2020 was a rough year for the Gulf Keystone Petroleum (LSE:GKP) share price. As the world economy came to a standstill, the company saw its stock crash by around 75%. But over the last 12 months, it has been back on the rise, increasing by nearly 150%.
What’s causing this growth? And can it return to its pre-pandemic levels?
The rising GKP share price
As the name suggests, Gulf Keystone is an oil company, and it operates within the Kurdistan region of Iraq. The pandemic forced many factories to close worldwide. Furthermore, due to travel restrictions, cars and planes remained mostly parked. With fuel consumption plummeting within a few weeks, the demand for oil evaporated, taking its price with it. Towards the end of 2019, oil prices stood at around $60/barrel. By March 2020, they had crashed to under $20. So, seeing the GKP share price getting slashed was not that surprising to me.
But, as the Covid-19 vaccine rollout continues to progress worldwide, factories have begun to reopen, and travel restrictions are being eased. Consequently, oil prices are back at around $60/barrel. And the GKP share price is making a rapid recovery.
What’s more, the company has reinstated its production expansion programme. By the first quarter of 2022, the firm aims to increase its production volumes to 55,000 barrels per day. By comparison, the guidance for 2021 estimates is a total of 40,000 to 44,000 barrels. Needless to say, this is good news and suggests that the worst has passed. But there are still some risks to consider.
The risks that lie ahead
The most prominent risk to Gulf Keystone, in my opinion, is oil prices themselves. 2020 demonstrated perfectly what happens to the GKP share price when the value of this commodity decreases. While I don’t believe a similar price crash is imminent, Gulf Keystone is not the only oil company ramping up its production volumes. Should the market become saturated, oil prices would likely suffer, placing additional pressure on its profit margins.
Beyond the commodity exposure, the firm does have some financial problems with the Kurdistan Regional Government (KRG). As it stands, the KRG owes the business $65m for oil produced between November 2019 and February 2020. The payments have been consistently delayed throughout last year due to the depressed oil prices. Recently the KRG issued a new payment plan proposal to the company. This proposal is still under review. But suppose Gulf Keystone rejects it? In that case, it’s unclear how long it will be until it receives the outstanding balance.
The bottom line
Overall this business looks like it’s on the road to recovery. It did suffer a $47.3m loss in 2020. But as previously explained, the loss was attributable to temporarily depressed oil prices. And with $161m of cash on the balance sheet, I’m cautiously optimistic about the GKP share price in 2021. Therefore, providing oil prices don’t begin to decline again, I believe it can make a full recovery this year.
Having said that, the company is staying on my watch list until more information becomes available surrounding the outstanding payments from the KRG.