After years of waiting, Gulf Keystone Petroleum (LSE: GKP) and Genel Energy (LSE: GENL) have finally started to receive regular payments for their oil exports from the Kurdistan Regional Government.
On Monday, Gulf Keystone confirmed that a payment of $15m gross ($12m) net had been authorised by the KRG to be wired to the company’s account during the next seven days. And on Tuesday, Genel announced that it had received $16.5m from the KRG for its share of the production from the Taq Taq field. The company then announced on Wednesday that it had received $8m for its share of production from the Tawke field.
The KRG has promised that these payments will be the first of many, and oil producers should now expect monthly payments. That said, the KRG hasn’t exactly pledged to settle all outstanding balances owed immediately, but this is a start.
What’s more, the KRG has stated that it plans to make additional revenue available to oil exporters during the first half of 2016 as oil exports increase.
Great news
As the KRG is now promising a steady flow of cash for companies producing oil within Kurdistan, Gulf Keystone’s outlook is now clearer than it has been at any point during the past three years.
Gulf Keystone desperately needs cash to sustain its operations. The company has been able to sell some oil into the domestic market; it is still burning through cash reserves at an alarming rate. Cash and cash equivalents at 25 August 2015 amounted to $63.9m, including $32.5m to meet debt service obligations. At the beginning of April, Gulf Keystone had a cash balance of around $127m, including the proceeds of a placing, which raised gross proceeds of $40.7m.
If the KRG continues to pay Gulf Keystone $12m net a month, the company should be able to keep its head above water until the beginning of next year, when the regional government is planning additional revenue available to oil exporters. Management has estimated, subject to audit, that Gulf Keystone had arrears amounts outstanding of $283m at 30 June 2015. Even if the KRG paid only 10% of this outstanding amount, Gulf Keystone’s outlook would be significantly improved.
Room for growth
The KRG’s regular payment plan is also good news for Genel, as it will help the company fund its plans for growth.
Genel is busy positioning itself for a prolonged period of low oil prices. Capital expenditure has been slashed by 70% year-on-year and the company has merged two outstanding bonds to lower interest costs. Still, the company is guiding for full-year 2015 production of 90,000 to 100,000 barrels of oil per day (bopd), up from 88,000 bopd as reported during the first-half.
And according to City forecasts, by investing for growth now, Genel’s earnings are expected to explode higher next year. Current City figures suggest that Genel’s earnings per share will jump 53% to 24.6p for 2016. On this basis, the company is trading at a 2016 P/E of 13.5 and PEG ratio of 0.3.
