Gulf Keystone Petroleum Limited: A ‘Story’ Stock Gone Sour

gulf keystoneGulf Keystone Petroleum (LSE: GKP) has the usual characteristics displayed by the hottest of oil stocks — a great ‘story’, the potential for lottery-like winnings, and a large herd of excited private investors posting on financial bulletin boards.

The Gulf Keystone story

Gulf Keystone was founded in 2001, and joined London’s AIM market in 2004 with the help of a £60m placing at 48p a share. However, the company only really emerged as a story stock in 2009. An early entrant into the Kurdistan Region of Iraq, Gulf Keystone’s first exploration well in its Shaikan block was drilled and announced as a major discovery.

By late 2011, Exxon Mobil was entering the region, and a rumour emerged that the US supermajor was talking to Gulf Keystone about a possible £7bn, or 800p a share, offer for the company. Gulf Keystone scotched the rumour, but the shares went on climbing to a high of 465p in February 2012.

Thereafter, the shares began to fall. A move from AIM to the Main Market in March this year didn’t arrested the decline, and the shares are now trading below the 48p placing price of 2004.

Delays and downgrades

Gulf Keystone, like most companies of its type, is forever raising cash to fund continuing exploration and the move to production. For example, there was a $200m share placing in 2011, an issue of $275m convertible bonds in 2012, a further $50m worth in 2013, and a $250m high yield bonds issue in 2014 “that will fully fund the Company and its development plan into 2015”.

Gulf Keystone’s funding position hasn’t been helped by persistent delays to management’s targeted output from early production facilities and the cash flows they would have generated.

In September 2012, the company said it was aiming for 30,000-40,000 barrels of oil per day by mid-2013. This has been pushed back and back, and currently stands at the end of 2014, “although certain consequences of the recent security situation, including the current short term limited availability of some international contractors, may cause this to move to Q1 2015”.

Gulf Keystone also disappointed shareholders in March this year when a third party audit of reserves showed total reserves of 9.4bn barrels of oil equivalent at Shaikan — much lower than earlier estimates of 13.7bn barrels.

Todd leaves the BoD

Rumblings of discontent among some of Gulf Keystone’s big investors about the company’s founder and chief executive Todd Kozel came to a head in the run up to this summer’s AGM.

Kozel, whose remuneration between 2009 and 2013 totalled a whopping $59m — making him better paid than the chief exec of Royal Dutch Shell! — jumped before he was pushed.

A story stock gone sour?

Despite the delays in production, the downgrading of reserves and the proximity of Islamic State forces, there’s no doubt that Gulf Keystone is sitting on a very valuable asset.

While many investors who bought into the story in the past five years will be sitting on massive losses, Gulf Keystone looks a tempting proposition at a current price of 44p for speculative investors prepared to accept the risks of further fundraisings if production doesn’t ramp up as planned or the worst-case scenario of the region being overrun by the Islamic State.

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G A Chester 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.