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Tom Winnifrith’s Sell Tips for Easter No 2 – Gulf Keystone at 36p

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.

To read Tom Winnifrith’s first sell tip for Easter click HERE

 

 

 


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More on GKP


Comments

4 comments

  1. Tom

    My last post deleted? - TW Note - No.

    I’m very heavily into the bonds at 40 cents and imo attractive risk:reward. Agree I’d be much more nervous about the equity since geared by the bonds.

    However your analysis does not ask why GKP has resumed exports, when cash flow negative, if not confident that will receive some sort of income to cover these costs.

    KRG have revised PSA terms for Genel (now splitting revenues 50:50) to allow Genel to tickover at low oil price just from local sales whilst they wait for export payments. Logical that KRG are also ‘‘looking after’ GKP. The oil producers and the Kurds need each other.

    The recent placing was led by the two main Insitutional shareholders, not private investors. Reasonable to assume these investors were aware of takeover option (appears they booted Murray out, was this because he favoured T5 takeover?) and hence placing price would reflect state of distress. When book building started several weeks ago the guide price was 25-30p. Actual price was 32p, about a 10% discount to prevailing price at time of build.

    Please explain why these long standing Institutions, who I’m confident know much more than us re end game valuations, were so generous if your 10p realistic?

    I don’t want to sound like a GKP nutter but GKP appear to be sitting on a potentially world class asset as verified by Tony Hayward of Genel last Friday. I’m told every major has been in the data room. I would be surprised if a takeover since Shaikan still early stage and bidders will take conservative approach re valuation. Hence I expect any deal to be more farm out with part cash up front and carry geared to field performance.

    Re ISIS, I’m not aware that this is any sort of a threat? Western support now too significant. USA building air base. The pipeline through Turkey may be vulnerable to attack but ISIS can’t ‘capture’ it.

    KRG desperately need GKP’s 40K bopd to get up to the magic 550K bopd and beyond for obvious reasons. Hence I’m expecting, as with Genel, KRG will throw GKP enough crumbs to tick over until regular payments established with Iraq and/or they exceed 550K bopd. Hopefully the Iraq dispute will be resolved shortly, especially since Kurdistan now up to 400K bopd and increasing Western pressure on Iraq to honour its agreement.

    Bottom line is the Kurds need the oil companies to max production and will provide the minimum to keep the oils producing. Obviously this is Phase 1. Phase 2 requires significant capital investment to lift production to next level (and beyond) but this must wait on security of income, back payments and oil price. Again, the Kurds need this investment/production since anything over 550K bopd highly profitable.

  2. Tom

    Apolgies, I was about to post elsewhere since thought glitch with SP.

    Now added a few links/quotes so if its okay, here is the new ‘improved’ version.

    My reply to Tom Winnifrith who has sell rating on GKP.

    http://www.shareprophets.com/views/11451/tom-winnifrith-s-sell-tips-for-easter-no-2-gulf-keystone-at-36p

    Tom

    I’m heavily into the bonds at 40 cents and imo attractive risk:reward. Agree I’d be much more nervous about the equity since geared by the bonds.

    However your analysis does not ask why GKP has resumed exports, when cash flow negative, if not confident that will receive some sort of income to cover these costs?

    KRG have revised PSA terms for Genel (now splitting revenues 50:50 on domestic sales) to allow Genel to cover OPEX whilst they wait for export payments. Logical that KRG are also ‘‘looking after’ GKP. The oil producers and the Kurds need each other. Malcy’s Blog suggested $15m per month (see 2nd April, www.malcysblog.com).

    The recent placing was led by the two main Insitutional shareholders, not private investors. Reasonable to assume these investors were aware of takeover options (Press reports claim they booted Murray out, was this because he favoured T5 takeover?) and hence placing price would reflect state of distress. Placing price of 32p, about a 10% discount to prevailing price at time of build, does not imply distress. And PI’s were scaled back to only 22%.

    Please explain why these long standing Institutions, who I’m confident know much more than us re end game valuations, were so generous if your 10p realistic?

    I don’t want to sound like a GKP nutter but they appear to be sitting on a potentially world class asset as verified last Friday by Tony Hayward of Genel on Bloomberg who said the issue with Shaikan is not the quality in terms of the scale but the capital investment required to develop in large volumes. I’m told every major has been in the data room. However, I would be surprised if a takeover since Shaikan still early stage and bidders will take conservative approach re valuing the massive upside potential. Hence I’d expect shareholders to be better served by farm out with part cash up front and development carry geared to field performance.

    Re ISIS, I’m not aware that this is any sort of a real threat? Western support now too significant. USA building air base. The pipeline through Turkey may be vulnerable to attack but ISIS can’t ‘capture’ it.

    KRG desperately need GKP’s 40K bopd to get up to the magic 550K bopd and beyond for obvious reasons. Hence I’m expecting, as with Genel, KRG will throw GKP enough crumbs to tick over until regular payments established with Iraq and/or they exceed 550K bopd. Hopefully the Iraq dispute will be resolved shortly, especially since Kurdistan now up to 400K bopd and increasing Western pressure on Iraq to honour its agreement.

    Bottom line is the Kurds need the oil companies to max production and will provide the minimum to keep the oils producing. Obviously this is Phase 1. Phase 2 requires significant capital investment to lift production to next level (and beyond) but this must wait on security of income, back payments and oil price. Again, the Kurds need this investment/production since exporting over 550K bopd highly profitable.

    My principle concern is the Boardroom shenanigans.

  3. Kurds need the oil companies yes….but do they need GKP? Why not let GKP go bust and another company come in, snap up the assets and develop?

  4. Because illogical. What does KRG want? Maximising current production and fast tracking the investment in new capex to dramatically increase production imo.

    Is that best achieved by letting GKP go bust, a bondholder restructuring that takes ages and then GKP walking wounded. At same time what message does it send to other oil companies that the KRG wants to invest in Kurdistan? That it lets one of its top players go bust despite KRG being at fault!

    Much better so be as supportive as possible and hope an Exxon shortly buys or farms in and has the confidence to commit to large scale capex programme


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