Gulf Keystone Petroleum delivers something more valuable than oil

Onshore oil installationI’ve written before about the need for Gulf Keystone Petroleum Limited (LON:GKP) to deliver on its promises if it is to retain any credibility as an investment, and I was pleased to see this morning that the company has done exactly that.

Oil production from Shaikan should hit 40,000 bopd later this month, as promised, leaving the path open for a third production facility and a rise in production to 66,000 bopd, if the payments from the KRG become more regular and the current price of oil doesn’t make funding the project too difficult.

At the very least, Gulf should now be able to stand on its own two feet as things now stand, even if it is only treading water: it’s not a zombie company with dwindling cash and no meaningful cash flow.

Although it’s been a grim year, and the firm’s shares are still down by 67% since January, this morning’s RNS was very encouraging, in my view.

I took a closer look in a new article for the Motley Fool earlier today, which you can read here.

Disclaimer: 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 investment decisions.

BG Group plc update sends mixed message — what should investors think?

Offshore oil or gas platformToday’s update from BG Group plc (LON:BG) was very much a case of taking the rough with the smooth.

On the one hand, the firm announced an impressive $5bn asset sale, but on the other hand it announced another big impairment and indicated that assumptions about future earnings and valuations may need to be revisited in the light of weaker commodity prices.

For investors, it’s a mixed — and confusing — picture. In a new article for the Motley Fool today, I took a closer look at today’s news and the outlook for BG, and considered whether current assumptions about the firm’s return to positive cash flow and earnings growth are likely to remain valid next year.

You can read the full article here.

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

Tesco PLC: New profit warning suggests troubles run deep

Tesco Tiverton store

“Tiverton, Tesco – – 85534″ by Martin Bodman – From Licensed under Creative Commons Attribution-Share Alike 2.0 via Wikimedia Commons –,,

Tesco PLC (LON:TSCO) shares tumbled more than 10% this morning, after the firm unleashed a major profit warning.

Tesco has cut full-year trading profit guidance for this year to a maximum of £1.4bn, around 30% below recent market expectations of £1.8bn – £2.2bn.

That’s a staggering 60% less than last year’s trading profit. Ouch.

Today’s update also suggested that considerable effort was being spent on restructuring the firm’s commercial relationships with suppliers, to avoid any risk of the profit overstatement seen earlier this year being repeated.

By implication, things were much worse — and more deep-rooted — than investors may have originally thought.

We won’t find out any more about Dave Lewis’ plans for turning around the Tesco business until January 8, but in a new article for the Motley Fool this morning, I’ve taken a closer look at today’s Tesco update — and considered what it might mean for shareholders, including a look at the dividend. outlook.

You can read the full article here.

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

Petropavlovsk PLC: a textbook example of shareholders bailing out bondholders

A tunnel in a gold mineBack in August, I published an article on the Motley Fool website entitled “3 Reasons Why Petropavlovsk PLC Shareholders May Be Left With Nothing.

The point of the article was to highlight that all of the available cash flow from Petropavlovsk PLC (LON:POG) operations was being used to fund interest payments on its c.$1bn of debt — and that shareholders would eventually have to stump up cash or cede an equity share in order to fund a debt restructuring.

The end result, which we’ve now almost reached, is that the firm’s existing shares will become worthless. The whole situation is a textbook example of the risk that excessive debt levels poses to equity investors — and today’s refinancing news confirms I was right to view the stock this way.

At the time of my original article, Petropavlovsk’s share price was around 37p. Since then, it’s made steady progress downwards to its current level of 11.7p, which gives the firm a market cap of just £22m.

Refinancing deal

This morning’s c.30% plunge was triggered by news that the firm has agreed a refinancing deal for the $310.5m of bonds that are due to be repaid in February 2015. The firm cannot possibly repay these out of cash flow or existing resources, so shareholders will stump up $235m through a heavily discounted rights issue, at 5p per share. The remaining $100m will come from a new, five-year, convertible bond issue.

Here’s what this means for shareholders: most, if not all of that $235m will be used to repay debt, not to improve the business. Even after this has taken place, net debt will still be around $700m, so repayments will still be arduous and leave no room for a dividend, especially if the gold price fails to recover (or falls further still).

Selling the rights issue shares at 5p — a 66% discount to yesterday’s closing price — is a clear sign of distress.

Massive dilution

Note the difference between today’s market cap (c.$35m) and the rights issue ($235m): this difference, combined with the discounted price of the rights issue shares, means that Petropavlovsk’s share count will increase by 23 times following the rights issue.

Any shareholder not choosing to participate in the rights issue will be diluted out of existence: your share of the refinanced business will be 23 times smaller than it is at present.

The fact that the new $100m bond issue is convertible means that even more dilution is likely in the future, if the business recovers and the share price rises, some of these bonds will be converted to shares. On the other hand, if Petropavlovsk fails to recover, don’t rule out another refinancing. Either way, shareholders will be diluted.

Bondholders are not taking a loss

Shareholders should note that this is a textbook example of the superiority of debt funding.

The firm’s bondholders are not taking a loss: they will receive around 66% of their money on time, and the remaining third within five years.

This is all perfectly correct

In case you’re in any doubt, this is not a scandal — it’s perfectly correct!

When a company runs into trouble, debt holders rank above equity holders in terms of recovering their investment. It is perfectly normal for shareholders to be diluted or wiped out, in order to fund debt repayments and make bondholders whole.

That’s why investing in poorly-funded and heavily-indebted companies is a huge risk: because as a shareholder, you’re a sitting duck, waiting to be sacrificed to feed hungry debtholders.

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

Trap Oil Group PLC shareholders need to ask themselves serious questions

Oil rigs in North SeaTrap Oil Group PLC (LON:TRAP) has been an unmitigated disaster as an investment, despite the firm’s promising start, cash-generating asset and today’s £18m cash balance.

Just how bad the market’s view of the firm is is illustrated by the fact it currently trades at a 50% discount to net cash.

I’ve remained cautiously optimistic on this stock for a long time (too long…), but I’ve started to think I need to be a little more rigorous with my analysis and consider taking a loss to get out — after all, the only certainty here is that the shares could still fall by another 3.5p…

Why the discount to cash?

There are several potential reasons why Trapoil’s shares are trading at a 50% discount to cash. Here are a few suggestions:

  • The market is discounting the gradual erosion of the firm’s £18m cash pile, as Trapoil meets its contractual obligations on Athena, spends money on G&A, pays £3.6m (based on 2014 AGM presentation) figures for the firm’s share of the Niobe well in 2015, and stumps up a potential £9m for the decommissioning of Athena in 2016/17.
  • Small cap AIM resource stocks can’t be trusted not to fritter away cash until there’s none left, rather than returning cash to shareholders if it can’t be profitably deployed.

Indeed, despite the cash balance, the only concrete hope for the firm seems to be the involvement of Peter Gyllenhammar, who owns 18% of the stock, and appears to have become very influential over the last year — witness the boardroom cull and other cost saving measures.

Shedding assets

Sadly, Trapoil isn’t selling its assets; it’s simply relinquishing them because it lacks the funds or partners necessary to try and develop or explore them, and because the high costs involved in North Sea drilling and production are starting to look seriously problematic against the backdrop of sub-$70 oil.

For example, according to Trapoil’s AGM presentation this year, the firm’s Surprise asset, which is a proven discovery with development potential, has 13.85mmbbl of reserves and a 10-year field life. The only problem is that this was calculated based on oil at $95/bbl. This looks less than appealing in today’s market, and although Trapoil owns 100% of Surprise, it will be forced to relinquish this asset at the end of 2014, unless it finds a development partner before then, which is pretty unlikely.

Similarly, Trapoil allowed its option on Total’s Alfa prospect to expire, due to uncertainty over drilling costs, which makes it much less likely that the firm will be able to monetise its adjacent Romeo discovery.

Trapoil does have a 10% carried interest in Homer, on which operator Noreco is meant to be acquiring some new seismic data in the second half of this year to fulfil a licence obligation, but there hasn’t been any update on this yet, and it’s unlikely to add much value to the firm in the current climate.

What about Athena?

Athena was meant to be the cash generator that funded Trapoil’s other exploration and development activities. Sadly, it hasn’t worked out that way. Cash has piled up (modestly) in the bank, while Athena production has fallen this year, due to various technical problems.

Operator Ithaca Energy recently said in its Q3 results that it was nearing the end of the Athena workover, so there will hopefully be an update on Athena production before the end of 2014.

Isn’t there any good news?

Trapoil is sitting on £35m of historic losses, which could be of some use to another, mid-sized North Sea operator — The Parkmead Group, for example — which might be able to do a share-based acquisition in order to get the benefit of Trapoil’s cash and historic losses, without spending much itself.

In my view, this seems the only likely exit route for Trapoil shareholders which might generate decent uplift on the current share price: I don’t think there’s much likelihood of any exploration-related upside, no of any capital return.

Should I sell?

Trapoil shares no longer pass my acid test: would I buy the same shares at today’s price?

By rights, I should sell. Indeed, I should have sold a long time ago. I will, however, probably wait until we hear that the Athena workover has been completed, in case this generates any positive newsflow on cash or production — but time is definitely running out for this stock’s position in my portfolio, as it’s by far my worst performer this year.

Disclosure: This article is provided for information only and is not intended as investment advice. The author has a long position in Trap Oil Group PLC. Do your own research or seek qualified professional advice before making any trading decisions.