Shares of Gulf Keystone Petroleum (LSE: GKP) climbed as much as 50% higher this week after the Kurdistan Regional Government (KRG) announced a new payment regime on Monday.
The cash-strapped Kurds (who are fighting ISIS and dealing with an influx of 1.8 million refugees) had been paying a flat net $12m a month to Gulf Keystone since last September.
Under the new regime (from 1 January) monthly payments will be based on netback oilfield revenues tied to the price of Brent crude, plus an additional 5% towards paying off the arrears owed to the company ($298.4m at the last count). The KRG will aim to process each month’s payment within 10 working days of the following month.
However, as the price of oil currently stands, Gulf Keystone will actually receive less per month than previously — $10m, with oil at $35 a barrel, according to analysts at Pareto. How will this impact on Gulf Keystone’s ability to make twice-yearly interest payments (April and October) on its $250m high yield bonds (13% coupon) and $325m convertible bonds (6.25% coupon)?
Power shift
The table below shows how Gulf Keystone’s cash position has progressed over recent months, and (in italics) projections through to the upcoming April bond interest payments. The projections are based on KRG monthly payments of $10m and the company’s average daily cash burn of $202,238. Under its bond covenants, Gulf Keystone must hold a cash reserve of $32.5m, so the unrestricted cash number is the important one.
| Date | Cash event ($m) |
Other cash movement since previous date ($m) |
Cash remaining ($m) |
Unrestricted cash remaining ($m) |
|---|---|---|---|---|
| 25 Aug 2015 | — | — | 63.9 | 31.4 |
| 15 Sep 2015 | +12.0 (KRG) | -2.9 ($138k a day) | 73.0 | 40.5 |
| 15 Oct 2015 | +12.0 (KRG) | -8.8 ($293k a day) | 76.2 | 43.7 |
| 23 Oct 2015 | -26.4 (bond interest) | -1.4 ($175k a day) | 48.4 | 15.9 |
| 2 Dec 2015 | +12.0 (KRG) | -5.8 ($145k a day) | 54.6 | 22.1 |
| 6 Jan 2016 | +12.0 (KRG) | -8.2 ($234k a day) | 58.4 | 25.9 |
| 12 Feb 2016 | +10.0 (KRG) | -7.5 ($202k a day) | 60.9 | 28.4 |
| 14 Mar 2016 | +10.0 (KRG) | -6.3 ($202k a day) | 64.6 | 32.1 |
| 14 Apr 2016 | +10.0 (KRG) | -6.3 ($202k a day) | 68.3 | 35.8 |
| 18 Apr 2016 | -26.4 (bond interest) | -0.9 ($202k a day) | 41.0 | 8.5 |
As you can see from these projections, Gulf Keystone should be able to make its April interest payments, albeit with just $8.5m to spare. Run the projections on to October, though, and Gulf Keystone’s unrestricted cash would fall short of the interest payment by $3.4m. Worse still, six months after that, the high yield bonds mature and Gulf Keystone has to find $250m.
If nothing changes, and my projections are on the mark, power will shift to the bondholders, and we’ll see a debt restructuring likely to involve a massive debt-for-equity swap that will dilute current shareholders to smithereens.
What needs to happen, if shareholders are to avoid being thoroughly mullered?
Squeezed hard
There’s no realistic prospect of the Kurds finding the cash to pay-off the full arrears they owe Gulf Keystone and the other international oil companies operating in the region, so I think we can rule out Gulf Keystone being able to repay the $250m high yield bond.
A big recovery in the oil price, and the KRG meeting and increasing its payments, could persuade lenders that it may be worth renewing the borrowings. However, judging by the size of the discount on which the current bonds are trading, lenders would demand a higher coupon than the old 13%. The other thing an oil-price recovery could do is attract a cash-rich partner or bidder. Again, though, Gulf Keystone would likely be squeezed hard on any such deal in its straitened circumstances.
In summary, then, Gulf Keystone continues to walk a tightrope, with its future almost entirely dependent on things outside of its own control. The longer the oil price remains depressed, the closer Gulf Keystone’s shareholders come to the abyss of a debt for equity swap. In these circumstances, where the company is in a weak financial position and the directors can exert little influence on the outcome, I would always be inclined to sell, and put my money to work elsewhere.
