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Gulf Keystone. Lessons for Both Sides of the Trade

By Luvian Miers | Sunday 17 July 2016


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.


My feelings of satisfaction at being vindicated on Gulf Keystone (GKP) when the details of the debt for equity swap were finally published yesterday were somewhat short lived, as I was put on notice that borrow was being recalled and I had to buy back a fair chunk of the position at more than three times its worth.
 
If you recall, the guaranteed notes in Gulf were trading at 68 cents in the dollar prior to yesterday and if holders were now able to sell their soon to be issued shares at 0.82p they would recoup their entire investment including the recently missed interest payment.  That the price will not go there and below as soon as they are issued 15 billion shares in lieu of their debt in the near future is inconceivable. Remember these guys are bond investors. They want their principal back plus interest. They do not as a rule, have a remit to invest in the equity of speculative resource stocks.
 
Such are the rules of the game however, that this is of no comfort to the legions of bears, myself included, who were forced out of a “no brainer” for technical rather than logical reasons. This is an important lesson for wannabe bears to take on board. Namely to remember that on top of the disgraceful and seemingly arbitrary borrow charges levied by prime brokers, there is always the risk that the stock can be recalled at a moment’s notice and at the most inconvenient of times.
 
For the bulls in the stock I despair. They were even buying yesterday after the restructuring was announced. The inability to distinguish between the interests of creditors and shareholders is probably the biggest failing of the retail investor, who in the case of Gulf cannot see beyond a “world class” resource which is gushing oil.
 
Anyway, this is my final word on Gulf Keystone, the most popular and talked about retail stock for many a year. For those who are willing to learn it has handed out useful lessons for both bulls and bears.  Good luck to its new owners. I wish it well.


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