The oil sector is still reeling from the oil price slump, which started more than 12 months ago. The slump has hit some producers harder than others, with smaller exploration and production companies taking the brunt of the pain.
Gulf Keystone Petroleum (LSE: GKP) is just one of the many small E&P companies that are suffering from the downturn. However, due to Gulf Keystone’s hefty debt load the company has very little room for manoeuvre and unless things go exactly to plan over the next 12 months the company’s creditors could suddenly pull the plug.
Gulf Keystone’s precarious financial position is hardly a secret. Indeed, last month management came out and warned shareholders that without a significant improvement in the company’s operating environment, it would struggle to remain solvent.
And after this warning it could be time for investors to sell out of Gulf Keystone and instead buy into one of its close peers such as Tullow Oil (LSE: TLW) or Premier Oil (LSE: PMO).
Plenty of financial flexibility
Like Gulf Keystone, both Tullow and Premier are trying to realign their operations to deal with lower oil prices. But unlike Gulf Keystone, Tullow and Premier both have the support of their bankers, and operate in relatively stable regions of the world so don’t have to wait months or even years to be paid.
One of Gulf Keystone’s biggest issues is the fact that the company operates in a highly volatile region of the world. What’s more, the company has to wait to be paid by the Kurdish Regional Government for its oil that’s sold to overseas buyers. Unfortunately, the KRG itself is strapped for cash and is only paying Gulf Keystone a small percentage of what the company is owed. Tullow and Premier don’t have the same problem. The two companies have steady and predictable cash flows from operations, putting them totally in control of their own future.
Also, these two companies have much stronger balance sheets than Gulf Keystone and because they’re generating steady cash flows, bankers are willing to give them some breathing space during this difficult time. Premier has net debt of $2.2bn, four times forward earnings based on the current oil price. However, the company still has $400m cash on hand, $850m of unused borrowing and is completing a deal to buy all of Eon’s cash-generative North Sea fields – a deal that should only increase cash flows.
Meanwhile, Tullow carries net debt of three-to-four times next year’s forecast earnings before interest, tax, depreciation and amortisation (EBITDA), although this figure varies depending on where the price of oil settles this year. Nonetheless, back in October Tullow agreed on fresh terms with its lenders that ensured it would continue to have access to $3.7bn of debt, so the company itself isn’t at risk of bankruptcy anytime soon. And Tullow is expecting to bring its Tweneboa, Enyenra and Ntomme (TEN) development — touted as Tullow’s second flagship project after the Jubilee field — on-line this year, nearly doubling the company’s output. This should help the group start to reduce debt, and may reignite interest among potential bidders.