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Gulf Keystone – a can kick of a placing solves nothing

By Tom Winnifrith | Tuesday 31 March 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.


Gulf Keystone (GKP) has managed to raise $40 million before expenses (let’s call that $38 million via a heavily discounted placing at 32p. This is a can kick. It is applying a sticky plaster when your arm just fell off. Bond holders will be laughing, for shareholders the wailing and gnashing of teeth is far from over.

That the stock was placed at a 20% discount tells you everything. It has not gone into firm institutional hands but will have been flipped onto Joe Retail today. Joe Retail looks back to the days of 200p+ and no doubt thinks that at 35p or 38p he is getting a bargain. Joe Retail is wrong.

Also wrong is my esteemed young colleague Ben Turney who has been a defiant bull of Gulf for some time and puts the bull case again today HERE.

As a bear from 186p down I remain a bear.

Gulf now has cash of c£124 million. But since 25 February – i.e. 5 weeks it appears to have sent c$8 million to money heaven from operations. I am prepared to accept Ben’s number that the number will be c£4 million a month going forward. However, it also has interest costs of c$5 million a month to meet and thus assuming no interruption of production it should be running on an empty tank in about a year. Indeed having been prepaid for c$26 million of oil the other day I may be optimistic as to when the rank runs dry. It could be by Christmas.

However I do not assume that there is any certainty that production will not be interrupted. If you operate anywhere near the very fluid front line with the Islamofascists of ISIL you are clearly at risk.

So this placing has prevented one default on the bonds but as the cash runs out there will be another. Bondholders are no doubt delighted that Joe Retail has stumped up a few more interest payments but in the end this will be another Afren. The debt is just not sustainable. Ben glibly notes that Gulf bonds are trading at 66 cents and 40 cents in the dollar. That tells you everything. If bonds trade at that level the equity has only option value, not the current £350 million market cap.

Ben, you remain long and wrong on this one. The shares are still a sell and 10p is my initial target.


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Comments

1 comments


  1. Paul Curtis

    But Joe Retail got scaled back to 22% of what they wanted.

    Appears several big Institutions coughed up most of the dosh and price was Simon Murray resigning.

    And you ignore that in bid talks?


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