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Gulf Keystone: positive upgrade to its numbers, but with a touch of caution

By Ben Turney | Thursday 1 October 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.


At 32p Gulf Keystone (GKP) is worth £313million. This morning, the company announced its updated Competent Persons Report (CPR) for its oil & gas interests in Kurdistan. The numbers are impressive, but the market reaction has been muted, with Gulf now trading flat on the day. When a company increases its 1P Reserves by a better than expected 55% this would normally be cause for celebration, even in today’s oil price environment. However, as we all know, Gulf’s main challenge isn’t getting oil out of the ground. It is ensuring it gets paid.

Two weeks ago, Gulf announced its cash position was $73million, which included the recent $12million net received for Shaikan crude oil exports. Against the odds, the company has managed to keep its head above water, but there is very little room for error.

However, it seems that Gulf’s board is confident that the Kurdish Regional Government will maintain regular payments for pipeline export sales. Given the difficult history surrounding this issue, the directors would surely have adopted a cautious approach before committing to delivering all crude oil deliveries to the export pipeline. That they decided to agree to this request from the Ministry of Natural Resources is an indicator that the company will be able to keep up its all important debt repayments and not breach any covenants.

In the wider context of what is happening in the oil sector, it is too early to make a definitive call that Gulf is out of the woods, but its £313million market cap does allow for plenty of upside if the company can safely navigate through these troubled waters.

Today’s announcement has helped crystallise the potential prize on offer for those prepared to take the gamble on Gulf’s survival. Even with the debt burden it is carrying, had Gulf announced today’s numbers for a producing oil field almost anywhere else in the world, the company’s share price would almost certainly trade at a substantially higher premium.

Even so, the numbers do require a little explanation and there is one particular note of caution. In this morning’s RNS, Gulf quoted the gross estimates for the Shaikan field. This is all well and good, but it the net figures that are more useful to investors. Table 1.1 on Page 7 of the CPR provides a summary of the Shaikan oil reserves, including Gulf’s Net Entitlement Oil Reserves. According to the CPR, the Net Entitlement Reserves “are the sum of GKP's share of cost recovery oil plus GKP's portion of the Contractor's share of profit oil under the PSC terms in Kurdistan.“

In summary Gulf’s Net Entitlement Reserves at Shaikan are:

  • 1P – 72million barrels
  • 2P – 105million barrels
  • 3P – 144million barrels

On their own, these figures provide Gulf’s value case with a degree of support, but the projections for the economic evaluation of Gulf’s Shaikan holding are already under some pressure. If you look at Table 1.3 on Page 7 this provides the oil price assumptions used in the model. For 2015, the Brent price assumption is $62. However, according to Quandl.com, Brent’s average daily spot price for 2015 has only been $55.4. In the longer run, the CPR’s estimates might make up for this shortfall (2016’s nominal estimate is $72/brl and 2017’s is $78/brl). In the shorter term this might be more problematic if Gulf has built its internal forecasts around this.

Despite this, Gulf has pointed out today that gross increase in Shaikan’s 2P reserves to 639million barrels of oil has “significantly” derisked the field’s commerciality. As Gulf says “the field's recovery mechanism, now recognised as being by solution gas rather than a water drive, results in greater predictability of field performance, increased reserves per well and lower capex per barrel”. Current daily production was in excess of 40,000bopd in the middle of September, so from a technical perspective Shaikan is living up to its world-class reputation.

And there is also the Sheikh Adi discovery to consider. Gulf is currently working on the Field Development Plan for Sheikh Adi and expects a future re-classification of the 112million barrels of 2C Resources to 2P Reserves. It has also identified a new prospect in the northwest block, which could hold another 169million barrels of gross prospective resources.

In the face of such adversity, Gulf continues to make excellent operational progress. The decision to scale back capital expenditure on development earlier this year, in response both to the collapse in oil price and regional troubles, seems to be paying off today. Although downside potential remains in the stock, thanks to the ongoing global oil price war, if Gulf does dip again this year, it might be worth revisiting as a potential buy. 


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