Cash-Strapped Gulf Keystone Petroleum Limited Suspends Exports

Gulf Keystone Petroleum Limited (LON:GKP) has resorted to selling cut-price oil to local buyers in order to raise some cash.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in Gulf Keystone Petroleum (LSE: GKP) fell by nearly 10% this morning after the Kurdistan oil producer announced that it was suspending export sales and diverting its oil production to the local market.

The reason given for the decision is that the firm is still not receiving regular payments for exported oil from the Kurdish authorities.

A costly trade-off

By selling oil into the local market, Gulf will receive prompt payment. The only downside is the price the firm receives will be around 20% lower than the export price, based on the figures provided in Gulf’s interim accounts last year.

Indeed, my calculations suggest that Gulf may now be receiving as little as $20 per barrel for local oil sales.

Although this should be enough to generate positive operating cash flow, based on Gulf’s reported cash operating cost of $9 per barrel, it won’t solve the firm’s financial problems.

Cash squeeze

Now isn’t a good time to throw in the towel and accept lower prices for domestic sales — but Gulf clearly has no choice.

As I warned recently, the firm appears to be facing a desperate cash crunch. Gulf has spent the money needed to ramp up production to 40,000 bopd, but the firm isn’t being paid for its hard work.

At the end of June 2014, Gulf was owed $165m for export sales. Since then, the firm has received a one-off $15m payment, but in the meantime production has risen — so the total owed is almost certainly now much greater than $165m.

Spent up

Gulf raised $240m in April 2014 from a new bond issue. By the end of August, the firm’s cash balance was down to $177m, and I suspect that the current total is now below $50m, possibly much lower.

To make matters worse, Gulf Keystone has to repay $52.8m of its $520m debt by the end of June.

John Gerstenlauer, Gulf’s chief executive, said today that “a number of longer term financing options are currently being progressed by the Board”.

The reality is that new lending is going to be hard to find and very costly. Gulf Keystone may have to try and raise money from shareholders, or attract new investors.

The firm’s decision to suspend export sales is correct and logical — but I’m not sure it will be enough to stabilise Gulf’s finances: until we know more, I’d steer clear of this stock.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »