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Gulf Keystone is a very different company these days - buy

By Gary Newman | Tuesday 12 September 2017

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.

Gulf Keystone Petroleum (GKP) was one of the most hyped up oil companies that I have ever seen during my time in the markets, and although that all ended in tears, I think it could be worth another look now as it has changed a lot since those days.

At one time the share price was trading at around the 450p level and with plenty of talk of takeover bids in the tens of billions from some of the largest oil companies in the world – in the days prior to the recent 100:1 consolidation – before a spectacular crash back to around the 1p level, when it became clear that it was drowning in debt, operations weren’t going as well as had been expected, and payments from the Kurdistan government for its oil sales weren’t coming in as expected.

Having gotten into serious financial troubles, partly due to its levels of debt, the company was saved by a restructuring of its balance sheet, when over $500 million of its debt was converted into equity, although that did leave it with nearly 23 billion shares in issue prior to the consolidation.

The people running the company y have also completely changed since the days when some of them were taking eye-wateringly large salaries, and the company was being run with massive admin costs and similar.

The half yearly results for the company are due out in just over a week, and I would expect them to show that the company has continued to improve and strengthen its position, especially given a big reduction in finance costs - which stood at over $60 million for 2016 – as a result of the restructuring.

The 2016 full year results were also impacted by the impairment charges relating to the relinquishment of the Ber Bahr and Sheikh Adi blocks, although that was pretty much cancelled out by the positive impact of the debt reduction.

Taking all of that into account, and in light of the regular payments which the company is now receiving for production from its Shaikan licence, I would expect the interims to be positive and show that the company is now making a net profit. It will also have a strong cash position – which stood at just over $140 million in mid-August.

The most recent operational update also showed that production is continuing to fall within guidance, at nearly 36.7kbopd, and given the improvement in oil prices that should certainly help the company.

Moving forwards the company is looking to increase Shaikan production to 40,000bopd, and eventually up to 55,000bopd, with a total of $83-133 million set aside for that - $58-68 million is expected to be needed to reach the 40kbopd target.

I would also expect that we will soon see a definitive receivables agreement being reached with the Kurdistan Regional Government relating to past unpaid payments relating to oil sales, as well as how future payments will take place, in much the same way as we recently saw with Genel Energy (GENL), and which certainly helped its share price to rise steeply.

There are certainly still risks here, especially given the part of the world in which it operates, alongside the fact that the KRG isn’t exactly awash with spare cash, but I believe that both of those risks will improve in the future.

It is also worth considering that at a market cap of circa £285 million, Gulf Keystone certainly doesn’t look expensive compared to its peers when you take into consideration the level of production, as well as what that could increase to. Plus debt of around $100 million for a company with this level of production is towards the lower end of what you would expect, certainly when compared to some other similar sized producers that are yet to refinance debt.

The share price has already risen a fair bit from the mid-90p area where it was trading just a few weeks back, but at around 124p to buy now I still wouldn’t consider that the shares asre expensive, given the upside potential both from production and the announcement of a deal with the KRG, which could come at any time.

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