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Gulfsands in quicksand since civil war in Syria

The civil war in Syria has forced Gulfsands Petroleum into some big decisions. The jury is still out on whether these will bear fruit

Investors are nervous. Gulfsands Petroleum shares have fallen precipitously from a high of 380 pence ($0.58) at the start of 2011 to just 60p today. The reason is not hard to discern: since the civil war in Syria broked out in March 2011, Gulfsands has been forced to declare force majeure at Block 26 as a result of EU sanctions against Syria.

Its 50% interest in the block (China’s Sinochem owns the other 50%) is not producing anything much – or anything from which can benefit Gulfsands. Before  force majeure was declared on 12 December 2011, this asset was responsible for most of the company’s revenue. “The immediate consequence of the force majeure declaration is that the group cannot expect for the foreseeable future to receive any revenue from its Syrian assets, which comprise substantially all of its revenue-generating activities,” it said in a statement issued at the time. The effect on the company’s financials has been devastating. In 2010, Gulfsands was reporting revenue up by 37% to $115.6 million, while net profit was up 58% to $44.7m. Group working interest production rose by 39% in 2010 to hit 10,308 barrels of oil equivalent per day (boe/d).

Ric Malcolm, the then-chief executive (who resigned in April), said of the results: “2010 was an excellent year, with production and reserves growth meeting expectations and in so doing, adding significant value for our shareholders. 2011 has the potential to be a rewarding year with an active exploration and development programme.”

However, by 2012 revenue had fallen to $5.6m, which was down 29% from the previous year, leading to a loss of $27m. Working interest production was just 311 boe/d – Gulfsands was now essentially a pure exploration player, with all the risk that this entails.

Fortunately, the company’s cash position at the end of 2011 was $124m with no debt, giving management the flexibility to diversify away from Syria toward new operations in Morocco, Tunisia and Colombia, as well as hold onto a portfolio of ageing assets in the US which the company had planned to sell until the conflict in Syria forced a rapid U-turn. In January this year, Gulfsands completed the acquisition of Cabre Maroc, a Moroccan subsidiary of Caithness Petroleum, for $19m plus an agreement to fund up to $11m of Caithness’s remaining exploration commitments.

Investment research house Edison said the Morocco venture offers near-term gas production and longer-term oil-focused upside. “Operational activities on the Rharb assets could deliver baseline revenues of $21m per year between 2015 and 2018, as production hits a [1,638 boe/d] plateau,” says the optimistic Edison, whose predictions of a bottom to the stock price have been confounded several times (Gulfsands is, perhaps not coincidentally, a client of Edison). “While the Rharb permit has material value, we view the asset as a foundation on which Gulfsands can explore and develop its more material assets on the Fe´s, and potentially Taounate, permits.”Cabre Maroc operates a portfolio of oil and gas exploration licences and gas exploitation concessions that total 13,352 square km in northern Morocco. With the acquisition, Gulfsands and Morocco’s state-run ONHYM are joint venture partners in the Rharb Centre and Rharb Sud permits, with Gulfsands as operator. Gulfsands and Caithness Petroleum, through their respective subsidiaries, will become joint venture partners with ONHYM in the Fe´s and Taounate permits, with Gulfsands operating both.

In July, Gulfsands gave an update on its Moroccan venture, saying it will start drilling the first well in its planned five-well shallow gas exploration programme at Rharb in early September. The first five wells are expected to take about four months to complete, with the estimated cost being $2.25m to $2.5m each for successful wells. Gulfsands’ new chief executive Mahdi Sajjad said in a statement: “We are now very focused on making a success of our Rharb drilling programme and to the early commercialization of the gas resources we are targeting.”

The second seismic programme will help locate drilling targets on the Fes permit. The estimated cost of capturing and processing this data will be about $14.5m, Gulfsands said. The company is planning to drill a well at the Fes permit area in 2014.

Edison says the Fe´s permits are central to Gulfsands as an investment proposition. “We consider Fe´s a high-risk play, but if oil can be discovered… we believe Gulfsands may be able to prove the existence of a legitimate oil fairway that could even extend into Taounate,” they said. “If this were achieved, Gulfsands’ running room could be significant.”

Colombian deal

Elsewhere, Gulfsands said in March that it had secured a deal to start working in new licence areas alongside the Colombian government in the Llanos and Putamayo areas. Exploration and production in Colombia since 2011 has led to a revision of reserve estimates from 1.9bn barrels in 2011 to 2bn barrels in 2012.

The bullish Edison aside – it has increased the 2014 risked exploration net asset value (the value if the company produced all of its assets) to 121p per share – other analysts and traders note the significant risks associated with Gulfsands’ drilling programme, while acknowledging management’s moves to diversify outside of Syria.

On 25 June, the company revealed a well at the Chorbane licence in Tunisia failed to hit oil.

Francis Hunt, a technical trader with, has a target of just 28p for the stock. “Technically it’s negative after falling through the key 78p support level,” Hunt says.

All that could change if peace comes to Syria. But even in the unlikely event that the fighting stops, it’s unclear if Syria can become a stable state again and Gulfsands can resume operatorship of its Block 26 assets.

Report card table - Gulfsands Petroleum
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