A quick look at the Gulf Keystone Petroleum (LSE: GKP) share price shows something remarkably similar to the oil price chart.
When the value of an oil explorer is based solely on the value of the hydrocarbon assets it’s sitting on, but which are not yet being pumped to the surface, I think that’s perhaps reasonable as there really aren’t any better ways to try to quantify its value.
But when we’re looking at a productive and profitable company, I don’t see anything rational in valuing it depending on today’s oil price. We all know that the oil price varies, and surely we also know that any specific day’s spot price bears little relationship to the long-term stream of profits to be expected from a successful producer.
Regular cash
Now that Gulf Keystone has overcome its early problems getting regular payments from the Kurdistan Regional Government, and the cash for its Shaikan oil is coming in regular as clockwork, we have a much better way of valuing the company. We can use its earnings, actual and forecast.
We saw a modestly positive EPS in 2017, and predictions suggest EPS of around 22p per share for the year just ended. That would put the shares on a P/E of a little under 10, which seems modest to me.
Rapid growth
The firm’s latest operational update revealed average gross production in 2018 of 31,563 barrels of oil per day (bopd), which is at the upper end of the company’s 27,000-32,000 bopd guidance.
With guidance a little higher for 2019, at 32,000-38,000 bopd, analysts are expecting largely flat earnings.
Gulf is working on the bottlenecks in its production process, expecting the work to be completed towards the end of 2019, and that’s expected to boost capacity as high as 55,000 bopd.
If that goes according to schedule, the City’s analysts are seeing a doubling in earnings per share by 2020, and that would drop the P/E multiple as low as 4.5.
Gambles?
If we look at a company like Aminex, its share price has collapsed over the past couple of years, and it’s been volatile at a relatively low level over the past six months. Valuation-wise, it’s still pretty much at the guessing game stage for Aminex, with the company’s farm-out deal looking positive, though there’s only a tiny first profit on the cards for 2020.
And looking riskier, UK Oil & Gas (LSE: UKOG), which was so recently such a great hope with its so-called Gatwick Gusher, has seen a share price collapse. It’s proving very difficult turning apparent hydrocarbon resources into actual flowing oil. There’s no profit on the horizon yet, and it’s anybody’s guess how long the cash-burn phase will last, and who will fund it.
I go for profit now
Meanwhile, back at GKP, we’re getting a regular payment update every month. The company has enjoyed cash receipts of $225m net during 2018, and was sat on $294m in cash at 15 January, saying it’s “fully funded to complete the expansion to 55,000 bopd.”
If you’re looking for a smaller oil producer for 2019, I reckon GKP is one to go for — and it’s on my personal shortlist.
