Gulf Keystone Petroleum (LSE: GKP) was one of my favourite oil stocks at one time, but just look at what’s happened to the share price.
We’ve seen at a 55% fall in the past five years, mostly in the past two. And GKP shares are down 99% since their all-time high in 2012.
Valuation crash
Forecasts for 2024 put the shares on a price-to-earnings (P/E) ratio of just 1.7. And the big dividends that shareholders used to enjoy have stopped, at least for now.
So what went wrong? Well, plenty. Gulf Keystone operates the Shaikan oil field, in the Kurdistan Region of Iraq. All was going well, paying the regional government its share and exporting mainly via a pipeline through Turkey.
But then the Iraqi government asserted its authority over oil exports. And no longer could the Kurdistan Regional Government (KRG) export oil itself.
The pipeline closed.
Will it reopen?
The existence of the company is at stake here. And with the export taps closed, the board is trying to keep the lights on for as long as possible.
There have still been some local sales, but only low volumes at low local prices. Still, in its 31 January update, Gulf told us that “we are actively working to increase volumes and remain focused on at least covering our estimated monthly capex and other costs of c.$6 million in 2024“.
Talks with the Iraqi government to reopen oil exports are dragging on. But at least they’re happening.
And the GKP board was sufficiently optimistic: “With the resumption of exports and normalisation of KRG payments, GKP will consider incremental field investment to realise Shaikan’s substantial reserves base and return to previous production levels“.
No-brainer buy?
As of 30 January, Gulf had $82m in cash on the books, with no debt. So it sounds like it can cover its reduced operational costs, but maybe not for long.
The company is also owed an outstanding $151m from the KRG for the six months before the pipeline was switched off. Whether it will get that unless there’s an agreement to resume exports must be in doubt. But it’s an extra bit of liquidity if things do get moving again.
Would I’d buy? Well, the oil exploration business has always been risky. And operating in politically unstable parts of the world is one of the big risks.
I’d say this one though is probably about as close to a 50/50 gamble as I’ve seen.
Multibagger or bust
If the export taps open again, and especially if Gulf gets back to those hoped-for “previous production levels“, I see a decent possibility of a nice multibagger.
But if it doesn’t happen, the only real alternative I see is a wipeout. If I bought now, I’d only do so with money I could afford to lose… with a fair chance of losing it.
For those with the courage to stump up a few quid now, I think the key question is, “do I feel lucky”?
