By Tom Winnifrith | Sunday 5 April 2015
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
I received shedloads of abuse when I first suggested selling Gulf Keystone (GKP) several moons ago at 186p – the shares are now 36p but where are the apologies? The sell case has changed but is in fact stronger now – my initial target is 10p.
First up look at the price you get for Gulf’s two sets of bonds – 66 cent and 40 cents in the dollar. In a break-up situation bonds rank ahead of equity and so when bonds are priced to get only 2 pence in 5 back that tells you that the equity is essentially worthless. The shares are worthless. History shows that bond markets (where the players are professional traders) are always far better prices of value than equity markets where share prices are determined at the margin by private investors, the sort of savants one sees on the LSE Asylum.
Gulf has numerous problems. But the core one is that even with a $40 million gross placing the other day it probably has real net cash (net of presales) of only around $90 million. With interest payments running at $50 million a year and the company still burning cash at an operational level it is quite simply running out of money.
It is not an IF it is a WHEN. And at that point it will have to cut a deal with the bondholders. Those who have followed Afren (AFR) will know what happens next. It is lube up shareholders time as you prep for a shafting, you will be diluted to the heavens.
Now I know that supporters such as Paul Curtis will start squeaking that “Gulf has put itself up for sale.” Paul you can go parade in your boxers and your tightest T-shirt in a bar full of supermodels but after a while you will realise that whatever you offer you are going home alone. The potential purchasers of Gulf are fully aware that it has a chronic init ability to generate cash, that it extracts oil not that far from the ISIL front line and that sooner or later will be owned by its bondholders.
As such they could offer bondholders 80p in the pound and just sit waiting for the inevitable default. Why on earth would they offer anything for the equity even if they wanted the assets?
This all makes the shares a very obvious sell with an initial target of 10p.
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