Should you buy Gulf Keystone Petroleum Limited after its open offer is oversubscribed?

Is Gulf Keystone Petroleum Limited (LON: GKP) set to soar following today’s news?

| More on:

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.

Gulf Keystone (LSE: GKP) has today released details of its open offer. It provides guidance as to whether now is a good time to buy the stock, or whether investors should stick to a less risky peer such as BHP Billiton (LSE: BLT).

Gulf Keystone’s open offer was oversubscribed and valid acceptances were received in respect of the entirety of the open offer shares. This means that Gulf Keystone has raised around $25m as part of its balance sheet restructuring plan announced in July. This paves the way for a $500m restructuring package that would drastically improve the company’s long-term outlook. It could also allow the takeover of the company by DNO ASA to take place.

Clearly, Gulf Keystone’s financial standing has been an Achilles heel for a number of months. Part of the reason for this is the slow payments for oil exports. Although some have been received of late, Gulf Keystone is still owed millions in back payments.

Allied to this is the risk the company faces due to its geographic location. It has performed extremely well in terms of operating under intense geopolitical risks in Northern Iraq. But when combined with its lack of full payment and the risks to the oil price, it has caused its shares to fall by 93% in the last year.

Looking for stability?

Looking ahead, the difficulty the company faces in terms of geopolitical risk is unlikely to go away any time soon. As such, it may be prudent for investors to focus on a more stable and well diversified resources company such as BHP Billiton.

BHP is also enduring a difficult period and is selling off parts of its asset base. However, this should create a more streamlined and efficient business that’s better able to cope in a low commodity price environment. Alongside this, BHP has been able to reduce costs and improve productivity so as to prepare itself for a long period of depressed commodity prices.

The impact of such measures is set to be felt as soon as in the current financial year. BHP’s bottom line is forecast to rise by 122% this year and this puts it on a price-to-earnings growth (PEG) ratio of only 0.2. This indicates that it offers significant upside potential, while Gulf Keystone remains lossmaking and is forecast to remain in the red in both the current year and next year.

Certainly, BHP faces the risk that commodity prices will fall, just as Gulf Keystone does. However, its stronger financial outlook, greater geographical and commodity diversity as well as its lower cost business model mean that even though today’s news from Gulf Keystone is positive, BHP remains a superior buy for the long term, in my opinion.

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.

Peter Stephens owns shares of BHP Billiton. 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

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 »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »