Gulf Keystone Petroleum (LSE: GKP) has been one of the great oil disaster stories for investors of recent years. Its protracted fall from grace culminated in a virtual wipeout for long-term shareholders last year in a hugely dilutive debt-for-equity swap.
The company still seems to be viewed as poison by many in the market but does this present a great opportunity for new investors to make a killing and old shareholders to recoup their losses? In other words, is it finally time to start buying Gulf Keystone stock?
From the brink of insolvency
The traumatic events of last year were precipitated by an overload of debt on Gulf Keystone’s balance sheet, a falling oil price and a deterioration in regional geo-politics.
The oil price and political situation left Gulf Keystone in a position in which it would be unable to service, refinance and/or repay its debt. With the company teetering on the brink of insolvency, management undertook a painful restructuring of the balance sheet. This involved a significant debt reduction from over $600m to $100m through the conversion of over $500m of debt into equity and a $25m equity raise through an open offer at 1.09 cents (0.82p) a share.
Management said the strengthened balance sheet and liquidity would allow Gulf Keystone to implement its near-term investment plan to maintain production at 40,000 barrels of oil per day (bopd) with the potential to increase production to 55,000 bopd.
Chief executive Jón Ferrier commented: “With the support of the MNR [Kurdistan Regional Government Ministry of Natural Resources], which has established a pattern of payments, and with a stabilising oil price environment and sustainable debt levels, we have the foundations of a strong future equity story for a restructured GKP to develop the Shaikan field and unlock its potential as one of the most significant assets in Kurdistan.”
Has there ever been a better time to buy?
Despite the transformation of the balance sheet (Gulf Keystone reported a cash position of $104m at 31 January), an improving oil price and some brightening of the geo-political outlook, the company’s shares are trading today at below the level when the very existence of the company was under threat.
A 1-for-100 share consolidation followed the restructuring, which means that today’s share price of 118p is equivalent to 1.18p in ‘old money’. The shares were trading at 2.02p immediately prior to the announcement of the restructuring.
Of course, Kurdistan remains a volatile region, although this is something that has always been known to investors. Also, discussions with the MNR regarding a regular and timely payment cycle and other commercial and contractual conditions have yet to conclude. However, management appears optimistic of gaining satisfactory clarity and “looks forward to making further investments to achieve plateau production at nameplate capacity of 40,000 bopd”.
Gulf Keystone has always been a relatively high-risk investment. Indeed, I have rated it as wholly un-investible over the last couple of years. However, looking at the business and potential today, I believe there’s never been a better time to buy the shares — albeit for investors with a higher tolerance for risk.
