Big Potential For Syrian Oil Investors

Published in Investing on 3 April 2012

Strong reserves and a cease fire could lift the fortunes of this oil company.

Political problems are a constant risk for many oil and gas companies but, until relatively recently, Syria would not have been on my list of high-risk countries.

The terrible events of the last year in Syria have changed this and led the EU to implement sanctions against the Syrian regime.

One consequence of the sanctions is that, since 1 December 2011, it has effectively been impossible for European oil companies to produce oil in Syria, thanks to an EU ban on doing business with General Petroleum Company (GPC), the Syrian state oil company.

Cease fire?

However, at the risk of sounding cold-blooded, yesterday's news of a cease-fire agreement in Syria means that the situation could improve in the coming months.

One company that has suffered in the crisis is Gulfsands Petroleum (LSE: GPX), an oil and gas explorer with exploration and production assets in Syria.

Gulfsands' share price slumped last year as EU sanctions forced it to withdraw from its production operations in Syria, which were carried out in partnership with GPC. A withdrawal from exploration activities followed at the end of January 2012.

GPC has continued to produce oil from the partnership's wells and, at the end of November 2011, Gulfsands was owed $25m in production revenues -- a figure that will have increased since then but will not be recovered until the sanctions are lifted.

It has maintained its local staff and infrastructure in Syria, resulting in a cash burn rate of $500,000 per month.

Strong results

Gulfsands published its full-year results today, showing a 23% improvement in post-tax profit to $55.1m and a 34% improvement in cash from operating activities, which rose to $94.3m.

This profit figure includes an allowance for the impairment of operations in Syria, but if all Syrian operations are excluded -- as could be the case this year -- a substantial loss of $26.3m would have resulted.

Unreachable reserves

Gulfsands' proven and probable ('2P') working interest reserves rose by 34% to 76.3mboe (million barrels of oil equivalent) in 2011.

The only catch is that a massive 97.6% of these are in Syria. Until EU sanctions are lifted, Gulfsands cannot make a penny out of these reserves.

In the meantime, Gulfsands has $125m of cash and some promising assets in Tunisia. It is also trying to develop further non-Syrian business.

Sanction lift?

Gulfsands' share price is currently at a three-year low, thanks to its Syrian problems. It's clear that, despite the directors' efforts, the bulk of the company's assets and immediate future prospects are in Syria.

The share price is 50% covered by cash, and a successful cease fire and the prompt lifting of sanctions could be very good news for the company. If the crisis draws out for too long, however, the damage to Gulfsands' finances could overwhelm the potential of its Syrian exploration and production assets.

I believe there is a good opportunity here, but I might be inclined to watch the news from Syria carefully and wait a little longer before committing.

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