Gulf Keystone Petroleum Ltd (LON:GKP), was loved and loathed in equal measure by shareholders who favoured the stock due to its exposure to northern Iraq - touted as one of the last great onshore ‘easy oil’ deposits. At the same time it was scorned by investors due to its accumulating debt now totalling US$100mln, the aggravation in the boardroom, the lack of corporate governance and eye watering executive pay.
Yet DNO’s US$300mln cash and shares bid for the UK group may not be a dead cert according to Sam Wahab, Cantor Fitzgerald Europe's director of oil and gas equity research. The success of the company and the investment opportunity relies on the fortunes of the political landscape in Kurdistan. Wahab agrees that from a geological level there is ‘easy oil.’ The cost of drilling and producing, says Wahab is “very low and the ease of doing business on the ground is good.”
What isn’t easy is procuring regular payments from the Kurdish regional government which is releasing monthly tranches of US$12mln on an intermittent basis, and until that is sorted “it’s not looking particularly commercial at this stage.”
Politics aside the oil continues to flow. 40,000 barrels of oil are produced a day and Wahab calculates this could increase to 55,000 a day in short order.
The Exploration and Production sector isn’t just the headline news domain of Gulf Keystone. It is also shared by debt laden Xcite Energy (LON:XEL). Wahab says the next six weeks is critical for the company. No cash flows are arising as the company looks to refinance with the market waiting for news on a potential debt for equity swap.
One of the success stories of AIM-listed E&P companies is Sound Energy which is one of Cantor’s top picks. And in response to who the likely winners in the next cycle will be, and who might thrive in this 'lower for longer' oil market, Wahab advocates the companies with strong balance sheets, cash flow visibility and a funded drilling programme which include SDX Energy Inc (CVE:SDX, LON:SDX), Amerisur Resources (LON:AMER).