Oil explorers come with risk, that’s a given. But sometimes the risk can be atypical, as we’ve seen with Gulf Keystone Petroleum (LSE: GKP)(NASDAQOTH: GFKSY.US). Gulf has found the oil, in very nice quantities, and it has the infrastructure in place to get it out and shipped — but it’s having trouble getting paid by the government of the Kurdistan region of Iraq.
Falklands Oil and Gas (LSE: FOGL), on the other hand, is still looking for the oil. But at least its not under the yoke of a temperamental government — assuming that Argentina’s latest outburst is just hot air.
Neither company is profitable yet, but which is the riskier?
Exploration risk
The risk for Falklands Oil and Gas is really pretty traditional, in that it’s still in the net investment and exploratory phase. The company is the largest of six operating around the Falkland Islands, and has embarked on a new drilling programme of six wells targeting more than 1.3 billion barrels of the stuff.
The risk, as always, is that it will run out of cash before it makes sufficient discoveries, but right now that doesn’t look too worrying — the company’s 2015 operations are well funded, and at 31 December it had around $100m of cash and no debt.
Oh, and the Argentinian legal threats are indeed groundless, as the UN has long ago ruled that it has no legal jurisdiction.
Gulf Keystone, on the other hand, looks like it should be a sure-fire winner — at least on the face of it. In 2014 it produced approximately 6.5 million barrels, and there’s a big increase expected for 2015. In fact, in December it hit its milestone of 40,000 barrels of oil per day. And it’s selling the stuff — except for actually getting paid for it.
Where’s the cash?
With revenue of $38.6m in 2014, the company recorded a loss after tax of $248m — a good part of that being due to the $100m it’s owed for exports but has so far been unable to actually get its hands on. Gulf is having to sell a lot of oil domestically for lower prices, and it has received a $26m pre-payment, so that’s promising.
But the debt is building up, with $240m raised in debt securities and associated warrants a year ago, though the firm only had cash of $85m at its disposal by April this year. Gulf is striving to get a regular export payment cycle established, and that’s going to be crucial to its survival — though the Kurdistan government is hardly the most stable and business-focused in the world.
Chairman Andrew Simon said that “2014 was a pivotal year for Gulf Keystone as we completed the critical transition from explorer to producer“, and 2015 needs to be pivotal in getting paid for what it sells.
So which is it?
Oil exploration is too risky for me, but if I had to choose I’d go for exploration risk of Falklands Oil and Gas rather than the political risk faced by Gulf Keystone.