The Motley Fool

Why the Gulf Keystone Petroleum (GKP) share price fell 4% in September

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Silhouette of an oil rig
Image source: Getty Images.

I haven’t often seen a turnaround story as impressive as Gulf Keystone Petroleum (LSE: GKP).

The company — which owns the Shaikan oil field in Kurdistan — was on the brink of failure in 2016. It had a massive pile of unpaid invoices and needed to refinance more than $600m of debt.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story. In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

Since then, chief executive Jon Ferrier has refinanced the business and turned it into a profitable, dividend-paying oil producer.

It’s been an impressive turnaround story, but GKP shares fell by 4% in September, and have since fallen by another 10%. Should shareholders be worried? Or is this a buying opportunity?

I’ve been looking at the group’s latest accounts to find out more.

Short-term disruption

September’s half-year results were pretty mixed. Gross oil production fell by 8% to 29,362 barrels of oil per day (bopd), as wells were taken offline for maintenance and upgrades. The oil price was also lower than during the same period last year, cutting the average realised price per barrel from $47.90 to $44.80.

Revenue fell by 18% to $95.6m and after-tax profit was 9% lower, at $24.2m.

That wasn’t all. Delays to certain equipment upgrades and drilling operations mean that although production is expected to be higher during the second half of the year, full-year production guidance was cut.

Mr Ferrier now expects production to average between 30,000 and 33,000 bopd this year. The firm’s previous guidance was for 32,000-38,000 bopd.

I’m looking ahead

I think that the firm’s disappointing interim results have played some part in its falling share price. Rising tensions in the region and a weaker oil price may also be to blame.

However, as a shareholder, I’m still very comfortable with the situation. Profits are stable and cash generation remains strong. The group’s net cash balance rose by $7.2m to $198.3m during the period, despite spending of $32.4m on capital projects.

Profit margins are also high — Gulf Keystone has generated an operating margin of 33.8% over the last 12 months. By contrast, the equivalent figure for BP was just 5%.

Management says that the firm is still on track to increase production to 55,000 bopd in the second quarter of next year. In my view, that’s the next big milestone shareholders should focus on.

Buy, sell or hold?

One thing that’s special about Shaikan is that it’s very cheap to run. This large field has operating costs of less than $4 per barrel of oil. This should mean that Gulf Keystone can generate free cash flow at almost any oil price.

Investing in this firm obviously carries some geopolitical risks. It’s basically a single-asset company in a region that has a long history of instability.

However, if you’re comfortable with this risk, I think Gulf Keystone remains an attractive buy. The shares look cheap to me, trading close to their net asset value and on just 6.5 times 2020 forecast earnings.

If Mr Ferrier can deliver the production growth he’s promised, I think shareholders are likely to see decent returns from current levels. I remain a buyer, although the geopolitical risks mean that this isn’t a stock I’d depend on too heavily.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story.

In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

Roland Head owns shares of Gulf Keystone Petroleum. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.