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Gulf Keystone - Truly Disastrous News from Kurdistan

By Tom Winnifrith | Friday 19 February 2016


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.


On the surface it seems like good news once again - as has been the case since September 2015 - the KRG has agreed to hand over $15 million ( $12 million net) to Gulf Keystone (GKP) in fact today's RNS is a disaster. 

In prior months the $15 million was a payment for output in the prior month. This time it is a payment for Shaikan crude oil exports in January 2016 of $5.8 million gross. In addition to the monthly entitlement, a payment of US$9.2 million gross is being made towards the recovery of the arrears owed by the KRG which stood at $294 million.

In other words monthly payments for production have been slashed by almost two thirds.

What does this mean for Gulf? You will remember that with costs now running at just over $8 million pcm (see HERE) and with an interest bill of $26.6 million a half year, at a cashflow level Gulf will still be burning cash. My guess is that cash on the balance sheet - which stood at $48 million after the last half yearly interest payment in October, will be c $40 million as at April 2016.

Debt comes in two tranches of bonds. $250 million repayable in April 2017 and $275 million repayable on 18 October 2017. Now let us assume that the KRG carries on paying as it plans to do in February for another 14 months. At that point in April 2017 the balance sheet will show:

Cash c$30 million.
Amounts owed by KRG $156 million.
Bonds due for immediate repayment $250 million
Bonds due for repayment in October $275 million.

Supporters, such as twitter lunatic Paul Curtis, are tweeting wildly about how all Gulf needs now is lots of capex to ramp up output. Such folks must be on heroin. Capex right now is zilch becuase Gulf has no spare cash.

When he has finished shooting up Paul might start dreaming that oil prices go up. But the reality is that unless they rocket ahead soon to $65+ and the KRG passes this all on there is not a cat in hell's chance of Gulf being able to repay the April 2017 bond let along the October one.

Gulf had been hoping that the KRG would repay the $294 million at once AND maintain monthly payments at a level that came close to covering costs & interest. That is clearly not going to happen and that means that even with zero capex, come next April this is toast and shareholders will get wiped out.

Supporters can carry on chasing the dragon, they can speculate about all sorts of what ifs, the grim reality is - as the 21% yield on the bonds implies - Gulf equity is totally worthless.

The target price for the shares is 0p.


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More on GKP


Comments

5 comments


  1. Drunken Sailor

    Couple of typos:

    $275 million repayable on 18 October 2014

    Paul might start dreaming that oil proces go up

  2. Tom

    Once again you misquote me. Please try to be fair.

    GKP burning about $7m per month. $12m covers bond interest. Last update re cash balances stated $58m.

    The previous payments included a significant contribution from KRG to back costs. This is why I have repeatedly told you KRG looking after GKP.

    Today’s RNS is patently net good news. It indicates that KRG still looking after GKP. There is no point making a one off special payment. Logic dictates that KRG are prepared to see GKP safely thro the critical April interest hurdle. This buys GKP until October to avoid a hard default.

    You keep misrepresenting me as a bull of the equity. The equity is very high risk and a hard default this April could have triggered a restructuring which would have be fairly disasterous for equity. Remember that no one can risk administration so any deal should be consensual. Hence equity won’t go to zero.

    The $5.8m gross was disappointing and the discount for heavy oil more painful than I was expecting. However this was based on $31 oil and margins improve as oil rises. OPEX is under $5 per barrel. There is a pipeline spur under construction which will eliminate expensive trucking costs, improving margins/netbacks.

    GKP very much on the critical list. They need oil price to bounce and M&A market to improve in time to resolve bond redemptions next year. I wouldn’t touch equity. However Shaikan is a great asset and probably has more potential than any rival asset in Kurdistan, for all types of oil. What value can GKP achieve in a rising market? Phase 2, raising production to 100K bopd, is mapped out. Just needs the funding ie M&A partner. Shaikan could be over 1bn barrels.

    So it’s possible equity has significant value in the future but high risk.

  3. Paul

    You really are on the methadone. GKP itself says op costs just over 8m pcm. So 12m gives you less than 24m every half year which is NOT ENOUGH to cover $26.5m of interest.

    The number i stated was cash after last interest payment explicitly. Your $58m is last cash – cash always builds up between interest payments.

    When you are off the drugs come back and get your facts right

    T

  4. Tom

    I know that GKP are comfortable at $12m per month. You know why I know.

    Hence costs must be sub $8m

    Remember costs are still coming down under Ferrier.

    I was chatting to someone yesterday who has done very detailed analysis and he reckoned currently nearer $6m.

    We shall see….

  5. Paul

    Arguing with you is pointless as you are just in 100% denial. Ferrier told Upstream costs were >$8m pcm. But you know someone who knows better than the CEO. Whatever…

    You are just making things up or you are on drugs, there can be no other explanation

    t


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