Is Gulf Keystone Petroleum Limited Still A Buy After The 2013 Bull Run?

2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.

Although AIM natural resource stocks haven’t all shared the gains enjoyed by the wider market, many of them have made solid progress this year. As Christmas approaches, I’ve been asking whether popular stocks like Gulf Keystone Petroleum (LSE: GKP) are still a buy.

Back to basics

Almost a year ago, I wrote an article looking at the 2013 outlook for Gulf Keystone. I’m pleased to say that although progress is slightly slower than I expected, the company is continuing to follow my script.

Courtroom victory

As I expected, Gulf Keystone defeated Excalibur Ventures’ legal challenge to the ownership of the Shaikan oil field in Kurdistan. The judge found in favour of Gulf Keystone on every point and awarded almost £14m of costs to Gulf Keystone.

Gulf Keystone is now planning to move from AIM to the Main Market as soon as possible in 2014, which should help its share price and credibility.

Kurds vs. Iraqis

Official Iraqi oil export figures recently included Kurdish exports for the first time, which I view as a sign that progress is being made behind the scenes in resolving the long-running dispute between the Kurdish Regional Government and the Iraqi central government.

A new pipeline directly linking Kurdistan to Turkey is currently under testing — although Gulf Keystone doesn’t expect to be ready to pump its oil into the pipeline until 2015, which is later than I’d hoped for.

Where next for Gulf Keystone?

Gulf Keystone’s share price peaked at around 225p following its court victory, but its fallen back to around 170p since then, as investors have begun to wonder how the firm will fund its target of 150,000 bopd production by 2015.

Here’s how things look at the moment:

Gulf Keystone Petroleum Value
Market cap £1.6bn
(Jan 2013: £1.6bn)
Shaikan oil in place 14 billion barrels
(GKP owns 51%)
Value per barrel
(assuming 25% recovery rate)
Net debt / cash balance $150m / $141m

Gulf Keystone’s most recent figures show a cash balance of just $141m, which won’t be enough. The firm recently issued $50m of convertible bonds, but there is still likely to be a funding gap between cash flow from oil sales and the capital expenditure needed to scale up production.

Despite this, I maintain my buy rating for Gulf Keystone, as I believe the Shaikan field is too good to be ignored — and I’m confident that the firm will eventually attract a deep-pocketed suitor.

The next Gulf Keystone?

Anyone who saw the potential of Gulf Keystone's Kurdish acreage back in 2009 is now sitting on a 931% profit. However, Gulf Keystone is unlikely to repeat this of performance -- it's already too big.

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Roland owns shares in Gulf Keystone Petroleum.