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ShareProphets Exclusive; Gulf Keystone technical team returns to Kurdistan this week!

By Ben Turney | Tuesday 2 September 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.

I just finished speaking with Gulf Keystone (GKP) CEO John Gerstenlauer and he has confirmed that the skilled technicians required to complete the final hook up of Shaikan 10 are flying to Kurdistan from Canada this week. In Mr Gerstenlauer’s words “we are still on track for 40,000bopd by the end of the year”. Hitting this target, by the self-imposed deadline, will be a significant milestone for Gulf. The company has been criticised in the past for slippages. In meeting the 40,000bopd goal this could go a long way to proving to the market that this business is finally on the cusp of fulfilling its vast potential. Mr Gerstenlauer is clearly confident of this being achievable subject to the security situation remaining stable.

As a reflection of the apparent improvement in the security situation in Kurdistan, Mr Gerstenlauer also told me that Gulf will begin “repatriating its expats to the country this week”. Evacuated as a precaution against further Islamic State (IS) advances, the re-entry of foreign workers to Kurdistan is welcome news for Gulf. The company’s operations are still in their infancy and there is understandable pressure to ramp up production.

The sudden invasion of northern Iraq by IS forces has been a horrible development in the region. The reported atrocities, widespread fighting and general instability don’t instil much confidence in this as an area to invest in. However, the colossal rewards on offer will more than likely trump any concerns. So long as the US Air Force keeps the loonies at bay and Gulf can continue to weather the storm, without it hampering operations too severely, the imminent operational future for the company looks increasingly bright.

A more pressing issue for the business concerns the establishment of a regular payment cycle. In his video accompaniment to the recently released H1 report, Mr Gerstenlauer highlighted this as the main task to deal with in the short term. Speaking with me, Mr Gerstenlauer has given a little more detail about why this matters and the current state of play. 

He begins, “in dealing with the Ministry of Natural Resources (MNR) we have made clear that to advance to the next tranche of production (66,000bopd) and to build Production Facility 3 (PF3), we need regular and dependable payment.” To build PF3, complete the required associated drilling (four wells) and install the supporting infrastructure (including the completion of the acid gas injection project) is going to require an additional c.$250million. This figure is based on the company’s updated cap-ex projection (slide 11 of the recent presentation). Gulf will have to return to capital markets to raise the money. According to Mr Gerstenlauer there is a healthy institutional appetite to fund the next stage of Shaikan development, but this is largely conditional on the reliability of Gulf’s income stream. 

When Gulf completed its $250million bond issue in April, the terms were expensive, reflecting the risks. There isn’t much that Gulf can do about the regional security situation, but it must take every step it can to prove the operational and commercial risks are minimised. So far, the physical development of Shaikan has gone to plan. It falls now on the Kurdish authorities to ensure that Gulf is paid promptly for the oil it produces.

According to Mr Gerstenlauer, Gulf isn’t involved in the marketing of its oil. It deals directly with an agent of the Kurdish Regional Government (KRG). As soon as Gulf loads the trucks it immediately transfers custody of its oil. Commercially this should insulate Gulf, at least to an extent, from the wider risks of international dealing in Kurdish oil. It should also, in theory, make the payment process much simpler.

Of the fifteen liftings of Shaikan crude from Turkish ports, the three payments it has received have come directly from the agent. Discussions are ongoing regarding all outstanding payments.

As important as resolving the payment cycle issue is to Gulf, it also matters a great deal to the Kurds. The development of Shaikan remains a strategic imperative for the KRG. Kurdish interests should be directly aligned with Gulf’s. Both are equally reliant on favourable international money markets. Both also need to demonstrate themselves as dependable commercial partners.

Despite the obvious pressure, Mr Gerstenlauer maintains a calm demeanour. He recognises the importance of speedy resolution to the payment cycle issue, but also speaks warmly of relations with the Kurdish authorities. Assuming Gulf and its Kurdish partners can form a robust method of payments, this will free the company to commit to the next investment phase at Shaikan. First Gulf will need to raise the c.$250million. Then, once work begins on PF3, Mr Gerstenlauer confirmed it should take roughly 24 months to complete. In the intervening period, “if things remain stable”, Mr Gerstenlauer hopes to be able to commit to PF4 to get to 100,000bopd, though he does acknowledge this decision is some way off.

At 77.75p (last seen), Gulf is valued at £691million. This price reflects the high level of expectation built into this stock. Even so, if Mr Gerstenlauer is able to deliver both 40,000bopd production and a defined regular payment schedule by the end of the year, these events could prove to be the catalyst for a strong rally over 2015. I remain long.


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