I’m not saying the oil price WILL recover in 2016: calling the bottom of a cycle is as difficult as spotting the top. Brent crude has slumped again to $45 a barrel and some claim it could fall as low as $20 in the Spring. But if you reckon the sell-off of the world’s top commodity has been overdone, the next question is how to play the recovery.
Premier Investment
Cheap oil has hit explorer Premier Oil (LSE: PMO) as hard as any, with its share price down 55% in the last six months alone. The recent sale of its Norwegian division Premier Oil Norge AS to Det Norske for $120m has given it a little respite. The money is going straight into paying down its debt pile, but will still only cover around 5% of next year’s $2.70bn forecast debt total, according to Canaccord. Worryingly, that hefty debt figure is based on oil at $58 a barrel. It could rise even higher.
Premier is exceeding production targets and making cost reductions of 25%. Liquidity is holding up, with cash and undrawn bank facilities of $1.2bn and forecast year-end covenant headroom in excess of $700m. Its critical Solan project is on track for first oil by year-end – weather permitting – while the Catcher project is also on schedule. This year’s expected £110m pre-tax loss is forecast to convert into a ÂŁ38m profit next year, and Premier does seem set up to survive another year of cheap oil (although that depends on how cheap). A serious oil price rebound and Premier could fly up the league.
Gulf In Class
These are tense times at Kurdistan-based oil explorer Gulf Keystone Petroleum (LSE: GKP). Gulf has the reserves – notably its world class Shaken field – and is getting oil to market, the problem is getting paid by the Kurdistan Regional Government. A $15m net payment on 15 September and another exactly one month later soothed investor nerves but November came and went without further payments.
While it waits, Gulf is running down its cash reserves. Last month, chief finance officer Sami Zouari, assured investors that although its cash balance had fallen below $50m for five consecutive business days, it had still met its debt obligations and continues to “manage expenditure prudently”. Management must feel pretty helpless as it waits for the money to come through, as monthly costs of around $8m eat through its reserves, while it looks to fund interest payments of US$26.4m to bondholders.
This is squeaky bum time at GKP as it falls victim to labyrinthine Iraqi politics. If it doesn’t get a regular flow of cash soon, things could quickly turn ugly. Even an oil price recovery won’t help if it doesn’t get the money. The operational side is fine, but its future is largely out of management’s hands. That makes it far too risky for me.