Gulf Keystone Petroleum‘s (LSE: GKP) shares are rising today, after a report emerged over the weekend that the company’s peer and regional partner, MOL Group, the Hungarian Oil and Gas Public Limited Company, or to give the
company its full name, Magyar Olaj- és Gázipari Nyilvánosan működő Részvénytársaság, was considering buying all of the oil produced from the Shaikan field for the group’s European downstream operations.
Specifically, within the past few days MOL’s management has stated that the group’s goal is to put in place an arrangement with all Shaikan parties, including Gulf Keystone and the Kurdistan Regional Government, which would see the group buy up oil from the region to export, refine across Europe and sell. This is great news for Gulf Keystone.
The export of oil from Kurdistan has been a hot topic for some time now. While Gulf Keystone has been able to export some of its crude, the company is still awaiting payment from the Kurdistan Regional Government. According to figures supplied by the company, Gulf Keystone is yet to receive payment of around £21m for oil exports.
What’s more, the oil that Gulf Keystone has not been able to export has been sold into the domestic Kurdish market. Unfortunately, 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. While many companies do sell their oil at a discount to Brent, a 50% discount is rather excessive.
Nevertheless, if MOL and Gulf Keystone sign an offtake agreement, it’s highly likely that Gulf Keystone will be able to achieve a high price per barrel of oil sold. Further, Gulf Keystone will receive regular payments from MOL, improving the company’s cash flow figures and making earnings easier to predict.
A strong partner
Gulf Keystone and MOL are already partners. Kalegran Ltd, a 100% subsidiary of MOL, owns a 20% share of the giant Shaikan oil field. For the two partners to work together on an export plan like this is a great development.
The agreement should bypass the tricky international laws and regulations that have so far slowed the export of crude from Kurdistan. Several tankers filled with Kurdish crude have failed to find buyers so far this year, bouncing from port to port with no authorisation to unload.
A deal with MOL should unlock markets for Gulf Keystone’s Kurdish crude and could be a precursor for additional deals further down the road. Indeed, as Gulf Keystone is currently trading at a five-year low, it could be easier for MOL to buy Gulf Keystone outright, locking in several decades’ worth of low-cost crude for the Hungarian oil major.
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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.