Category Archives: Oil & Gas

Offshore oil or gas platform

Which oil producer will follow Afren Plc down the pan next?

Offshore oil or gas platformThe near-demise of Afren Plc (LON:AFR) caught many investors by surprise, and I have to admit that while I did flag up the risk of a collapse following the firm’s admission that it was seeking to delay a $50m bond interest payment, I underestimated the true scale of the problem.

What’s more, it should have been obvious — hell, it was obvious, and I missed it.

Even without knowing that the yield on Afren bonds had risen from 6% last July to 35%, the signs were there in Afren’s Q3 cash flow statement. Operating cash flow was being wholly absorbed by capex — without any spare capacity to repay or service debt. This was okay while oil prices remained high, but as oil prices started to fall, it should have been obvious to me back in December that Afren’s largely unhedged oil sales would cause cash flow to be crushed, triggering a liquidity crunch for the firm. (In my defence, it was the start of December, when oil was still $70 per barrel — I underestimated that decline, too…)

In the light of this realisation, I decided that I should take a more critical look at the finances of four other popular UK-listed small/mid-cap oil producers, to see if any of them were at risk of an Afren-style collapse.

I broke down the resulting analysis into two articles, which were published on the Motley Fool UK website.

The first, featuring Gulf Keystone Petroleum Limited (LON:GKP) and Genel Energy PLC (LON:GENL), can be read here.

The second article, which looked at Premier Oil PLC (LON:PMO) and Enquest Plc (LON:ENQ) can be found here.

These four companies may not be the next to fall — there’s even talk now that Tullow Oil may breach its convenants.– and in my view, at least one, possibly two of the companies listed above will survive intact

However, I am pretty certain that Afren won’t be the last casualty, so it’s now more important then ever to scrutinise energy firms’ cash flow, capex and debt — how much cash is coming in, are prices hedged, when are repayments due, and will debt convenants be breached in the meantime?

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

A falling knife.

Fenner plc, Lamprell Plc and The Weir Group PLC: falling knives or bargain buys?

Should you catch a falling knife?The falling price of oil is starting to throw up potential bargains in the engineering and oil services industries. Three examples from the engineering sector are Fenner plc (LON:FENR)Lamprell Plc (LON:LAM) and The Weir Group PLC (LON:WEIR).

However, there’s a clear risk that all three of these could prove to be falling knives.

Of the three, I suspect that Fenner is closest to bottoming out: as I explain in a new Motley Fool article this morning, it doesn’t seem likely to me that Weir and Lamprell’s current valuations reflect the full consequences of oil’s recent collapse.

In contrast, Fenner’s business is more diverse and benefits from the fact that many of its products are consumables, that need to be replaced regardless of market conditions in order to keep essential plant in working order.

I’m believe that all three of these companies will become attractive recovery plays when the time is right, and I will be watching them closely over the coming months to learn more and see what happens.

You can read the full article here.

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

Onshore oil installation

Gulf Keystone Petroleum delivers something more valuable than oil

Onshore oil installationI’ve written before about the need for Gulf Keystone Petroleum Limited (LON:GKP) to deliver on its promises if it is to retain any credibility as an investment, and I was pleased to see this morning that the company has done exactly that.

Oil production from Shaikan should hit 40,000 bopd later this month, as promised, leaving the path open for a third production facility and a rise in production to 66,000 bopd, if the payments from the KRG become more regular and the current price of oil doesn’t make funding the project too difficult.

At the very least, Gulf should now be able to stand on its own two feet as things now stand, even if it is only treading water: it’s not a zombie company with dwindling cash and no meaningful cash flow.

Although it’s been a grim year, and the firm’s shares are still down by 67% since January, this morning’s RNS was very encouraging, in my view.

I took a closer look in a new article for the Motley Fool earlier today, which you can read here.

Disclaimer: This article is provided for information only and is not intended as investment advice. The author owns shares in Gulf Keystone Petroleum. Do your own research or seek qualified professional advice before making any investment decisions.

Offshore oil or gas platform

BG Group plc update sends mixed message — what should investors think?

Offshore oil or gas platformToday’s update from BG Group plc (LON:BG) was very much a case of taking the rough with the smooth.

On the one hand, the firm announced an impressive $5bn asset sale, but on the other hand it announced another big impairment and indicated that assumptions about future earnings and valuations may need to be revisited in the light of weaker commodity prices.

For investors, it’s a mixed — and confusing — picture. In a new article for the Motley Fool today, I took a closer look at today’s news and the outlook for BG, and considered whether current assumptions about the firm’s return to positive cash flow and earnings growth are likely to remain valid next year.

You can read the full article here.

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

Oil platform in North Sea

Trap Oil Group PLC shareholders need to ask themselves serious questions

Oil rigs in North SeaTrap Oil Group PLC (LON:TRAP) has been an unmitigated disaster as an investment, despite the firm’s promising start, cash-generating asset and today’s £18m cash balance.

Just how bad the market’s view of the firm is is illustrated by the fact it currently trades at a 50% discount to net cash.

I’ve remained cautiously optimistic on this stock for a long time (too long…), but I’ve started to think I need to be a little more rigorous with my analysis and consider taking a loss to get out — after all, the only certainty here is that the shares could still fall by another 3.5p…

Why the discount to cash?

There are several potential reasons why Trapoil’s shares are trading at a 50% discount to cash. Here are a few suggestions:

  • The market is discounting the gradual erosion of the firm’s £18m cash pile, as Trapoil meets its contractual obligations on Athena, spends money on G&A, pays £3.6m (based on 2014 AGM presentation) figures for the firm’s share of the Niobe well in 2015, and stumps up a potential £9m for the decommissioning of Athena in 2016/17.
  • Small cap AIM resource stocks can’t be trusted not to fritter away cash until there’s none left, rather than returning cash to shareholders if it can’t be profitably deployed.

Indeed, despite the cash balance, the only concrete hope for the firm seems to be the involvement of Peter Gyllenhammar, who owns 18% of the stock, and appears to have become very influential over the last year — witness the boardroom cull and other cost saving measures.

Shedding assets

Sadly, Trapoil isn’t selling its assets; it’s simply relinquishing them because it lacks the funds or partners necessary to try and develop or explore them, and because the high costs involved in North Sea drilling and production are starting to look seriously problematic against the backdrop of sub-$70 oil.

For example, according to Trapoil’s AGM presentation this year, the firm’s Surprise asset, which is a proven discovery with development potential, has 13.85mmbbl of reserves and a 10-year field life. The only problem is that this was calculated based on oil at $95/bbl. This looks less than appealing in today’s market, and although Trapoil owns 100% of Surprise, it will be forced to relinquish this asset at the end of 2014, unless it finds a development partner before then, which is pretty unlikely.

Similarly, Trapoil allowed its option on Total’s Alfa prospect to expire, due to uncertainty over drilling costs, which makes it much less likely that the firm will be able to monetise its adjacent Romeo discovery.

Trapoil does have a 10% carried interest in Homer, on which operator Noreco is meant to be acquiring some new seismic data in the second half of this year to fulfil a licence obligation, but there hasn’t been any update on this yet, and it’s unlikely to add much value to the firm in the current climate.

What about Athena?

Athena was meant to be the cash generator that funded Trapoil’s other exploration and development activities. Sadly, it hasn’t worked out that way. Cash has piled up (modestly) in the bank, while Athena production has fallen this year, due to various technical problems.

Operator Ithaca Energy recently said in its Q3 results that it was nearing the end of the Athena workover, so there will hopefully be an update on Athena production before the end of 2014.

Isn’t there any good news?

Trapoil is sitting on £35m of historic losses, which could be of some use to another, mid-sized North Sea operator — The Parkmead Group, for example — which might be able to do a share-based acquisition in order to get the benefit of Trapoil’s cash and historic losses, without spending much itself.

In my view, this seems the only likely exit route for Trapoil shareholders which might generate decent uplift on the current share price: I don’t think there’s much likelihood of any exploration-related upside, no of any capital return.

Should I sell?

Trapoil shares no longer pass my acid test: would I buy the same shares at today’s price?

By rights, I should sell. Indeed, I should have sold a long time ago. I will, however, probably wait until we hear that the Athena workover has been completed, in case this generates any positive newsflow on cash or production — but time is definitely running out for this stock’s position in my portfolio, as it’s by far my worst performer this year.

Update Feb 2015: As per my original disclosure below, I was long Trap Oil Group at the time this article was published. However, I subsequently took my own advice and closed my long position gradually through December, ending the year with no financial interest in the firm.

Disclosure: This article is provided for information only and is not intended as investment advice. The author has a long position in Trap Oil Group PLC. Do your own research or seek qualified professional advice before making any trading decisions.