Shares in Gulf Keystone Petroleum (LSE: GKP) (NASDAQOTH: GFKSY.US) surged higher on Wednesday, after the firm said that it was in preliminary talks about a sales of the company or certain assets.
In this article, I’ll look at Gulf’s financial situation in more detail and ask how much the firm’s shares might be worth, in a bid situation.
Cash situation
Gulf’s current cash balance is $69m, which means that the firm has burned through around $18m per month since the end of August, when the balance was $177m.
On Thursday, Gulf confirmed that it had received a $20.8m pre-payment from a buyer for future Shaikan oil sales, taking the firm’s total cash balance to about $90m.
However, despite this new money, Gulf still needs extra cash to meet its debt repayment schedule: on Wednesday, the firm said that “with the intention of meeting its existing debt payment obligations, the Company is undertaking a review of its financing options”.
Debt situation
Gulf’s net debt currently stands at about $520m. The high interest rates on this debt mean that $743m of interest and principal payments are due over the next five years, with $52m due by 30 June 2015.
We don’t know how much of the $52m has already been paid, but I suspect that a substantial portion remains still outstanding, meaning that the clock is ticking for Gulf, which could run out of cash by this summer.
What’s a fair price for GKP?
Anyone choosing to buy Gulf Keystone would have to take responsibility for both its equity and its debt. This figure is known as a firm’s enterprise value (EV), and Gulf’s EV is around £1.25bn.
Oil producers are commonly valued based on the ratio of EV/proven+possible (2P) reserves. In Gulf’s case, this equates to a valuation of about $7.90 per barrel.
That’s substantially higher than Gulf’s Kurdistan rival Genel Energy, which currently trades on an EV/2P valuation of around $4.60 per barrel.
If Gulf shares were valued on the same basis, Gulf’s share price would be just 25p!
Gulf bulls will say that Shaikan’s 2P reserves grossly underestimate the amount of recoverable oil in the field, and this may be true.
However, Gulf’s cash-strapped situation means that any potential buyer will have the upper hand in negotiations. In my view, a share price of around 50p is generous, and is unlikely to be topped by any realistic bid.
I could be wrong. Gulf shares could hit 100p, but I seriously doubt it. I reckon a reversal back to recent lows of 35p is more likely.
