Mixed results for Gulfsands as Syria sanctions bite

Gulfsands Petroleum (GPX) on Tuesday announced mixed results for 2012, with a post-tax loss of $27 million (£17.6 million), following the implementation of sanctions against the oil industry in Syria.

"The past 12 months have been, without question, the most difficult period in the company's history and among the most trying episodes I can recall in any business venture in which I have been involved," commented chairman Andrew West.

Cash outflow from operations stood at $14.6 million, while free cash balances at year-end amounted to approximately $91 million, down from $124.2 million in 2011. By 8 April, the company's cash balance was reduced to $68 million after paying for the Moroccan acquisition of Cabre Maroc.

"During 2012 we have focused on reducing the rate of cash burn and we will continue to keep a tight grip of overheads to ensure that the maximum benefit is derived from the group's cash resources through exposure to exploration," explained chief executive Ric Malcolm.

Operationally, 2012 was a "difficult year" for Gulfsands, which had to consolidate a non-Syrian leg to the business.

The company received no revenue from its Syrian assets in Block B.

In Morocco, the execution of the agreement to acquire Cabre Maroc in December 2012 provided good oil and gas exploration opportunities to generate "meaningful" cash flow through the exploitation of biogenic gas reservoirs in the Rharb permit areas and longer-term reward exploration opportunities in the Fes and Taounate permit areas.

Elsewhere in North Africa, the company reported increased participation in Kerkouane and Chorbane permits, securing an operatorship of Chorbane, onshore Tunisia. A seismic survey will be carried out at the Chorbane Permit during 2013.

Beyond the Middle East and North Africa, the company was awarded two operated exploration licences in the Putumayo and Llanos basins in Colombia post year-end 2012. Gulfsands confirmed it was in negotiations with a number of parties to join a consortium to explore these permits.

Looking ahead, Malcolm said: "We anticipate that the group's performance will improve during 2013 and with the cash on hand at 31 December 2012 our future exploration obligations for 2013 and beyond are fully funded."

"We do not preclude the option of raising further capital, either through equity or debt, in the near future should the need and opportunity arise," he added.

Furthermore, he stated: "2014 will also be an active year as we aim to drill up to seven exploration wells in our Moroccan and Tunisian permits."

Analyst view

Analysts at FoxDavies reiterated their 'hold' recommendation on the stock with a reduced target price of 150p.

They explained: "Given the acute nature of the timing, we are raising our risking on the stock... as the valuation impinges on the final outcome of its Syrian operations.

"[The] results from Gulfsands are not so much about the top line, which has been decimated by the exclusion of its Syrian operations, but about the cash balances and the outlook. Management must be credited with not waiting for fortune to turn in the company's favour as it has sought investments elsewhere to offset the impact of its exposure to Syria."

The analysts added: "With around $90 million in the bank and an ambitious investment programme, the longer-term outlook ([excluding] Syria) hinges on the ability of the company to achieve sustainable cash flows from its new operations before the cash balance is consumed.

"The company can do more to help itself by cutting the cash portion of the salary bill, replacing it with a non-cash share element; in these situations cash is king, and management must lead the way."

Dougie Youngson, oil and gas analyst at VSA Capital, agreed 2012 saw "considerable progress" in diversifying the portfolio away from Syria, while adding the cash balance could "expand the portfolio further".

"Activities ramp up in Morocco this year as the company targets first gas in the fourth quarter. Five wells will be drilled in Morocco along with the acquisition of 600 kilometres of 2D seismic. A further 200 kilometres will be acquired in Tunisia with other work planned for Colombia," he explained.

"Confirmation of the cash position is the most important aspect of the [news] and we continue to view Gulfsands as a recovery play with considerable upside should the situation in Syria be resolved," Youngson concluded.