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Gulf Keystone – Leaked Two-Phase Restructuring with Investor Wipe-out

By Graham Neary | Sunday 3 July 2016

Disclosure: The author has a short position in one or more of the shares mentioned. 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.

Concrete details of the restructuring at Gulf Keystone (GKP) have apparently been leaked to the Times this weekend, confirming that the end is nigh for this once-loved and highly-debated stock.

As was suggested by the expiration of the Standstill Agreement, which I discussed here yesterday, talks are confirmed to be approaching the endpoint as the various parties “haggle over the final details” (it was either this or that talk had broken down). The deal "will wipe out its investors but allow the stricken producer to survive."

Gulf shareholders are at the back of a queue which includes both classes of bondholder and also the new equity investors required to provide the CAPEX financing for the rest of the year. It’s reported that along with a debt-for-equity swap, $40 million of new funds will be put in by “a core of institutional investors”.

As the various parties haggle over who will own what after the restructuring, the only incentive for them to offer existing equity a token stake in the new structure will be to maintain the continuity of the LSE listing - this cooperation not being worth anything close to the current £47 million market cap.

The continued hope among shareholders, as recorded on the bulletin boards, is quite remarkable. There, the Times article has been met with incredulity and with dark talk of shareholder lawsuits if it does turn out to be true.

Gulf has not kept us up to date with its latest cash balance but at mid-March, the balance was $50.6 million. Of this, $32.5 million was restricted within the Debt Service Reserve Account. It's true that monthly payments have been received from the Kurds since then. But when shareholders say that Gulf could pay its coupons if it chooses to do so, they are forgetting that if it uses the money inside the Debt Service Reserve Account, it is in breach of the updated bond covenants and again effectively in default.

Even if it had been possible to gain forgiveness from note-holders in relation to the DSRA, another round of coupons three months from now, and essential CAPEX, would have again created an impossible situation.

The good news is that the company will continue to exist, oil will keep flowing, and employees will keep their jobs and that my short position will be highly profitable.

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