I think it’s very wrong to concentrate only on a share price (as folks making investment decisions purely from chart patterns do). But for those who have been following Gulf Keystone Petroleum (LSE: GKP), there’s been quite a dramatic story.
The recovering oil price has helped most oil companies, and almost certainly saved a few from going bust. With a barrel breaking the $80 barrier last week for the first time since 2014, share prices are up across the sector.
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But few have done anywhere near as well as Gulf Keystone’s gain of 165% since the start of the year. If you’d invested right at the end of 2017 (when oil was still only just above $60), you’d have doubled your money, and then some, in just nine months. Who says investing for the short term doesn’t work?
Over the past couple of years, we’ve seen the Kurdistan Regional Government making good on its promise to keep up regular payments for oil shipments. Earlier failures, coupled with mounting arrears, added to Gulf’s debt problem and almost brought it to its knees, before a major rescue package bailed it out.
And first-half results made Gulf sound like the successful small oil company it now is.
But before you rush out and buy into any old oil explorer in the expectation of getting rich quick, here’s a sobering thought. Investors who bought Gulf Keystone at its peak price in February 2012 have lost a full 99% of their money — even after 2018’s impressive rise.
The rescue deal saw existing investors pretty much wiped out, with pre-existing equity prior to the crunch becoming close to worthless. But that’s what happens if you invest in a company that essentially becomes insolvent — its assets become the property of whoever stumps up the cash to drag it back from the brink.
Other oilies, notably Premier Oil and Tullow Oil, came close to serious financial trouble and needed some degrees of financial restructuring to stay afloat. But they were never as close to the edge as Gulf Keystone.
Perhaps the most striking thing about the Gulf Keystone share price today is that it’s getting a bit boring — and I see that as a very good sign.
The company finally turned a profit in 2017, with forecasts for the current year putting the shares on a P/E of 13 — which would drop to 8 if 2019 forecasts prove accurate.
And the debt problem is history, with $240m in cash on the books at 7 September. That makes the firm’s refinanced $100m debt (consisting of five-year notes) look like a mere formality.
There’s still risk associated with Gulf’s geographic location in the Kurdistan Region of Iraq, but the deal with the government seems to be holding up — and the government needs it to work, too.
On the whole, Gulf Keystone Petroleum is looking to me like a decent investment, on an attractive valuation.