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Is Gulf Keystone Petroleum Limited Planning A Rights Issue?

oilThe financial position of Gulf Keystone Petroleum (LSE: GKP) has come under scrutiny once again this week. Specifically, analysts are now speculating that the company could be forced to ask investors for additional cash, via rights issue or placing, within the next few months to finance expansion plans.

However, it seems as if these cash call rumours have no basis and Gulf Keystone appears to be well financed for the time being.

Strong balance sheet

At the end of August Gulf Keystone released its half-year report for the six months ended 30 June 2014. Alongside these results, management noted that as of 26 August the company had cash and cash equivalents of $177m.  By my calculations, this hefty cash balance gives Gulf Keystone enough financial fire power to fund its day to day operations, as well as development spending for some time to come. 

What’s more, a month after issuing its half-year report Gulf Keystone issued a production update at the beginning of October. Management reported that during the month of September the company sold 220,000 barrels of oil into the Kurdish domestic market. These sales generated $5.9m in cash for the company, or $9.4m in gross revenues.

These figures indicate that Gulf Keystone is selling its oil into the domestic market for around $42.72 per barrel, more than 50% below the Brent benchmark. But still, valuable cash is flowing into the company’s coffers. If production continues at this rate, Gulf Keystone is set to generate approximately $70.8m in cash from domestic oil sales over the next 12 months. 

Unfortunately, there’s less clarity on the cash Gulf Keystone is set to receive from the sale of its oil into the international market. Indeed, the company reports that over four million gross barrels of Shaikan crude oil have been sold to the international market since export sales began during January. However, payments from oil sales have been slow to materialise and Gulf Keystone is yet to receive payment of around £21m for oil exports. 

Set for growth  

As Gulf Keystone generates cash from existing operations, the company is spending to increase production, targeting production of 40,000 gross barrels of oil per day in the short-term. And rising production should only improve the company’s financial position.

That being said, while new oil wells and production facilities are under construction, capital spending will take a hefty chunk out of Gulf Keystone’s cash balance. Still, the company is currently generating cash and cash generation should only increase in line with production, which will cover some costs. 

With that in mind, it would seems as if the next few months are key for Gulf Keystone. If the company can sort out a payment schedule with the Kurdish government for oil exports and deliver on its expansion plans, cash call fears will disappear and the company’s shares could soar. 

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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.