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Gulf Keystone – Will the Kurds make good on their promise to start paying?

By Ben Turney | Tuesday 4 August 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.

Shares in Gulf Keystone (GKP) surged yesterday from a low of 26p to a high of 36p, triggered by news of a pledge by the Kurdistan Regional Government (“KRG”) that it will start making monthly payments to its oil producers from September. This morning, Gulf’s stock has settled back to 33.5p (last seen), valuing the business at £327.6million. This is towards the bottom of the company’s trading range since the start of the year and after yesterday’s excitement the question is, is Gulf a buy?

Apart from the odd favourable spike, having been so consistently burned by my analysis of Gulf over the last year and a half I am understandably a little wary writing about this stock. Frustratingly I was looking at Gulf last Friday, after the company’s latest operational update. Gulf opened that day at 25.75p, having touched an annual low of 24.77p the day before and it crossed my mind this dip might be a buying opportunity.

However, this hindsight-inspired waffle is of little use now. That opportunity has been and gone and it only pays to look at what might happen next.

One aspect of Friday’s announcement that caught my attention was that the company announced a single day’s production figures. As positive as it is that on 29 July Gulf produced 43,700 barrels of oil, and shipped 39,500 of these by truck to service domestic demand (for which the company gets paid), this sort of selective reporting is often a warning sign. Just like initial flow rates, single day production figures usually are little better than PR-spin, delivered to encourage private investors to extrapolate wildly what the trend might be.

Perhaps I am being a little too suspicious about this, but it will be revealing to find out what the company’s latest average production rates are, in its interim results on 27 August.

The release of the interim results could prove to be decisive for Gulf’s share price’s prospects over the medium term. As welcome as yesterday’s news from the KRG is, there is no indication yet that this will resolve the issue of the historical payments owed to Gulf for prior unpaid for oil supply. It is hard to say what the balance of this amount now is, but it is certainly something to look out for at the end of August.

What the KRG owes Gulf becomes more significant when looked at in relation to how much debt the company holds. After the successful completion of the debt restructuring earlier this year, this matter became a little less pressing, but the longer the oil price remains depressed the stronger the financial headwind Gulf faces. Outstanding monies owed by the Kurds simply serve to strengthen this effect.

But before I sound too negative on the stock, the next two months could mark the latest crucial juncture in the evolution of this company. Assuming Gulf doesn’t disappoint in August’s interims and the KRG makes good on its public pledge (which, let’s be honest, is not a certainty), then this could provide the company’s share price with a firm footing to build on the recent trading range and move hight. At 33.5p, it looks like support is there, but buying the equity in this company remains a bold move. 

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  1. Daniel Victor

    How fast have the Kurds promised to repay the money owed ? They pretty much had to start covering the producers’ expenses or they’d probably have stopped producing.

  2. Ben

    My view is that KRG are already doing what it takes to keep GKP ticking over. Ie covering overheads and (will cover) bond interest payments. This will continue to be the case until oil price rises and there is more money in the kitty. Hence yesterday’s RNS of little real world at sub $60 oil

  3. @Daniel – quite probably that is correct.

    @Paul – a prolonged period of ticking over looks likely, but I still want to see the figures at the end of the month to try and gauge how insulated Gulf is against another bump in the road.

  4. Daniel Victor

    Interesting.I was short and have close on the view that there are better shorts out there than this.Can’t see,however,why the Kurds would care who runs the company – shareholders or bondholders.The cynic in me suspects that they will pay expenses plus a small amount – not necessarily enough to cover bond interest payments.

  5. Daniel Victor

    Sorry – typo – ‘have closed’.

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