On paper, Gulf Keystone Petroleum (LSE: GKP) has made solid progress in 2014 — it’s now got a main market listing, maiden reserves and commercial production — none of which were true at the start of the year.
However, in reality, the story so far this year is one of disappointment and frustration for most of the firm’s shareholders, who were expecting much more, and have seen the value of their shares fall by nearly 50% since January.
What’s really happening with Gulf Keystone?
1. $1,004m
In March, Gulf Keystone’s share price fell by nearly 30% in one day, when the firm’s first ever Competent Persons Report (CPR) assigned a net present value of just $1,004m to Gulf Keystone’s 54% share of the Shaikan field.
The CPR didn’t question Shaikan’s size — which it estimated as 12.4bn barrels of oil in place — but only confirmed reserves of 299m barrels, of which Gulf Keystone’s share is just 163m barrels.
Gulf Keystone was quick to point out that it has only drilled 25% of the 109 wells it is planning to drill as part of the Shaikan Field Development plan, and future wells should enable the firm to convert more of its resources into commercial reserves — but the damage was done.
2. 16,000 bopd
Gulf Keystone is currently producing 16,000 barrels of oil per day (bopd). The firm’s forecast is for this to rise to 20,000 bopd by the end of the June, and to 40,000 bopd by the end of 2014.
This seems feasible, and in my view Gulf Keystone’s credibility depends on it hitting these targets — the firm is fully funded at present, but must start generating cash flow to fund further growth.
3. $6.46m
In May, Gulf Keystone received its first payment — $6.46m — for oil exports.
The firm expects to receive between $150m and $180m from oil sales this year, and market expectations are for post-tax profits of $28m in 2014, and $94m in 2015 — placing the firm’s shares on a 2015 forecast P/E of 14, which doesn’t seem excessive.
Export uncertainty
I rate Gulf Keystone as a buy at its current price of 94p, but it isn’t without risk: the Iraqi government has denounced as ‘illegal’ the first shipment of Kurdish oil from Turkey, and it’s not yet clear whether a buyer has been found for this oil — Kurdistan could be forced to discount the oil heavily in order to sell it.
