Gulfsands Petroleum moves into Morocco after Syria woes. Questor says hold.
Gulfsands Petroleum 115½p+3 Questor says HOLD
Until the start of last year, Gulfsands Petroleum’s business was performing very well and management had significant operational success. However, its main producing asset was in Syria and the company is now in the process of transforming itself by moving into new territory.
Gulfsands operates an oil block in Syria, with a 50pc working interest. However, the contract is currently in force majeure as a result of EU sanctions. The situation in the Middle Eastern country is not improving if anything, it appears to be on the verge of civil war. It is unlikely to improve any time soon.
This is a shame, as management had built up a valuable business. The owner of the other half of Gulfsands’ Syrian block was Emerald Energy, which Chinese state-owned group Sinochem snapped up for $875m (£538m) in August 2009. Syria accounted for around 30pc of Emerald’s revenues at that time.
Gulfsands’ management have responded by expanding outside Syria. As part of this strategic shift, the company announced the acquisition of three new onshore licences in Morocco earlier this week. They will be acquired through the takeover of Cabre Maroc, a unit of private company Caithness Petroleum.
Gulfsands will pay Caithness $19m in cash, put aside $11.5m of financial guarantees for future exploration commitments made to Morocco’s regulator, and up to $11m for Caithness’s exploration costs on the two licences in which it retains an interest.
The deal gives Gulfsands between 45pc and 75pc of shares in a number of licences across the “Fes” and “Taounate” permits and provides access to significant exploration potential, near-term oil production and multiple drilling targets. The news is therefore very positive. Gulfsands plans to use recently acquired seismic data to help drill up to nine wells on gas targets from the second quarter of next year.
Gulfsands also has interests in two offshore exploration permits in Tunisia and one in southern Italy. It also has a longstanding memorandum of understanding with Iraq’s oil ministry to capture “flared gas”, which is usually wasted by being burnt off at oil wells. A definitive contract is not in place yet, however. Gulfsands also owns a small number of assets in the Gulf of Mexico, which it is in the process of divesting.
The group’s balance sheet is relatively healthy as Gulfsands carries no debt and had $106.3m of cash available as of June 30.
Following the closure of its Syrian operations, the group had an interest in production of 322 barrels of oil equivalent per day (boepd) through various stakes outside the country.
This compared with 10,923 boepd of production in the first half of last year.The company still has revenues, although they are much reduced. In the first half, revenue was $2.9m compared with $78.6m in the first half of 2011.
Regular readers will know that Questor does not usually recommend buying shares in pure exploration plays. They tend to have a way of burning through cash. Gulfsands does have some revenues coming in, but they are not substantial.
The security situation in Syria cannot carry on forever although just how safe is the title to Gulfsands’ asset there remains to be seen.
The shares are down significantly from highs of 401½p seen in January 2011. Management are doing the right thing in their diversification strategy and the shares could look very cheap if discoveries are made, so some investors may wish to consider the shares for the more speculative part of their portfolio. Questor, however, continues to keep a hold recommendation.