If you fancy hanging tough with high-risk commodity plays in the hope of unearthing a quick buck, let mining giant Glencore (LSE: GLEN) be an example to you. It has just suspended its final 2015 dividend, in the teeth of falling commodity prices and $30bn of net debt.
Scrapping the dividend will save it $1.6bn but it needs to do a lot more to cut its debt to a target $20bn by the end of next year. In pursuit of this goal, it is launching a capital-raising drive, cost-cutting purge and asset fire sale all at the same time. Glencore’s shares surged on news of the plan, even though the debt reduction programme will still leave it highly geared.
Risk seekers have been tempted by chief executive Ivan Glasenberg and chief financial officer Steven Kalmin’s joint statement highlighting the company’s strong liquidity, positive free cashflow, lack of debt covenants and recent credit ratings affirmation. The stock is down 67% in the year and the 2016 interim dividend has already been scrapped. Despite the euphoria that’s followed, Glencore offers more muck than brass right now.Â
Gulf In Cash
No natural resources company has escaped the commodity price meltdown unscathed, but oil explorers have been hit harder than most. Investors in Gulf Keystone Petroleum (LSE: GKP) have seen the share price more than halve from 75p to around 33p over the past year. Buying opportunity or blowout, which is it?
Gulf’s plight has been worsened by the fact it operates in the most politically turbulent regions of the world. Its Shaikan operation in Kurdistan has the capacity to produce 60,000 to 70,000 barrels per day, the problem is getting the oil to market, and securing payment from the Kurdistan Regional Government. That has left GKP burning through cash market while it awaits payment. When I last looked at the stock in April, it had $127m in cash reserves, but it has since burned through half that sum, so unless help is forthcoming, it is only a matter of months before it burns through the rest.
The good news is that the Kurdistan government has indicated that it will start making regular payments from this month, while GKP continues to bank revenues from the laborious job of trucking oil to Turkey. All is not lost but this is a company on a deadline. Asset sales and fresh financing may give it more time, but the clock is ticking down at nerve-wracking speed.
I Should Soco
Oil producer Soco International (LSE: SIA) has seen its share price slide around 65% this year as the sector hits the skids. But it is in a stronger financial position than Gulf, strong enough to pay out $51m of dividends in the first half of this year, despite significant capital investment in its H5 wellhead platform in Vietnam, which has just started production month ahead of schedule.
With no debt on the balance sheet, low operating costs and “attractive Vietnam production economics”, this is more solid than the average oil explorer these days. First-half 2015 pre-tax profits of $32m were sharply down on last year’s $174m, but at least it is profitable. Traders will be celebrating a 12% rise in its share price over the last week. Investors will appreciate the 6.37% yield. Soco is still risk, but the rewards are a bit more visible.