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Gulf Keystone at 27p – a risky buy, but watch the 6.25% 2017 bond price

By Ben Turney | Wednesday 11 November 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.

In the next week we should find out whether or not the Kurdish Regional Government (KRG) is going to make good on its summer pledges. In August and September it promised to establish a regular payment cycle to the various oil producing companies active in the country for crude exports. Share prices of Gulf Keystone (GKP), Genel (GENL) and Norwegian firm DNO (DNO) leapt on the news. Two months and two payments later, the third should be due on or around 15 November. If Gulf receives another $15million, might this help restore some faith in the company’s future?

Although Winnifrith and the other Gulf bears have been consistently right about the company’s share price, they’ve been helped out a great deal by the collapse in the price of oil and the rise of the ISIS/IS/ISIL or whatever the hell the nutbags are calling themselves these days. However, in his last piece on the subject Tom wondered “Why do some folk think that the Kurds give a FF about shareholders in Gulf Keystone?

At last it looks like he might finally be wrong!

Since Tom’s last broadside on Gulf (one to follow this piece, no doubt), the Kurds appear to have shown they do give a “FF” about Gulf’s shareholders. On 7 September the company announced it expected to receive a $15million payment “within seven days” and on 15 October it announced it had received a second $15million payment. If the company follows this with a third consecutive monthly payment of $15million, surely even Winnifrith might accept that the worm is turning?

Of course, Gulf still has a long way to go before it could be classed as being in good financial health. The company carries a pretty heavy debt burden and its bonds are selling at a steep discount. This could spell trouble for equity holders, if there are any more bumps along the way.

For example, Gulf’s 6.25% 2017 bonds currently sell for 38¢ on the dollar. As far as bond holders are concerned this means they cannot lose so long as Gulf’s assets are worth more than $200million. There is no senior debt, but if Gulf defaults it is a completely different story for shareholders.

So much depends on the KRG honouring its pledges.

In October’s payment update, Gulf announced it had a cash balance of $76.2million, but was “in the process of making interest payments of US$26.4 million”. Assuming the company receives its next tranches of $15million this month and next, the risk of a 2017 default diminishes. If Gulf’s 6.25% 2017 bonds start to rise in price this would be bullish for equity holders. At present the market suggests it is still pricing Gulf to fail, but this company has been resilient through tough times.

At 27p, Gulf is worth £266.5million. The share price is bumping along the bottom of its 2015 range. The company remains hostage to the outlook for oil, regional tensions and the willingness of the Kurds to pay their bills. However, if Gulf is to survive and flourish, this year’s consolidation could provide the foundation for a sustained move forward. The headwinds are strong, but if Gulf can fight through these it could unlock phenomenal value at its world class Shaikan field.

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