By Ben Turney | Monday 11 August 2014
Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
I’ve spent a little time this morning wondering how I could write about events in Kurdistan. It is horrible hoping to profit out of human suffering, but I’ve had to remind myself the market is amoral. It simply reflects the good and the bad of our society, for better or worse. I’ve chosen to be a market commentator and it is more than probable that if you are reading this piece you’ve chosen to buy stocks. However we might feel about what is happening in the world, in this aspect of our lives our goal is simply to grow our wealth by as much as we can. Fear often leads to the best buying opportunities. It is generally a costly mistake to ignore this. The precipitous drop in the value of the various companies with Kurdish oil ventures could prove to be a significant opportunity for anyone who believes in the long term viability of these operations.
Before continuing I have to accept that a few months ago I totally underestimated the military strength of the Islamic State (IS). I suggested that fears of a repeat of the Syrian civil war were misplaced and that Gulf Keystone (GKP) was a stock to buy at 75p. Over the following few weeks Gulf’s share price did rally >35%. Short term traders would have done very well out of this trade, but I have a longer term outlook for this company.
As conditions in Iraq deteriorated, Gulf’s stock fell from a June peak to make a new low at 61p on Friday. I wasn’t around to write about this then and also missed the intraday low. Even so, I have opened new positions in Gulf as I remain convinced that I haven’t underestimated the strength of the US Air Force.
Now that the Americans have publicly started launching air strikes, I can’t believe that the Islamists will be able to withstand this intense pressure for long. Until the end of last week the American response to the IS advance was tentative, to say the least. With tens of thousands of Iraqi Christians trapped in the mountains, this gave politicians the propaganda tool they needed to counter any scepticism about yet more military engagement in the Middle East. With American jets active once more over Iraq, the semblance of stability in Kurdistan could return very quickly.
This is not to say that the conflict won’t get worse. It is still possible that the listed companies with Kurdish oil operations might face further disruption. This morning, Petroceltic (PCI) temporarily suspended operations in Kurdistan and, on Friday, Afren (AFR) announced that it had halted production at its 785 barrel a day oil field at Barda Rush, as a precaution. Given the ongoing investigation into Afren’s CEO and COO and the adverse effect this has had on the company’s share price, this could be a particularly appealing stock to consider buying (at 98p), as my colleague Gary Newman suggested last week.
But it’s Genel (GENL) and Gulf that I am most interested in. Of the two Genel, at 807p, is certainly the safer play, but Gulf offers the greater potential reward, assuming that the progress of IS can be stopped. Tom’s been very vocal in suggesting he doesn’t believe it can, but I think he vastly underestimates the precision and power of modern airborne munitions. Had America bombed Assad’s regime, after last summer’s alleged chemical weapons attack, it is highly improbable the conflict in Syria would continue today. Once the warplanes started hitting Gaddafi’s forces, his dictatorship fell in short order. In the same way the Islamists of IS are likely soon to find out that the heavy equipment they captured during their lightening advance, and which has helped increase their momentum, is going to do them little good from this point forwards.
Firm in the belief that we aren’t witnessing the beginning of a repeat of the Syrian conflict, I’ve been wondering how to approach this market.
As mentioned, Genel is probably the most sensible and safest play. With the strength of its balance sheet and operations diversified globally, this company should be cushioned, at least to some extent, against further escalation in the conflict. It can afford to wait for a resolution, and should be well positioned to regain the £500million or so that has been wiped off its market cap in the last few weeks. For a stock to buy and hold over a long period of time, it makes a lot of sense to own Genel, irrespective of what has recently happened. The >20% drop in its share price could prove to be a gift for the patient investor, with a long term outlook.
Gulf, on the other hand, faces more immediate pressures. Followers of this will be aware of the financial tightrope it is on. It is well known Gulf will need to return to market (probably in H1 2015) to raise several hundred million pounds to fund the next phase of development of Shaikan. In the spring, a few eyebrows were raised at the 13% yield Gulf had to pay on its $250million bond issue. If the conflict in northern Iraq drags on, this will obviously cause the company problems. What happens over the next few weeks is likely to prove telling. If we see further escalation of the conflict and no sign of the IS in retreat, then I will probably be forced to revisit my view on Gulf. However, my expectation is that we will soon be reading about the advance of Kurdish fighters, under the cover of the air superiority of their American allies.
Tom and I have just published a new e-book, “The 49 Golden Rules of Making Money from oil, gas and mining shares” and it is now available on Amazon for £6.25 or you can order a FREE copy HERE
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