Disclosure: The author has a short position in one or more of the shares mentioned. 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.
June was a quiet month for Gulf Keystone (GKP), at least in terms of news for observers. Internally, there are doubtless all manner of interesting conversations taking place. We were given a twin helping of clues on Friday as to the content and direction of these discussions. There is still no reason to believe that the shares have any value, but maybe the end is nigh.
First up, served at 7am yesterday, was the ironic news that 25 million barrels have now been produced from Gulf’s flagship Shaikan field.
It’s ironic because, thanks to the Production Sharing Contract (PSC) signed with the Kurdistan regional government, it triggers a $10 million “production bonus” to be paid to the Kurds’ Ministry of Natural Resources.
This bonus has been triggered despite the vast arrears owed to Gulf by the Ministry, those arrears having contributed in no small part to the debt default situation which the company is currently enduring.
Gulf tells us that: “The Company is currently in discussions with the MNR regarding the payment and offset mechanism of the production bonus available under the Shaikan PSC.”
Indeed - it would be helpful if Gulf did not have to send $10 million in crisp banknotes to the Ministry under the current circumstances! Previous significant payables to the Ministry have already been “offset” against its arrears, so perhaps that shall also be the case for the production bonus. That would be a small positive to go along with the happy news that the Ministry has recently been paying to Gulf the approximate $15 million per month in regular payments which it had promised to do.
With regards to that debt default situation, June had seen the continuation of a Standstill Agreement with Gulf’s bond and note holders, such that some of these creditors had pledged not to order the principal amounts of the bonds immediately due and payable (as is their right, having failed to receive April’s coupon payments).
This Standstill Agreement had been extended several times since April, but has now finally been allowed to expire. In an after-market announcement, Gulf reported:
The Company is currently discussing the terms of an agreement with certain restricted members of the Ad Hoc Committee and other stakeholders. These restructuring discussions remain ongoing notwithstanding the expiration of the Standstill Agreement.
It’s impossible to tell from this announcement whether the expiration of the Standstill Agreement is due to certain creditors being frustrated by the negotiations and threatening to call in their debts immediately, or whether enough progress has been made toward a restructuring that the Agreement is no longer necessary (although in that case, why not extend it anyway?).
As time has drifted, it should not be lost on bondholders or on management that the October coupons are now just a few months away. Furthermore, the company’s capex needs are set to intensify as we move into the second half of the year.
I continue to hold a small short position in Gulf as I think it should only be a brief period of time before existing equity holders are put out of their misery. Gulf’s £47 million market cap remains far too high.
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