The current oil climate is ruthless and only the best companies with the strongest balance sheets are holding up. Any company with financial vulnerability is under serious pressure, and their share price has been hit hard. These three companies all have weak or deteriorating balance sheets, but good assets. Will this be enough to survive or will they be victims of the oil crash?
A spot of bother
Gulf Keystone(LSE: GKP) was once the darling stock of retail investors around the country. Since then news hasn't been great and the share price has suffered. Currently the company is in a spot of bother, cash balances are dwindling and the company isn't receiving full payment for its Shaikan crude. Gulf Keystone has over $550m of bonds that need repaying next year, for a company with around $50m in cash that will be a problem.
The company is heavily reliant on the Kurdistan Regional Government (KRG) being able to pay Gulf Keystone in full. The KRG has much more pressing matters to deal with, so you would expect Gulf Keystone to need to refinance all of its bonds sometime in the next year to survive.
Genel Energy(LSE: GENL) operates in the same region as Gulf Keystone, but seems to be in a more stable position. Its balance sheet is much stronger, with $455m in cash, but Genel has recently had to write down some reserves at its Taq Taq field. This has slashed reserves and is a worrying sign for the company.
Genel has stated recently that it are actively looking for value-accretive acquisitions, with Kurdistan being the most likely place for an acquisition to happen. Could Genel be running the rule over Gulf Keystone? Any deal there will likely be with the bondholders, leaving little or nothing for equity holders, similar to the Petroceltic bid-situation.
Xcite Energy(LSE: XEL) operates, and 100% owns, the heavy oil Bentley Field on the East Shetland Platform. The future of the company is very simple -- it must farm out or find funding for the development of Bentley, or the game is up. The balance sheet is dire, cash balances are $27m and the company must repay $139m of bonds in June 2016. This means the company is under serious pressure to get a deal done by June, but in this economic environment getting a deal done for a heavy oil field in the North Sea is close to impossible.
Any potential acquirer could simply wait until June and then do a deal with the bondholders to acquire the company for pennies. A recent rally in Xcite's share price was a good point to sell as many believe the shares are worthless unless a big deal can be pulled off.
These three companies are all in tough situation,s but if any of them manage to pull it off then equity holders could see massive returns. Oil and gas in 2016 is a high-risk game, especially in distressed companies but, as always, with high risk comes huge potential.
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Jack Dingwall has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.