There’s nothing more tempting than a once flying-high share price that crashes to the ground.
Straight away, we think of picking up a potential bargain and hope that business problems prove to be transient so that the shares can take off again carrying our investment with them.
Such is the apparent attraction of shares in Gulf Keystone Petroleum (LSE: GKP). The oil company traded at 220p in September but now the shares fetch 57p — should I fill my boots?
What’s the problem?
Naturally, the business faces a few issues.
A major problem is that it operates in the troubled Kurdistan region of Iraq. With Islamic State insurgents banging on the back door, it’s safe to say that there are plenty of other oil firms with more comfortable operating set-ups to invest in.
The geographical circumstance of operations is off-putting for sure, but Gulf Keystone Petroleum’s biggest challenge is that it faces a potential cash-crunch, which threatens the firm’s solvency — that’s even more off-putting.
Going concern?
After a long period of exploration and discovery, the company has recently started producing oil. That’s good, but there seems to be a problem being paid for the oil.
During the first half of 2014, Gulf Keystone Petroleum reckons it received revenues from domestic sales (to the Kurdistan region) and increased oil production for export. However, while the firm received regular payments for its domestic production, it didn’t get its full entitlement for exports. The Kurdistan Regional Government (KRG) has a contractual obligation to pay for the oil Gulf Keystone trucks for export, some 70% of the firm’s production, but the process for receiving consistent settlement is not yet established — oh dear! That’s not helpful at all.
It’s no surprise that the directors see the matter as their main priority and they are pushing the KRG for talks on the issue. Reading the recent half-year results statement, it’s clear to see the urgency. The firm says over and over again that receipt of cash revenues from export sales is critical to the on-going business. Get that? Critical.
The directors say the firm depends on existing cash resources, which came in at $177 million on 26 August, together with production takings. The receipt of revenues from export sales is, in their own words, critical for the Group’s ability to continue as a going concern — don’t you just hate it when directors use the ‘GC’ words!
What now?
There is clear risk that another cash call could hit investors, which would squash the share price further still if it happens. But if you are still unsure about the potential dangers of investing in Gulf Keystone Petroleum right now, let’s consider this extract from the firm’s own statement on risk.
The directors reckon the firm faces these principal risks and uncertainties:
- political and regional risk;
- liquidity and credit risk;
- capital availability;
- meeting shareholder expectations;
- organisational capability;
- risks associated with infrastructure and export market;
- business conduct and bribery act;
- field delivery risk including a successful delivery of the Shaikan Field Development Plan;
- health, safety environment and security; and
- prohibition on flaring and undeveloped options for monetising natural gas discoveries.
It’s a big list with some heavy duty items on it, and it’s the main reason I’m staying away from the shares for now.
