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Gulf Keystone 0p by early May - I slash target price from 1p

By Tom Winnifrith, The Sheriff of AIM | Friday 15 April 2016

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.

I am beginning to think that my 1p target price for Gulf Keystone (GKP) is in fact far too generous. Having called this as a sell at 180p and all the way down to abuse from every moron in the land I think it is time to revise the target price. The shares are off another 9% today to just 4.675p. Okay I shall stop being a nice guy, I am cutting my target price from 1p to 0p.

I had thought shareholders might be left with a little something post a debt for equity swap. But I am struck by this piece on Zero Hedge:

Elsewhere, Gulf Keystone Petroleum Ltd. also took its first step to a Chapter 11 filing when it announced it would delay about $26 million of bond payments due next week as low oil prices and disruptions in Iraq press its finances.As Bloomberg reports, the company intends to use grace periods for payments on convertible bonds and guaranteed notes due on April 18, it said in a statement on Thursday. Shares of the London-based oil explorer tumbled as much as 36 percent to record-low 4.5 pence.

Gulf Keystone, which operates in the Kurdish region of northern Iraq, also intends to hold talks about fundraising and debt obligations after oil prices plunged about 60 percent in two years. Financial difficulties have been compounded by previously erratic export payments from the Kurdistan Regional Government.

“We are working to achieve the best possible way to restructure our balance sheet,” Gulf Keystone’s Chief Executive Officer Jon Ferrier said in the statement. “Addressing our funding needs will ensure the company’s longer-term future.”

Payments on $325 million of October 2017 convertible notes can be delayed until May 2, without risk of default. Those on $250 million of guaranteed notes due April 2017 can be postponed until May 3. The convertible notes are quoted at 13 cents on the dollar, while the guaranteed notes are at 49 cents, according to data compiled by Bloomberg.

Bondholders including GLG Partners, Sothic Capital Management and Taconic Capital Advisors have hired Houlihan Lokey Inc. to advise them on the potential debt restructuring, people familiar with the matter said in February. It is unlikely that these coupon payments will be paid meaning that the ad hoc creditor committee will likewise end up owning the company, which when delivered, will continue pumping even more oil now that its overall cost of capital slides as it has no more debt payments to worry about.


May 2 is a bank holiday so I suggest that the last day when Gulf shares could be traded is potentially as soon as 29 April. Two thinks should strike you.

1. If bonds are now quoted at 13 cents in the dollar that tells you the equity is totally worthless.

2. Zero Hedge's analysis that the interest payments will be skipped so allowing the bondholders to take complete control of the company looks very plausible. The KRG can keep dealing with the body corporate it is just that the equity is wiped out.

On that basis I am prepared to admit that my previous 1p target price was way too generous. I am sometimes too much of a nice guy for my own good and for that I apologise. The new target price is 0p. The stance remains sell.

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More on GKP



  1. Evil Banksta

    I’m sceptical of zero but think that somewhere around about 0.5p is a perfectly sensible target since that puts a value on the “co-operation of shareholders” (aka the market cap of GKP) at £5m. I would expect the bondholders to get swapped into equity but with the two bonds treated differently. The convertibles are unsecured (you note trading at 13% of par) and should be completely swapped to equity (perhaps reprice their warrants as well?). The guaranteed notes (guaranteed by Gulf Keystone Petroleum International Ltd) have a better credit status and greater frustration value because they’re closer to the operating assets. They may accept a haircut in return for some equity but should be expected to otherwise argue to retain a percentage of debt.

    Both sets of bondholders will want a market into which they can sell their shares (if they’ve already gone short to hedge themselves then they’ll want a clean exit). There is value in shareholders agreeing to a D4E swap instead of forcing a liquidation, in terms of reduced legal expenses, continuity of a market listing, etc, etc. Cast your mind back to Marconi in the early noughties, for example, the company had a £600m market-cap post-restructure and the original shareholders took 0.5% of the equity – so £3m. More recently in the Uniq restructure, shareholders manged to wangle to retain £8m of value, whilst the pension fund took the rest.

    All in all, assuming that the business doesn’t go completely south with unexpected liabilities being discovered (like Afren) then shareholders should expect around about £5m attributed as value to their cooperation and hence a share price of 0.5p. At that level the argument from the bondholders is simple: agree to the debt for equity swap and we’ll let you have £5m of value, don’t agree and that’s probably more than enough to pay the legal costs of a liquidation, and re-listing.

  2. I think that is an excellent piece of analysis from Evil Banksta.

    However I don’t think he has fully considered the willingness of shareholders in these types of companies to commit hari-kari. Consider Afren and Petroceltic, where time and again shareholders have posted on the asylums about not letting bondholders get their shares. If they are going down, they are going to take everybody else with them. With Petroceltic they had a chance to salvage a small part of their investment by taking the 3p on offer from Worldview. But no, most of them are still there, clinging onto the mast as the good ship Petroceltic sinks below the waves.

    Quite how most of these absolute cretins still have money I have no idea. Not that I should really complain. A large percentage of my gains on Afren came from shorting around 2p, when it was 100% certain that sub 1p was the very best result possible. Similarly a sizeable proportion of my Petroceltic winnings will be from selling between 7 and 8p when it was 3p or bust. I can see the same thing happening here with GKP. Shareholders will be as obstructive as possible until they are completely wiped out.

    I think Tom will be proven correct. 0p and not even a consolatory bag of crisps for the GKP morons.

  3. Evil Banksta

    FWIW I’ve had a closer look at the numbers and given the additional capex that GKP require I’d amend my previous comment. I now expect both bonds to be swapped to equity in their entirety but with a much better return for the guaranteed bonds versus the convertible bonds. Some equity will need to be raised in addition and the bondholders will probably get first “dibs” in that.

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