By Tom Winnifrith, The Sheriff of AIM | Thursday 14 July 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.
Its apology time. To all those morons who have berated me for being a Gulf Keystone (GKP) bear from 180p down it is time to apologise. Today, Paul Curtis and the GKP barmy army have suffered the final kick in the gonads with news of a massive debt for equity swap which sees near total equity wipeout. Its ouzo O'clock for the Sheriff of AIM who awaits the apologies.
Lets start with the bad news for the morons before going onto the even worse news. First up $500 million of the company's $600 million of debt will be converted into equity. Then in order to stop production from tanking, to maintain output at 40,000 bopd, there is a $25 million open offer priced at just 0.86p. Ouch. Oh ouch again.
If that, underwritten, open offer is taken up in full existing shareholders will own 14.5% of the enlarged equity. If not they will own just under 5%. In other words the bond holders are getting 85% of the equity for $500 million. But $25 million buys you 10% of the company so the bondholders are taking a haircut too especially unsecured bond holders who see $325 million of loans converted into shares worth just $50 million at 0.86p. For them it was that or nothing.
Post the deal Gulf will have $100 million of debt but it will still be owed c$100 million by the KRG but some of that is disputed. Yes, there will be cash on the balance sheet but much of that will be needed for the capex required to stop production tanking.
In short shareholders are going to be screwed as so often predicted here. The secured bond holders will be left with $100 million owing to them - the repayment of which one would assume will come before any dividends are paid and having converted another $150 million of debt into 60% of the enlarged post open offer placing. Given that the open offer values Gulf at $250 million, if those folks sell their shares at 1p they will get out having got their capital and accumulated interest back. that is quite a result and one would assume that they will sell the shares. Bond owning funds do not like owning penny shares. So there is a massive stock overhang at c1p and that is one reason why the shares (2.75p last time I looked) will tank further.
The other reason is fundamentals. Assume that most of the cash goes on capex so the balance sheet post restructuring is fairly neutral on terms of debt/ sums sure to come from the KRG and cash, what will the entity be worth. Assume $15 million in monthly sales with costs of $8 million.
Add on another $1 million for interest and PLC costs and you are looking at c$6 million profit or $70 million a year. At 0.86p the market cap is $250 million or three and a half times profits/cashflows. Maybe there is some upside in that but not an awful lot and thus with both fundamental overvaluation and a massive stock overhang these shares will be heading down to c1p.
Now for all those folks who insulted my parentage, analysis and track record and thought they knew better that a chap whose career started working in the then No 1 ranked oil equities research team in the City, a song from Chicago. Paul & the morons, my analysis was spot on at all times: go form an orderly queue please...
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