2015 has been a very different experience thus far for investors in BP (LSE: BP) (NYSE: BP.US) and Gulf Keystone (LSE: GKP). That’s because, while shares in the former are up by 9% since the turn of the year, the latter has seen its share price collapse by 27%.
A Challenging Region
A key reason for Gulf Keystone’s share price decline this year has been the challenges involved in operating in the Kurdistan/Iraq region. Notably, payment for exported oil has been slow and very uncertain and this has forced Gulf Keystone to cease exporting oil and focus on internal sales only.
While the plus side of this is improved cash flow, it also means that the price received for oil is estimated to be up to 20% less than would have been received for export sales. As such, Gulf Keystone’s forecasts have been revised downwards and this has hurt investor sentiment in the stock.
Although the challenges that come with operating in a region that is experiencing a prolonged conflict are not unique, Gulf Keystone’s problem is that it lacks diversity. For example, if BP and not Gulf Keystone were operating in similar circumstances, it would have many other regions and locations that could pick up the slack and on which it could channel resources and investment. As such, BP offers a degree of stability that Gulf Keystone simply cannot match, which makes it a far less risky investment.
Future Potential
Clearly, higher risk often comes with higher reward and this is certainly no different in Gulf Keystone’s case. As a business, it is performing well and has a sound strategy and, as such, if the external factors that have hurt its operations do improve then it could deliver vast rewards for its investors.
However, the possible rewards on offer at BP are also sizeable, with it having the potential to benefit from an improvement to its own external influences such as sanctions against Russia, the ongoing payments regarding the Deepwater Horizon oil spill, and also a low oil price that is expected to fully recover in the long run. So, while BP comes with a lot less risk than Gulf Keystone, it also offers significant rewards that give it a much more appealing risk/reward profile.
Looking Ahead
While Gulf Keystone Petroleum could prove to be a superb investment in the long run, it is likely that its share price will come under further pressure in the short term. That’s because the conflict in Kurdistan/Iraq is showing little sign of abating and, as such, further negative news flow could be released moving forward.
BP, on the other hand, offers excellent value for money at the present time, with its shares having a considerable margin of safety. For example, they trade on a price to book (P/B) ratio of just 1.1, which is extremely cheap and means that BP could be an excellent long term performer.