Shares in Ithaca Energy (LSE: IAE) rose by more than 10% this morning, as investors were cheered by the firm’s 2014 results.
In contrast, investors in Gulf Keystone Petroleum (LSE: GKP) saw the value of their shares fall by more than 10% when trading started, after the Kurdistan firm announced a $40m rescue fundraising to meet short-term commitments.
Is either firm a buy in today’s market?
Ithaca shows promise
Ithaca’s results were quite encouraging, in my view. The firm reported underlying operating cash flow from operations of $181.5m for 2014, down from $241m in 2013.
This is a strong result that’s been made possible by cost cutting, and an effective hedging strategy: as long as the price of Brent stays above $10, Ithaca’s current production operations will breakeven or make a profit.
The only remaining question mark is over the firm’s ability to bring its Stella project into production on budget, and without further delays.
Ithaca confirmed today that its current debt facilities, which total $1.1bn, should be enough to bring Stella into production. Peak net debt of $850m is expected within the next three months, but in my view, the firm will be dependent on a recovery in the price of oil by 2016, in order to help it repay debt and deliver profits for shareholders.
Overall, I reckon the odds are in favour of Ithaca, which I rate as a speculative buy.
What about Gulf Keystone?
Last night’s placing of $40m of new shares at 32p — a 20% discount to yesterday’s closing price of 40p — indicates just how real Gulf Keystone’s cash crisis is, despite an $86m cash balance.
The firm says that the money will be used to “strengthen the Company’s financial position in the near term” while it continues to look for a longer-term solution that will enable it to refinance or repay its debts.
This means either the sale of some of its assets, or a major refinancing of its $520m debt pile. The firm’s failure to achieve either of these targets may explain why chairman Simon Murray announced his resignation this morning.
Today’s fundraising won’t solve the firm’s problems. At around 35p per share, my view on Gulf Keystone is that potential risks and rewards are currently quite evenly balanced — the shares may be a hold, but are not a buy.
We’ve already seen how the oil crash has thrown up a number of bargains — along with some value traps that could see shareholders left with nothing.