Pioneering Kurdistan oil explorer Gulf Keystone Petroleum (LSE: GKP) is one of the biggest oil success stories of recent years. The company’s Shaikan field is thought to contain around 14 billion barrels of oil, and anyone who picked up the company’s shares cheaply when markets crashed five years ago is now sitting on an almost 600% profit.
I think that Gulf Keystone’s credibility as a takeover target could increase sharply over the next six months, as three key risks facing the business are likely to be resolved.
The majority of oil pumped in Kurdistan so far has been sold into the local market, where demand is limited, and prices are low. Some exports are now taking place by truck, but this isn’t viable for high production volumes.
To solve this problem, a direct pipeline to Turkey is now being built, and is expected to be operational by the end of the year. This will be a key milestone for Gulf Keystone, as its 2015 production target of 150,000 barrels of oil per day is meaningless without a reliable export route.
Gulf Keystone has been in dispute with a former partner called Excalibur Ventures, whose founder Rex Wempen claims that he is entitled to a share in Shaikan. The resulting High Court case concluded in March, and a written judgement is expected in the next few weeks.
Gulf Keystone must confirm that it is the undisputed owner of Shaikan before it can become a credible takeover target.
Gulf Keystone CEO Todd Kozel recently got involved in a highly-public spat with M&G, which has a 5.1% shareholding in the firm. However, the new board that eventually emerged from this dispute should improve Gulf Keystone’s corporate governance credentials.
A particular benefit is that Gulf Keystone’s board is now led by former Glencore International chairman, Simon Murray, who has considerable experience of high-level deal making.
A recipe for a takeover?
Gulf Keystone plans to move from AIM to a Main Market listing in the near future, and a resolution to the court case could open the door to a FTSE 250 listing, which would attract new institutional shareholders.
Shaikan is big enough to fit into the portfolio of a major oil company, and I believe that should a takeover deal emerge, it could value Gulf Keystone at 50-100% more than its current share price.
Finding the next Gulf Keystone
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> Roland owns shares in Gulf Keystone Petroleum Limited but does not own shares in any of the other companies mentioned in this article.