Why has Gulf Keystone Petroleum Limited climbed 35% in two days?

Onshore oil installationEven by the standards of the oil and gas sector, shares in Gulf Keystone Petroleum Limited (LON:GKP) have performed badly this year.

As I write, the stock is down by 60% on the year to date, despite gaining 35% in the last two days.

What’s going on?

The funny thing about the gains of the last two days is that the market doesn’t quite know what’s going on, but Gulf Keystone appears to have convinced most investors that it will be good news.

Gulf released an RNS yesterday postponing its next interim statement (which was originally due today, 30 October) until 13 November. This would usually mean bad news, but the firm said that “constructive discussions” were taking place with the Kurdish Ministry for Natural Resources (MNR), implying that by 13 November, the subject and outcome of these discussions might be available for public consumption.

Investors lapped it up, lifting the stock around 20% yesterday, and this morning, the firm did it again, climbing around 10% after issuing an RNS highlighting that its partner MOL had gained Field Development Plan approval for the Akri-Bijeel block, in which Gulf has a 20% working interest.

The big question is what is the subject of the “constructive discussions” the firm is having with the MNR — and will it solve Gulf Keystone’s potential funding problems?

In two article for the Motley Fool, I’ve taken a closer look at yesterday’s news (click here) and today’s Akri-Bijeel update (click here).

For what it’s worth, I continue to rate Gulf as a hold, as the risk-reward balance now appears quite reasonable.

Disclosure: This article is provided for information only and is not intended as investment advice. The author owns shares in Gulf Keystone Petroleum. Do your own research or seek qualified professional advice before making any trading decisions.

Is NEXT plc profit warning a sign of trouble ahead?

Should you catch a falling knife?

Is Next a falling knife, or is today’s warning a short-term blip?

NEXT plc (LON:NXT) has made good on its promise and issued a profit warning this morning, after telling investors on 30 September that this would happen, if we didn’t get a cold spell in October.

The weather remained mild in October, and so did Next’s sales, triggering a 3% cut to the firm’s full-year profit guidance.

I’m not normally a buyer of stocks after just one profit warning — the old adage that profit warnings come in threes is all too often correct — but I’m more inclined to trust Next, thanks to its outstandingly transparent and consistent guidance and reporting.

In a new article for the Motley Fool this morning, I took a closer look at today’s news and the firm’s growth over the last five years, and gave my view on whether there is worse to come — and whether Next deserves a buy rating at the moment.

You can read the full article here.

Disclosure: This article is provided for information only and is not intended as investment advice. The author has no financial interest in any of the companies mentioned. Do your own research or seek qualified professional advice before making any trading decisions.

Solo Oil PLC, UK Oil & Gas Investments PLC et al Slide On Horse Hill Results

Onshore oil installationEarly feedback from David Lenigas devotees on Twitter suggested that this morning’s RNS announcements from the Horse Hill companies may have been positive.

Comments such as “we have a winner” may have suggested that the well had performed in-line with expectations.

I can only assume that the people concerned hadn’t read the RNS fully, and compared it with the pre-drilling presentation given by UK Oil & Gas Investments PLC (LON:UKOG) in January this year.

Unsurprisingly, Mr Market did the maths, and the shares in all of the Horse Hill companies are down by between 15% and 30% as I write, at lunchtime (although some of these stocks are still up over a 5 day timeframe, they are all down on one month ago too, in some cases quite heavily).

The problem is that although Horse Hill-1 did find oil, there was much less than expected. In a new article for the Motley Fool this morning, I explained the numbers and compared them to pre-drill estimates, which seem to have been conveniently forgotten in all the hype.

I also give my view on whether Solo Oil PLC (LON:SOLO) remains a buy, or not.

Click here to read the full article.

Disclosure: This article is provided for information only and is not intended as investment advice. The author has no financial interest in any of the companies mentioned. Do your own research or seek qualified professional advice before making any trading decisions.

Why I’ve sold Victoria Oil & Gas plc

Victoria Oil & Gas customer site

Victoria Oil & Gas is using its producing Cameroon gas field, Logbaba, to create a gas supply network for industry in the Doula region of Cameroon (image copyright Victoria Oil & Gas).

I’ve long been a bull of Victoria Oil & Gas plc (LON:VOG), but after reading the firm’s final results yesterday, I sold my shares. Here’s why.

Missing info: In my view, the worst thing about Victoria’s results was what they didn’t say. For example, the firm did not confirm the average price per unit sold of gas or condensate, although it previously has done.

This seems bizarre; I’ve never seen an energy or resource company publish annual results without specifying the average price per unit sold. Obviously the price of condensate will have fallen with the oil price, but has the price of gas fallen too, perhaps for new customers? We don’t know.

Accounting notes: Victoria’s accounts also raised some questions, due to the firm’s decision to publish them without any supplementary notes. As with gas prices, notes were included (as normal) in the interim results earlier this year, but were missing yesterday. Why?

I expect they will appear in the firm’s annual report, due in the next couple of weeks, but their absence from the final results RNS yesterday makes me uneasy, especially given the glacial pace at which Victoria publishes its accounts, nearly five full months after the firm’s 31 May year end.

In my view, there are only two explanations for this: Victoria is trying to hide some bad news for as long as possible, or its financial controls are so chaotic that its only just managed to scrape together some coherent figures, one month before the next half-year ends. Either way, I’m not impressed.

Accounting questions: I may not be a forensic accountant, but I reckon I ought to be able to spot the $20m cash inflow from RSM on Victoria’s cash flow statement, given that the firm only did $14m of revenue last year.

I can see an arbitration-related adjustment on the income statement, but why isn’t this cash influx clearly represented on the cash flow statement? Again, notes are needed to make sense of what’s happened to the $20m payment.

There are other questions, too: what, for example, was the $3,978,000 ‘other loss’ recognised in the income statement? The lack of financial detail in these results is shocking, in my view.

How long? I accept Chairman Kevin Foo’s comments that ground-breaking engineering projects always take longer than expected — having been an engineer myself, I understand this. However, the firm’s glacial reporting appears to be matched by the speed at which it pays suppliers and receives payment from customers.

Things don’t seem to be improving, either, as debtor days are rising and creditor days are falling. If this trend continues, a cash crunch could follow:

2013 2012
Debtor Days (average time VOG takes to get paid by customers) 348 days 305 days
Creditor Days* (average time VOG takes to pay suppliers) 443 days 606 days

*Estimated using cost of sales

Of course, things may have changed — for better or worse — in the five months since the period these figures refer to. It appears to be a struggle for Victoria to publish its annual results before the end of the first half — and that’s the problem. I no longer feel I have any idea what’s going with this business.

The company’s annual report, which is due to be made available in the next couple of weeks, may answer some of my questions, but then again, perhaps there’s a reason the company is so tardy.

Back in January, Victoria promised that the results of the Deloitte review of the RSM settlement payment would “be completed within 90 days”. Nine months later, and we’re told Victoria and RSM are reviewing the draft — but we’re still in the dark.

Will some of the $20m have to be repaid to RSM? Has Victoria spent any of this money? We just don’t know, and I’m not prepared to risk my own money on that basis anymore.

Valuation doubts: My final concern relates to Victoria’s valuation. This year, revenue doubled to $14.7m, but the company failed to make a profit due to ‘other losses’ as yet to be explained.

If we assume revenue will double again in the current year and that Victoria will deliver an operating margin of around 25%, which is not unusual for this type of business, then we’d be looking at an operating profit of around $7.5m, with post-tax profits of perhaps £3.8m, assuming a 20% tax rate and the current USD/GBP exchange rate.

That means Victoria’s current valuation is around 15 times my purely theoretical guess at next year’s profits — which may be wildly optimistic. That suggests to me that there could be limited near-term upside to VOG’s share price.

Better out than in: Victoria oil & Gas may still deliver a multi-bagging gain from here on in, but it seems very speculative for an investment that is, essentially, a small utility, not an E&P company.

I’ve run out of patience with the company’s slow and opaque reporting, and have put my money elsewhere, in grown-up company, whose reporting doesn’t raise so many questions.

Disclosure: This article is provided for information only and is not intended as investment advice. The author has no financial interest in Victoria Oil & Gas. Do your own research or seek qualified professional advice before making any trading decisions.

Activist shareholder takes punt at Tethys Petroleum Ltd: should shareholders back changes?

Onshore oil installationIt doesn’t seem long ago that Tethys Petroleum Ltd (LON:TPL) appeared to be on the cusp of transformative successes. Gas and oil production in Kazakhstan looked set to rise and become a cash cow, helping to fund the company’s transformative exploration assets in Tajikistan.

The barnstorming potential of the Tajik assets appeared to be confirmed when Tethys secured a 66%, $63m farm-out deal with no less than Total SA and China National Petroleum Corporation (CNPC).

Not come to pass

As shareholders will be painfully aware, the company has failed to deliver on the promise of 2012 and 2013. Tethys shares have fallen by 61% over the last 12 months, and the company has agreed to sell a majority interest (50% plus one share) of its Kazakh assets for $75m, a deal which I think could cost shareholders dearly in the long term.

As I explained in a new article for the Motley Fool this morning, the risks of further dilution and financial frustration look high, especially as Tethys founder Dr David Robson appears to be more motivated by his seven-figure salary than his minimal shareholding in the firm.

I fear that Tethys could become yet another cash-strapped small cap resources stock that limps along with heavily dilutive funding from China, until shareholders are left owning almost nothing — except an expensive board of directors, who are effectively employed by their Chinese backers to manage local operations and political relationships…

On this basis, if I were a Tethys shareholder, I’d back Pope Asset Management’s call for change: the company and its assets need careful management to maximise cash generation, and give Tethys shareholders a meaningful chance of benefiting from the truly monster potential of the company’s Tajik assets.

Given founder Dr. Robson’s recent form, I’m not sure Tethys can provide this under his leadership.

Disclosure: This article is provided for information only and is not intended as investment advice. The author has no financial interest in Tethys Petroleum Ltd. Do your own research or seek qualified professional advice before making any trading decisions.