Is Gulf Keystone Petroleum Limited a top small-cap recovery play for 2018?

Small-cap, Iraq-focused oil producer Gulf Keystone(LSE: GKP) has a chequered past, but it's beginning to look as if the firm is moving on from its previous mistakes.

After undergoing a momentous restructuring at the end of 2016, the company's management spent much of 2017 trying to stabilise the business. A low oil price has hampered efforts to rebuild, but now that the price has recovered to levels not seen since the end of 2014, Gulf Keystone's outlook has improved considerably.

Putting the past behind it

Today, the company announced that in 2017 production hit 35,298 barrels of oil per day, which was in the middle of last year's guidance of 32,000 to 38,000 bopd. However, for 2018, management is expecting production to come in at a slightly lower rate of between 27,000 to 32,000 as it continues to work on a delayed investment plan for the year.

The company is looking to "significantly increase investment in Kurdistan to step up gross production to 55,000 bopd in the near to medium term, a material step towards development of the full potential of the field and production around ca.100,000 bopd," according to CEO Jón Ferrier.

There's plenty of headroom available on the balance sheet to pursue this production plan. At the end of June, the firm had net debt of $2m with cash reserves of more than $100m. Since this date, Gulf Keystone has continued to receive payments from the authorities for oil exports and its net cash position has improved to $47.2m.

Gulf Keystone has a plan in place to grow and has the cash to pursue development. However, the firm will only be able to succeed if the political situation in Iraq stabilises. Unfortunately, it does not look as if this is going to happen anytime soon. So, while the company's outlook has improved dramatically over the past 12 months, I'm hesitant to say that it's in the clear just yet.

Production stability

A better oil price recovery play for your portfolio might be Amerisur Resources(LSE: AMER). Focused on South America, specifically the relatively politically stable regions of Ecuador and Colombia, Amerisur has a much brighter outlook than Gulf Keystone.

For the past few years, the company has been consolidating its position in the regions it operates, buying new prospects and investing in operations to improve efficiency.

These efforts are starting to pay off. It exited the year with production of 7,000 bopd, compared to the average daily production for the year of 4,862 bopd. Based on this higher output, coupled with higher oil prices and fatter margins thanks to the commissioning of a new pipeline, City analysts expect Amerisur's net profit to hit £3.1m for 2017, rising 11-fold to £38m for 2018. Based on these forecasts, the shares are trading at a forward P/E of just under 10. There's also $20m of net cash on the balance sheet.

Overall, if you're looking for a small-cap oil producer to add to your portfolio, I'd choose Amerisur over Gulf Keystone, thanks to its rapidly growing production and profitability.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Amerisur Resources. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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