Is Gulf Keystone Petroleum Limited The Perfect Partner For BP plc In Your Portfolio?

2014 has undoubtedly been a highly challenging year for oil companies across the globe. Indeed, it’s little wonder when the price of crude has fallen by around 25% during the course of the year, leaving the top and bottom lines of oil stocks across the globe in an uncertain position.

Furthermore, with the political situation in the Middle East remaining highly uncertain, operators in the region such as Gulf Keystone (LSE: GKP) have endured a period of even weaker sentiment as a result.

However, with a positive operational update, things could finally be starting to get better for Gulf Keystone. Is it, therefore worth buying at the present time? And, could it prove to be the perfect partner for an oil major such as BP in your portfolio?

Geographic Risk

Clearly, the focus of Gulf Keystone on the Kurdistan region of the Middle East presents both opportunity and risk. Indeed, for much of 2014 the market has focused on the risk of investing in the company and, as a result, its shares have been down by as much as 75%. However, recent positive news flow in the form of the intention of the Kurdistan Regional Government (KRG) to commence payments to producers in the region, as well as an encouraging production update, have improved sentiment in Gulf Keystone so that it is now up 46% in the last month alone.

Future Prospects

Indeed, Gulf Keystone appears to have bright prospects, with the company being on-track to meet its target of production capacity of 40,000 boepd by the end of the calendar year. Furthermore, the company has enjoyed almost a year of uninterrupted exports and appears to be well-positioned to make further progress as we move in to 2015, although external factors are clearly still a major risk to the company’s future operations.

In this respect, there is crossover with BP (LSE: BP) (NYSE: BP.US), in terms of it potentially being affected by further Russian sanctions. Indeed, BP has a 19% stake in Russian operator, Rosneft, and although its business is highly diversified and it does not rely on its stake for profits, any decline in the situation in Russia would be bad news for BP’s overall performance, as well as it having the likelihood of hurting sentiment in the stock.

Looking Ahead

In BP’s case, continued uncertainty regarding Russian sanctions, the lower oil price and also the compensation claims arising from the Deepwater Horizon oil spill mean that its current valuation is relatively low. For example, BP trades on a price to earnings (P/E) ratio of just 10, which indicates that a substantial margin of safety is currently built in to its share price. This should provide investors with confidence in the investment potential of the company and, with a yield of 5.7%, they can afford to be patient for any upward rerating to take place.

In Gulf Keystone’s case, its immediate future depends upon the receipt of regular payments from the KRG, as well as the political instability in the region not affecting production moving forward. While these two areas are clearly known unknowns, the strength of the company’s share price in recent weeks indicates that investors are perhaps not fully pricing in such risks. Therefore, while Gulf Keystone has substantial long term potential, its share price may not deliver the same rate of growth in the near term as it has over the last month.

As a result, while BP appears to be a clear buy at the moment, investors may wish to be cautious when it comes to buying a slice of Gulf Keystone, as sentiment could be hit hard by any short-term disappointments. But if you're looking for shares to invest in now, then these 5 companies could prove to be a better place to start.

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Peter Stephens owns shares of BP. 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.