The thing with falling shares is that it can mean one of two things — either the fall is justified and there might even be worse to come, or the shares are oversold and into bargain territory. Telling the two apart is rarely easy, but there’s good money to be had if you get it right.
Troubled oil
Gulf Keystone Petroleum (LSE: GKP) is one. There are good reasons for the price fall to 32.5p, which has knocked 66% off its value in a year. The problem is that the government of the Kurdistan Region of Iraq has not been the best of business partners and it’s been very hard for Gulf Keystone to get the cash owed in payments for oil supplied for export.
The company is working on a pre-payment plan for future oil sales, and with the resources sitting in the Shaikan oil field there’s really no doubt about future riches — though we’re still looking at forecast losses for at least this year and next. The questions are how much money will the company have to borrow until profits finally arrive, and how much will be left for current shareholders.
I have no idea how to guess at that, but my biggest fear is that we could see a repeat of what’s been happening at Afren where shareholders are set to lose almost all of their company.
Soaring stock
Things are different at Amur Minerals (LSE: AMC), where a 34.5% fall in just a few days has left the shares at 29p. But that comes after a couple of spikes which saw the price more than quadruple between 21 May and a peak of 44.5p on 15 June. Even after the recent retrenchment, you’d still be sitting on a cool seven-bagger had you bought Amur shares a year ago, so what’s the story?
It’s all down to the company getting approval for mining in the Far East of Russia at its Kun-Manie nickel copper sulphide deposit, with its latest expert geological approval having come just a few days ago.
So is the dip a buying opportunity for those who missed out earlier? Well, there are no forecasts and nothing quantifiable from which to guess at a fair share value. And it is at the mercy of the Russian government. It’s a gamble for sure, but you might do well.
Slow slide
Xcite Energy (LSE: XEL) is another unprofitable oil explorer whose life depends on borrowed money at a time when the oil price is in a slump — the firm restructured its debt financing in 2014, increasing its total debt but at least leaving it with £32.5m in cash at the end of December to fund operations. The subsequent first quarter saw an uprating of the firm’s reserves, but still generated a net loss of $0.45m.
As debt rises, so the value of the company’s equity falls, and over the past 12 months we’ve seen the Xcite share price lose 45% to 33.5p.
Again the question is which comes first, profits or more debt-driven dilution. Xcite might be the best of these three, but I can still see further downside before things get better.