Why I think the GKP share price looks cheap

The GKP share price looks cheap after recent declines and the stock has the potential to produce big gains for investors from current levels.

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The GKP (LSE: GKP) share price has fallen heavily this year. Since the beginning of 2020, shares in the oil company have fallen by more than 50%.

The share price has followed the price of oil lower in 2020. However, oil now seems to be staging a comeback. As such, now might be a good time to buy into GKP before the recovery really gets underway.

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GKP share price on offer

The coronavirus crisis has hammered oil demand around the world. The size of the impact on the market cannot be understated. Indeed, the price of oil briefly traded at a negative level a few weeks ago as producers struggled to find buyers.

Luckily, over the past few weeks, the market has stabilised. The price of oil has recovered substantially and is now back above $30 a barrel. As economic shutdowns around the world are eased, oil demand should continue to improve. This may mean the price of oil continues to rise.

The GKP share price may also continue to track the price of oil higher as the company’s fortunes improve. As oil companies go, GKP went into the current downturn in a relatively stable position.

At the end of April, the firm had $164m of cash on its balance sheet to help it weather the storm. What’s more, the company’s operating costs are some of the lowest in the world.

For the year ended 31 December 2019, it cost the firm $3.90 to produce one barrel of oil. The average price received for each barrel GKP produced in 2019 was $42.90. The company reported an overall net profit margin of 21% for the year.

These numbers suggest GKP has the financial flexibility to maintain production through the current uncertainty. Management has also acted quickly to reduce capital spending and costs, which should only improve the company’s long-term potential.

A rising price of oil may lead to improving investor sentiment towards the GKP share price, which could result in attractive capital gains over the medium term.

Diversification is key

Still, while it looks as if GKP can pull through the current crisis in one piece, the company might experience further near-term volatility. Therefore, it may be sensible to own the firm as part of a well-diversified portfolio of stocks. This approach would allow you to profit from any potential upside while minimising downside risk.

Indeed, while GKP has some of the lowest production costs of any oil business in the world and a strong balance sheet, it’s not immune to macroeconomic trends. If a second wave of coronavirus cripples the global economy again, the company may have to take further drastic action.

So, while the GKP share price may have the potential to deliver substantial capital gains from current levels, it may be best to own the stock alongside a portfolio of other companies in different sectors and industries.

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Rupert Hargreaves has no position in any of the shares mentioned. 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.

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