What’s Stopped Me From Buying Gulf Keystone Petroleum plc Today

Royston Wild considers the investment case for Gulf Keystone Petroleum plc (LON: GKP).

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Today, I am looking at Gulf Keystone Petroleum (LSE: GKP), and deciding whether to load my investment portfolio with a barrel or two of the company’s stock.

Boardroom battles hang heavily

Gulf Keystone Petroleum’s executive structure has come under the microscope recently from major shareholder M&G Recovery Fund, who criticised directors’ remuneration as well as the state of corporate governance at the firm.

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The fund sought to address the problem by appointing four independent directors and, after stiff opposition the firm, Gulf Keystone Petroleum was forced to concede and assuage to M&G’s demands.

Fresh incumbents include Jeremy Asher, who was described as “disruptive” by chairman Simon Murray during his period shift on the board, a comment made just a week before the changes. Question marks thus abound over how effectively the re-jigged board will be able to operate.

Oil explorer still courting trouble

Gulf Keystone Petroleum remains locked in a bitter court battle with Excalibur Ventures — a story that stretches back to 2011 — which claims that it holds the rights to up to a third of the former’s oil assets in Kurdistan.

Although the case adjourned in March and a decision expected during the summer, both sides are still awaiting a ruling due to the complexity of the case. Needless to say the outcome of the matter could have huge ramifications on future revenues.

Risks outweigh rewards at current prices

Despite these worries, analysts expect Gulf Keystone Petroleum’s revenues to more than double in 2013, to £46.8m, helping to narrow pre-tax losses to £32.3m. Further out, the prospect of exploding production is anticipated to drive revenues to £189.6m in 2014, snapping the firm into profit to the tune of £63.5m.

In turn, losses per share of 3.1p this year are anticipated to swing to earnings per share of 6.9p in 2014. Still, next year’s figure creates a P/E rating of 26.5, above the current forward average of 22.7 for the rest of the UK’s listed oil and gas producers.

In my opinion, this sours an already fragile investment case for the firm. Undoubtedly, Gulf Keystone Petroleum has excellent production potential through its gigantic oil assets in Kurdistan. But until a resolution to the Excalibur Ventures saga — an issue that would have catastrophic implications for future income — is obtained, I believe that the hazards currently outweigh any potential rewards.

Drill for riches with the Fool

Regardless of all the boardroom strife and overhanging legal battle, Gulf Keystone petroleum — like all natural resources plays — still comes attached with a heightened risk profile. Drilling for oil and minerals mining is often a ‘hit and miss’ business where the timing, and indeed quantities, of potential payloads are extremely unpredictable.

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> Royston does not own shares in Gulf Keystone Petroleum.

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