Gulf Keystone Petroleum's future production could reach North Sea levels.
Shareholders who were brave enough to buy shares in Gulf Keystone Petroleum (LSE: GKP) at the depth of the slump in 2009 and have kept their nerve since are now sitting on a 4,000% profit.
Shares in the Kurdistan oil explorer have risen from an all-time low of 5p to today's price of around 200p -- and it seems almost certain that there is more to come. (By the way, although finding a 40-bagger is one way to make a million from shares, there are easier ways! If you're interested in building a million-pound portfolio to retire on, I'd recommend reading this free report.)
Billion barrel baby
GKP has made some of the biggest new oil discoveries in recent years; king among the company's assets is its Shaikan field. Gross oil-in-place estimates for Shaikan range from eight billion barrels at P90 (90% probable) to 13.4 billion barrels at P10 (10% probable).
Even making allowance for the fact that the amount of oil that can be recovered from the ground will be much lower -- perhaps half -- this is still a massive, world-class discovery.
GKP is in the final stages of its field appraisal programme for Shaikan, following which it will produce a field development plan for the move to full-scale production. Trial production is currently running at nearly 18,000 bopd (barrels of oil per day), and this is just scratching the surface of the 400,000 bopd that GKP expects when the field is fully developed. This would place it on a level with peak output from big North Sea oil fields like Forties and Brent.
Cash in hand?
GKP published its final results today, providing an insight into the company's cash situation. In 2011, it generated $6.9m in test production revenue, spent $167m on capex and recorded post-tax losses of $62m. However, high expenditure and an overall loss are to be expected, given that test production output is still ramping up and the company has been footing the bill for a fairly busy exploration programme.
Luckily, GKP is in good shape at the bank. Following a share issue last year, it currently has $183m in cash and liquid investments and it's also planning to sell a stake in one of its other discoveries. Combined with the income from test production output, this should be enough to keep it ticking over until the field development plant for Shaikan has been completed.
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Export risk
Kurdistan is a semi-autonomous region of northern Iraq and its local government is currently locked in a dispute with the Iraqi central government over export licensing and payments for foreign oil companies.
This is the main reason that GKP's shares are not already more expensive -- despite plans for a pipeline to export to Turkey, all production currently has to be sold to the domestic oil market, which is not big enough to allow GKP to fulfil its production potential.
The way forward
Although GKP has adequate funding for its current operations, it doesn't have the resources necessary to fund a full-scale development of the Shaikan field, which it estimates will cost $7bn to $10bn. The reality is that this is likely to be funded by a major oil company that will buy GKP outright, buy its Shaikan license or buy a substantial stake in Shaikan from GKP.
Everyone has their price, but GKP seems keen on remaining independent and is mulling a move from the AIM market to a premium listing on the LSE. Its £1.7bn market cap would place it firmly in the FTSE 250 and further growth might allow it to move into the FTSE 100, alongside fellow independent-made-good Tullow Oil (LSE: TLW) and oil majors BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB).
Investors in GKP are keenly awaiting the completion of the Shaikan field appraisal and the consequent discovery of how the move to full production will be funded. Whatever the outcome, a big boost to GKP's share price is likely, but this may not happen until the political dispute over oil exports from Kurdistan is resolved.
Further investment opportunities:
> Roland owns shares in Royal Dutch Shell but does not own any of the other shares mentioned in this article.
