LONDON,— Iraqi Kurdistan attracted some of the biggest names in the oil industry as it promised investors the opportunity of fantastic gains and chunky dividends, but all it has delivered is painful losses and broken dreams for hundreds of retail investors.

Gulf Keystone in crisis

The latest blow came from Gulf Keystone Petroleum. Management were forced to admit last week that the end is near unless it can come to an arrangement with its lenders. The company is facing looming interest payments in April and October this year, and needs to repay $250m of its debts by April 2017. The cash on the balance sheet fell to $51m on March 16, down from $234m in June 2014.

The shares tumbled almost 30pc last week to a record low of 9.4p as the company struggled to find a buyer. The company effectively put itself up for sale through a strategic review launched in February last year.

While the losses at Gulf Keystone Petroleum are painful they should come as little surprise. The company had a poor track record of hitting production targets as far back as October 2013. The lack of accurate information from management also treated retail investors with disdain.

Todd Kozel, its founder, retired as chief executive and three other non-executives also resigned in 2014, developments that some reckoned could pave the way for a bid.

We advised selling Gulf Keystone Petroleum shares at 172p in October 2013, and repeated that advice (Sell, 109p, June 2014) throughout the past two-and-a-half years (Sell, 20p, December 2015) as the situation demonstrably worsened.

Genel Energy slump

Genel Energy, the other Kurdistan-focused oil group, has delivered similarly dismal returns for investors under the stewardship of ex-BP boss Tony Hayward. At the end of last month the shares collapsed by 40pc after it admitted one of its biggest assets, the Tak Tak oil field, was about a third of the size of initial estimates.

The oil company slumped to a loss of $1.2bn during the 12 months to the end of December after it was forced to write down the value of the oil fields in light of lower prices and reserves.

We initially gave Genel the benefit of the doubt and recommended buying the shares as recently as June 2014 at 971p. However, once the cash started drying up, the oil price started tumbling, and the situation got worse across the border in Syria we cut our losses.

We recommended selling Genel shares at 828p in October 2014 and they have lost 85pc of their value since then.

Payment dispute

The London-listed oil producers have not only had to struggle with falling oil prices. The main source of revenue, the Kurdistan Regional Government (KRG), has become increasingly stretched by fighting a war against the Islamic State of Iraq and the Levant (Isil).

At the same time as fighting a conflict the KRG is in a long running dispute with the Iraqi government over how to share oil revenues.

The oil is flowing through a new pipeline built to the Turkish port of Ceyhan but payments from the KRG are irregular.

Lessons for investors

It is all a far cry from the heady days when the oil price hovered around $100 per barrel. Gulf Keystone Petroleum briefly soared to £4 per share in early 2012, valuing the group at £3.6bn. Genel reached its high water mark in early 2014, with the shares at £11, valuing the group at £3.1bn.

Retail investors piled in hoping to get in early on the next oil boom. Both companies have seen their shares collapse in line with the falling oil price and Gulf Keystone Petroleum currently has a market value of just £90m and Genel is around £200m.

It has been a sorry and painful tale for retail investors, but if anything can be salvaged it is the lessons of how to avoid these value traps in the future.

One rule is to carefully monitor management statements and sell if they repeatedly provide poor guidance. A second is to watch the boardroom and sell if there are lots of changes in quick succession. A third is to keep an eye on the cash flow at the company – if it starts drying up then it could be time to take some of your own money off the table as the company will probably come asking for more.

Finally, take a look at the directors’ pay, and if they haven’t adjusted their wages to take into account the struggles at the company then its time to make for the exit.

By John Ficenec

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