Gulf Keystone Petroleum Limited Becomes Bid Target After Court Win

Gulf Keystone Petroleum (LSE: GKP) shares were suspended until noon yesterday, but more than made up for lost time by gaining nearly 20% when trading started. They’ve since fallen back a bit, and are now around 16% above Monday’s close.

The cause of the temporary suspension was the long-awaited judgement in Gulf Keystone’s court battle against its former partner, Excalibur Ventures, which claimed it was entitled to a share of Gulf Keystone’s prize asset, the 14bn barrel Shaikan oil field.

Judge Christopher Clarke ruled against Excalibur yesterday, confirming Gulf Keystone’s undisputed ownership of its prize asset, and allowing the firm’s shareholders to look forward with confidence.

Turning the corner

Earlier this year, Gulf Keystone faced criticisms relating to its corporate governance, legal troubles and lack of progress in bringing Shaikan into production. All of those criticisms have now been addressed, and today’s court victory means that the firm’s move from AIM to the Main Market later this year should be assured.

The remaining obstacle facing Gulf Keystone, and other major Kurdistan producers, is the region’s lack of export infrastructure. This should be addressed later this year, when a pipeline allowing direct exports from Kurdistan to Turkey is due to come into service.

In parallel to this, Gulf Keystone is building out its production infrastructure, and expects to be producing 40,000 barrels of oil per day by the end of the year, and 150,000 bopd by 2015, triggering strong cash flow growth.

Shaikan likely to get bigger

Gulf Keystone’s Shaikan field is already a giant, boasting a mean estimate of 13.7bn barrels of oil in place. However, it’s quite likely to get even bigger, as Gulf Keystone continues to drill development wells to test the limits of the field.

The firm is currently drilling the Shaikan-7 well, which is expected to complete in spring 2014. If successful, Shaikan-7 could lead to a significant upgrade to Shaikan’s resources.

Takeover target?

According to Gulf Keystone, Shaikan is the largest onshore oil development in the hands of an independent operator anywhere in the world. It’s an obvious takeover target, especially as Kurdish oil is relatively cheap and easy to extract, compared to offshore oil fields.

Most investors believe that a takeover is the natural end goal for Gulf Keystone, and with both Exxon Mobil and Chevron already present in Kurdistan, plus likely strong interest from Asian national oil companies, a bid might not be far away.

The next Gulf Keystone?

A takeover bid could be very profitable for Gulf Keystone investors, but if you are looking for oil and gas shares that can provide spectacular, multi-bagging gains, then you will need to focus on smaller, more risky companies.

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> Roland owns shares in Gulf Keystone Petroleum.