The Motley Fool

Why Now Could Be The Time To Buy Gulf Keystone Petroleum Limited

oilA barrage of bad news has hit Gulf Keystone Petroleum (LSE: GKP) this year, although some of it has been completely out of management’s control. 

Firstly, during March a third-party audit of the company’s oil reserves deemed them one-third smaller than previous guidance. Then the company warned that delays in receiving payments for exports could hold back revenues this year. After that, a boardroom battle followed, Islamic State insurgency within Iraq blew up and finally, oil prices have slumped. 

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However, despite all the bad news, and bad press, Gulf Keystone’s underlying business continues to perform well. As a result, the sliding share price could offer investors the perfect chance to buy in at an attractive price. 

Meeting forecasts

Gulf Keystone seems to be making solid progress at its flagship Shaikan field in Kurdistan. The latest half-year production figures revealed that the company had produced 2.3m barrels of oil, a production rate of around 12,000 bbl/d. 

What’s more, despite regional instability and board room battles, the company increased production to approximately 20,000 bbl/d during June.  For me, rising production despite all of the headwinds Gulf Keystone has had to grapple with, indicates that the underlying company is stronger than it has ever been before. 

Gulf Keystone is also being cautious with its guidance. Specifically, the company has stated that its target is to double production by the end of this year to 40,000 bbl/d. However, management has issued a statement saying that regional insurgency could push this milestone into the first half of 2015. 

Finding customers

Despite Gulf Keystone’s success, the company is yet to overcome some major issues involved with operating inside Kurdistan. 

For example, Kurdistan is still having trouble finding buyers for its crude, with the US and central Iraqi government blocking sales to outsiders. For this reason, Gulf Keystone is having to sell its oil at a significant discount to the Brent benchmark. 

During the six months ended 30 June 2014 Gulf Keystone reported that the realised oil price at its Shaikan facility was $51 to $56/bbl. While the company’s sale of oil into the domestic market only achieved a price of $42/bbl. 

Additionally, Gulf Keystone is yet to receive payment for oil exports worth around £21m. 

Explosive earnings 

Gulf Keystone’s surging production should underline rapid earnings growth, even though the company is having trouble finding customers. 

The City is currently predicting that the company will report a pre-tax profit of £35m this year, earnings per share of roughly 0.33p. But with production expected to double next year, analysts have 2015 earnings per share of 6p pencilled in, putting the company on a forward P/E of 11. 

The bottom line 

So all in all, at present levels Gulf Keystone could be a great investment. The recent declines in the company’s share price have made the shares look cheap and production growth should send earnings sky rocketing over the next two years. Now could be the time to buy. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.