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Giving Gulf Keystone the benefit of the doubt

By Ben Turney | Thursday 28 August 2014

Disclosure: I own shares in one or more of the stocks 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.

So much hype and hysteria surrounds Gulf Keystone (GKP) that determining a valuation can be an unnecessarily emotional affair. I’ve been increasingly bullish on the stock, since the publication of the Competent Persons Report. However, today’s numbers have given me pause for thought. At 77.5p (last seen), Gulf is valued at £688million. For a company which produced 2.2million barrels of oil in the first half, there is no escaping from the high degree of expectation priced into this stock.

Over the last few months, my basic premise on becoming a Gulf bull has been that the release of the CPR gave shareholders some tangible numbers to base their estimates on (at long last!). The wild speculation of the past could be laid to rest and the debate about the company could enter a more measured phase. Of course, the advance of the Islamic State did little to cool things down, but now that the USAAF is happily setting about what it does best, the release of today’s half yearly report from Gulf sheds a welcome light on the state of this business.

The headline that most people seem interested in is the 40,000bopd production target. It now seems unlikely that Gulf will meet this by the end of the year. CEO John Gerstenlauer, all but confirmed this in a confident video response to today’s results (seen here). 

In Mr Gerstenlauer’s words, the British Government needs to remove its travel warning to Iraq and the airlines need to resume flights there within three weeks, if the company is to stand a chance of meeting its goal. This is because foreign technical contractors cannot currently gain entry to the country. Gulf needs these people to finalise the development of Shaikan 10. Apparently the flow lines for Shaikan 10 are in the country and local contractors can complete the trenching work. The skilled manpower required to finish the final hook ups is missing.

Even if Gulf misses the end of year deadline for the 40,000bopd, this doesn’t necessarily mean the end of the world. A more pressing concern is resolving the difficulties in establishing a regular payment cycle for the oil Gulf sells. Again referring to Mr Gerstenlauer’s video presentation, there have apparently been fifteen liftings of Gulf’s oil from the Turkish coast, of which the company has only received payment for three. I imagine part of the delay has been caused by problems with final delivery of Kurdish oil, but this is clearly an issue Gulf needs to address as soon as possible.

Behind the attention grabbing headlines, one line in the presentation accompanying the half yearly report has caught my attention. On slide 8, the third listed priority is to “establish a steady flow of revenues before making decision on further investment”. I am surprised more people don’t seem to have picked up on this. In one of my early articles on Gulf, I referred to the Field Development Plan, as outlined in the CPR. According to this Gulf needed $529.9million to drill the twenty six development wells of Phase 1. April’s $250million bond issue accounted for nearly half of this amount, but the expectation was that Gulf would return to market in the first half of next year to try and raise the remaining $279.9million.

I wonder now the extent to which the company’s thinking has changed. The IS insurrection has hardly helped boost sentiment towards the region, problems with regular payment from the KRG emphasise some of the basic business risks and there is also the increasingly fractured relationship with the Iraqi central government to consider.

Despite all this Mr Gerstenlauer deserves the benefit of the doubt. He has only been in his new role for a matter of weeks and the depth of information provided today is a welcome sign for the future. I continue to hold my position, subject to closer inspection of the figures.

Perhaps Gulf’s executives are considering a significant change to the original plan, in response to the geo political operating conditions. This morning, Gulf’s PR representative confirmed I will interview Mr Gerstenlauer early next week. I plan to ask about the company’s expectations and plans for 2015, beyond the attention grabbing headlines. There is no doubt of the incredible potential Gulf has to offer, but the company’s stock market valuation will be determined how quickly and reliably the business can advance its projects. 

I will report back on this as quickly as I can. 

Tom and I have just published a new e-book, “The 49 Golden Rules of Making Money from oil, gas and mining shares” and it is now available on Amazon for £6.25 or you can order a FREE copy HERE

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