Full year results from Gulf Keystone Petroleum (LSE: GKP) are due on 26 March, and on Tuesday, the oil producer gave us a 2019 operational update.
Gulf Keystone, which operates in the Kurdistan Region of Iraq, came close to going bust in its early days. The company shipped oil via the Kurdistan regional government, but the government wasn’t paying and the cash almost ran out. But since a regular payment schedule was set up, cash has been coming in pretty much monthly, just a few months in arrears.
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The latest payment, announced on 8 January, was for $21.7m gross ($17m net to Gulf) for oil sales in August. The result of the payment programme is something unusual — a smaller oil firm with surplus cash. There was, in fact, net cash of $192m on the books at 20 January.
Awash with cash
Gulf is returning some of that cash to shareholders via a share buyback, which it also confirmed on Tuesday. It will immediately commence the final $10m of the planned $25m purchase announced on 10 December. Total share buybacks amount to $35m to date.
In addition, Gulf paid out a total of $50m in dividend cash in 2019. Investors in struggling oilies, particularly those shouldering big debt burdens, must look enviously on the firm.
That the company is buying back shares rather than paying special dividends suggests it thinks its shares are undervalued. I agree. But first, how did the year go?
Gulf met its 2019 production guidance with an average of 32,883 barrels of oil per day (bopd), and is currently pumping approximately 40,000 bopd. The firm has also commenced oil exports via pipeline from its Shaikan project, which should improve its output capabilities in 2020.
Why I’ll buy
Healthy production levels and strong cash generation are enough in themselves to make me interested in buying Gulf Keystone shares. Financial fundamentals help too, with analysts rating the shares at a P/E of 12.8. That’s not amazingly cheap, but then I look at how it will drop if current forecasts turn out accurate.
It’s all down to development plans for the Shaikan field, and Gulf has been working on expanding annual production significantly. The firm aims to raise its production by between 30% and 45% in 2020, targeting 43,000 to 48,000 bopd.
There’s some de-bottlenecking and work on facility expansion needed, but it says that’s on schedule.
Looking to the longer term, it is aiming at production of 55,000 bopd, which it says it should achieve by the third quarter of 2020.
As a result of the expected rise in earnings per share, City experts are putting Gulf shares on a forward P/E of 6.5 in 2020, dropping as low as 3.9 for 2021. Meanwhile, dividend yield predictions suggest 5.2% for 2020 and 6.5% a year later.
The only real risk I see is for Northern Iraq to turn catastrophic again, and that’s not a trivial risk.
But against that, we’re looking at an oil company paying dividends on a par with Shell, but without the debt problems of Premier Oil or Tullow Oil, and on a cheap growth valuation. And with proven reserves and strongly rising production, unlike UK Oil & Gas.
Am I going to buy? Unless something goes drastically wrong in the next month or so, I certainly am.