.4% for the same period of last year.

Unless pricing on newer work is collapsing, these margins don’t seem to be a cause for concern either.

For the time being, I don’t see any reason to change my view on Lamprell and continue to hold.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

Offshore oil or gas platform

Will Shell’s offer for BG Group trigger a wave of dealmaking?

Offshore oil or gas platformToday’s offer by Royal Dutch Shell for BG Group has compelling logic, in my view, and should be a sound move for both firms, albeit one which will take a few years to prove itself.

Shell’s expertise and focus on LNG and deepwater drilling is well-mirrored in BG, and Shell CEO Ben van Beurden’s record of cost-cutting and asset sales to date suggests to me that he will live up to his promise of $30bn of disposals and $2.5bn per year of sustainable cost savings.

Shell’s move to buy BG indicates two things: firstly, Shell’s management believes that the oil price will recover in the next eighteen months, and secondly, the firm is increasing its bet on a gasified future.

However, the more interesting question, of course, is what Shell’s bold move means for the wider industry. In my view, this deal could well mark the low point in valuations for independent producers with solid assets: inevitably some of those firms who are financially distressed may still fall by the wayside, but solid firms with good prospects may now see a floor placed under their valuations.

That’s not to say that the oil price has necessarily bottomed out: it may have, but there could still be a few violent moves lower to come, along with a further period of low prices before the global oversupply problem is addressed.

Staying within the universe of the London Stock Exchange, there are a number of other obvious bid targets: Tullow OilGenel EnergyOphir Energy and perhaps Premier Oil and Gulf Keystone Petroleum — plus of course BP, which could yet become part of the ExxonMobil empire, in my opinion.

In two new article for the Motley Fool today, I took a closer look at some of these possibilities and speculated on what may happen next:

Whatever happens, I’m pretty sure there will be further consolidation in the oil sector while mid-cap valuations remain so low. What do you think might happen next? Let me know your thoughts in the comments below or @rolandhead on Twitter.

Disclosure: This article is provided for information only and is not intended as investment advice. The author has long positions in Royal Dutch Shell and Genel Energy. Do your own research or seek qualified professional advice before making any trading decisions.

Victoria Oil & Gas customer site

Victoria Oil & Gas 2015 interim results: any improvement?

Victoria Oil & Gas customer site

Victoria Oil & Gas is supplying gas for heat and power to industrial customers in Douala, Cameroon (image copyright Victoria Oil & Gas)

Having slated Victoria Oil & Gas plc (LON:VOG) after the publication of its 2014 results, I decided to take a look at the firm’s interim results, which were published at the end of February, to see if anything had improved.

The main areas that concerned me in the 2014 results were:

  • High levels of cash consumption
  • Stressed working capital situation with high levels of bad debt and likely bad debt
  • Excessive remuneration for staff and related parties — I’ve previously highlighted how Chairman Kevin Foo’s interests didn’t appear very well aligned with those of shareholders. Put differently, this company appears to be skilled at enriching its management but not its shareholders.

Have things improved?

Cash

Victoria’s cash balance fell from $17m to $5.8m during the period, while total borrowings rose from  $10.7m to $12.4m, an increase of $1.7m. In total, the firm appears to have consumed almost $13m of cash between June and November 2014.

However, in Victoria’s defence, some of this expenditure should have been funded by the firm’s 40% partner, RSM, which has subsequently paid up most of what it owed.

Victoria didn’t provide a pro rata breakdown of RSM’s payments across its accounting periods, but did say that it had received $6.9m from RSM to cover its share of expenses from February 2014 onwards, while a further $1.2m was still outstanding at the time of publication.

I’ve guesstimated the amount of this expenditure incurred during Victoria’s H1 (June- Nov) as $6m, meaning that Victoria’s net cash consumption during H1 appears to have been around $7m.

Working capital

Perhaps my biggest concern in 2014 was the apparent poor quality of Victoria’s receivables, and its fairly grim payables situation.

During H1, Victoria’s payables actually fell, from $12.5m to $10.5m, so I’ll focus on receivables here.

There was a slight improvement in receivables, too. Trade and other receivables (excluding monies owed by RSM) rose by 23% from $4.8m to $5.9m during the first half, as you’d expect given higher gas sales.

However, debtor days (the average time taken for customers to pay their bills) was 106 days, a modest reduction on the 120 days reported last year.

We won’t learn how this translates into good and bad debts, plus subsidised (never to be repaid?) customer installation costs, until this year’s annual report is published, but limited progress does appear to have been made.

Excessive related party remuneration

I’ve written about the gravytrain being enjoyed by top management at Victoria before. The firm’s interims suggest that the influx of cash from RSM, coupled with rising revenues, have given renewed momentum to the firm’s remuneration habits.

Total related party transactions — described as “payments to directors and other key management personnel” rose from $1.6m during the first half of last year to a nice round $2.0m during the first half of the current year.

One area of particular growth was “Directors’ remuneration – cash payments”, which rose from $716,000 during the first half of last year to $1,183,000 in the current year. That’s 10% of revenue!

Still a sell?

My conclusion after reviewing Victoria’s 2014 results was that the firm was putting a too much of a favourable spin on its receivables, and continuing to burn cash.

Although the subsequent growth in gas sales and the new supply agreements with the local power company are a big bonus, in my view, the firm’s interim results suggest my conclusions from last year are still broadly valid.

The increase in debt is worrying, and even if this is brought under control with more regular payments from RSM, I believe Victoria’s $100m valuation is ample, if not excessive.

Upside to valuation?

Victoria says annual production for 2015 is expected to average 10.4 mmscf/d, around 2.5 times the current average of 3.9 – 4.4 mmscf/d.

To keep things simple, let’s assume that means H2 revenues will be 2.5 times H1 revenues. Therefore, using the last 18 months’ figures as a guide, this is how Victoria’s 2015 income statement might look:

  • FY2015 revenue of c.$40m;
  • Gross profits c.$11.2m
  • Administrative expenses: $10m
  • Sales and market expenses: $0.8m
  • Operating profit: <$0.5m
  • Post-tax profit: c.$0.00

This is –obviously — a simplification, but as I’ve said before, it’s hard to see how Victoria will make a meaningful profit in the foreseeable future, unless perhaps gas sales rise much higher and actually manage to grow faster than the firm’s considerable overheads… (Remember, the firm’s forecast in 2011 was for sales of 44mscf/d in 2014. Actual sales were less than 4mscf/d).

There are of course, a few people who benefiting directly from Victoria’s rising revenues: the beneficiaries of the 4.5% royalty payment that comes directly off the top of the firm’s revenues. This would have been more than $500,000 during H1 alone…

Victoria Oil & Gas remains a sell, for me — especially as the firm could, in the next few years, face competition from BowLeven, whose Etinde gas field lies just offshore from Douala. BowLeven already has an outline agreement to supply a nearby fertiliser plant with gas, starting at the end of 2015…

Disclosure: This article is provided for information only and is not intended as investment advice. The author has no financial interest in any company mentioned. Do your own research or seek qualified professional advice before making any trading decisions.

Onshore oil installation

Gulf Keystone Petroleum Limited bid hopes: what are the shares really worth?

Onshore oil installationGulf Keystone Petroleum Limited (LON:GKP) got private investors all hot and flustered yesterday, after announcing that the firm was reviewing the options for a possible sale or asset sale.

I don’t know what the buyers who bid the shares up to 55% were expecting, but yesterday’s RNS made it clear that despite incoming cash (of which more in a moment) of $20.8m, Gulf is still on the rocks, financially speaking:

Concurrently, and in view of strategic discussions and its current liquidity position, and with the intention of meeting its existing debt payment obligations, the Company is undertaking a review of its financing options and in that context will engage in discussions with its key stakeholders.

In other words, any sale at the moment would effectively be a distressed sale to a buyer in a very strong negotiating position.

What about the $20.8m?

Here’s another mystery: this morning (Thursday) Gulf confirmed that the US$26 million gross payment (US$20.8 million net to Gulf Keystone) for Shaikan crude oil sales referred to in Wednesday statement had arrived successfully in the firm’s bank account. Good stuff.

Except that the the firm has now revealed that the payment is a pre-payment for oil sales from a third-party buyer. Not — as I’m sure most investors assumed — part of the backlog of payments that’s due to the firm from the Kurdistan Regional Government.

What have we learned?

Firstly, given Gulf’s current situation, a pre-payment deal of this kind is material. Investors might expect the RNS to have revealed a little more about what’s been agreed — is it for export or domestic sales, who is the buyer, and how much oil has been sold forward?

To me, this lack of information suggests that the terms of the deal are not especially favourable to Gulf.

Secondly, it’s a timely reminder that the Kurdish authorities have no reason to clear the backlog that’s owed to Gulf — which I estimate at around $150m — anytime soon. Here’s why.

Gulf has stopped exporting oil, so is no longer generating income for the Kurds, whose finances have presumably been battered by the impact of the fall in oil prices and the cost of doing battle with ISIS.

The arrears owed to Gulf were accumulated when oil prices were much higher, so clearing these arrears would cost more than the income that would be generated if Gulf did start exporting oil again. Thus there is no logical reason for the Kurds to pay Gulf in the near future — I’d suggest a year or twos’ delay is likely.

The debt issue + a realistic valuation

The pressing question of Gulf’s $520m net debt is the other big reason that any hopes for a premium takeover bid are naive and futile.

I’ve also completed a ballpark valuation of Gulf’s shares which suggest that the 55p peak reached yesterday may be as good as it gets — and substantial downside is possible.

I haven’t touched on these issues in this article, as I have covered both topics in some detail in a new article for the Motley Fool, which you can read here.

Disclaimer: This article is provided for information only and is not intended as investment advice. The author has no financial interest in Gulf Keystone Petroleum. Do your own research or seek qualified professional advice before making any investment decisions.

Oil platform in North Sea

As Trap Oil Group PLC collapses, is loss-making production threatening North Sea operators?

Oil platform in North SeaIn any market crash, the first companies to suffer are the smallest, and those with unmanageable debt loads.

We’ve already seen the effects of ill-judged debt loads:

After watching oil rise by nearly 20% since the end of January, oil bulls might believe this is as bad as it’s going to get.

However, today’s news from AIM tiddler Trap Oil Group PLC (LON:TRAP) — and by proxy its much larger partner, Ithaca Energy Inc. (LON:IAE)  has convinced me there is almost certainly much worse to come.

Pumping cash down the drain

In case you missed it this morning, Trapoil admitted that although its sole producing asset, Athena, is now pumping oil again, it isn’t economic at $58 per barrel. Here’s what Trapoil had to say:

“… at the currently depressed oil price of approximately US$58/barrel the field is significantly loss making and the Company is currently incurring a cash outflow of approximately £380,000 per month after absorption of its share of the field’s operating costs.”

In other  words, the operating costs of this well are considerably higher than $58 per barrel. Trapoil had net cash of £7m at the end of 2014, but clearly this is fast disappearing down the drain — one year’s losses at $58 per barrel would be £4.6m.

In fact, based on Trapoil’s working interest production of 720bopd, my calculation suggest that the break-even price for this well could be as high as $85 per barrel.

Ouch. I had wondered whether Athena was profitable sub-$60, but I didn’t expect things to be this bad.

In my view, Trapoil is clearly toast: back in early December, I warned that the risks were high and suggested that I should already have sold. Subsequently, I did sell, and at the end of January, I replied to another investor on Twitter highlighting why:

Who’s next?

Athena is operated by Ithaca, which is presumably losing money at the same rate as Trapoil. However, Ithaca also benefits from having around half of its production hedged at $102/bbl until the end of June 2016, which should help to offset these losses, assuming that all of Ithaca’s production isn’t losing money at a similar rate.

Ithaca is a much larger business, and Athena isn’t one of its biggest assets, but today’s news has sent Ithaca shares down by around 6%, and begs the question: how much more North Sea production is currently losing money?

In an interesting piece of timing, OPEC’s monthly oil market report for February, which was published yesterday, claimed that 15% of current UK North Sea production was uneconomic at current oil prices.

Today’s news has given that claim rather more credibility, in my view — there’s nothing like cold, hard figures to make reality hit home.

Alongside Ithaca, other mid-cap LSE-listed North Sea operators whose shares have slid by around 5% today include:

  • Enquest
  • Premier Oil
  • The Parkmead Group
  • Xcite Energy
  • Cairn Energy

Interestingly, Faroe Petroleum — which is noted for its quality assets and mostly operates in the Norwegian North Sea, where the tax regime is more generous — did not lose ground today, closing broadly flat despite the 2% decline in Brent crude, which is now back down to $55/bbl for March delivery.

Are the firms above losing money on their North Sea production (or likely to when it starts up)? Are other operators, who I missed from the list, losing money?

Time permitting, I hope to take a more detailed look at London-listed North Sea operators later this week, to try and determine what their North Sea breakeven price might be, and who might be hemorrhaging cash at today’s prices.

Update 18/02/2015: I’ve not had a chance to take this further yet, but this article by experienced oil man Steve Brown on Share Prophets provides a detailed insight into the rough breakeven costs for a number of key North Sea fields, including Catcher (Premier Oil), Kraken (Enquest), and Clair Ridge (BP). Well worth a read (you can also see an updated version of the main chart on Steve’s website, here).

Disclaimer: This article is provided for information only and is not intended as investment advice. The author has no financial interest in any company mentioned. Do your own research or seek qualified professional advice before making any investment decisions.