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Will The Cash Flow For Gulf Keystone Petroleum Limited?

Those invested in Gulf Keystone Petroleum (LSE: GKP) will be used to share price volatility. We can’t really expect much else from an oil exploration and production company that has its main operations in the Kurdistan Region of Iraq.

Yet, the latest volatility is pleasant. The shares are up 38% to around 79p since I wrote about the firm last month. So, what’s going right?

Show me the cash

Last month, I said the directors were concerned about cash not coming in for the firm’s oil exports. The Kurdistan Regional Government’s (KRG) has a contractual obligation to pay for the oil Gulf Keystone trucks for export, but the process for receiving consistent settlement had not then been established, and the firm was engaging the KRG in talks on the issue, an urgent matter seen as critical for the company’s ability to continue as a going concern.

In an update on 13 November, Gulf Keystone said itis continuing to develop its producing field and has trucked oil to the Turkish coast uninterrupted since 29 November 2013. All the firm’s production currently exports, and nineteen tanker cargoes, totalling 4.7 million gross barrels of Shaikan crude oil, were sold to the international market since the Shaikan crude oil export sales began from the port of Dortyol in January 2014. That’s a lot of oil chalking up for settlement.

Mercifully, on the 7 November, the Kurdistan Regional Government’s Ministry of Natural Resources announced a plan to make an initial payment of US$75 million on account to producers for exports in November 2014, with further payments to follow on a regular basis.That promise, and the sniff of it in the wind beforehand, seems to be the power behind Gulf Keystone’s recent share-price strength.

Can Kurdistan pay on time?

The oil money Kurdistan is taking from exports seems to face several conflicting demands. The Ministry of Natural Resources of the Kurdistan Regional Government said:

“These revenues are helping the region survive the serious challenges to its continued welfare and stability: the vital fight against ISIS terrorists, the unprecedented influx of refugees and IDPs, and the economic sanctions imposed by Baghdad.”

Gulf Keystone Petroleum’s recent share-price action suggests investors are optimistic that the money will soon flow into the firm’s coffers, but I remain a little nervous about some of the wording in the 7 November news release. The KRG went on to say:

“The KRG recognises that, for the continuing growth of the Kurdistan oil industry, it is necessary that contractors receive payments in line with their contractual entitlements.”

I’d argue that it is necessary for legal and moral reasons, too, but maybe I’m reading too much into the apparent nuance of the statement. The KRG reckons it will make an initial payment of $75 million on account to producers for exports, with further payments to follow on a regular basis. With further production increases, producers will receive their full contractual entitlements, the government says.

That’s reassuring, but I’ll be happier when we see the colour of the money. The statement continues:

“the KRG is grateful for the support received from our contractors, who continue to stand behind the people of Kurdistan”.

That, in my cynical old mind, raises the issue of potential ongoing delays for payment, as using your contractors to finance your own operations, by delaying payment, is the oldest trick in the book. I’m not saying that the KRG aims to do that, I’m sure their intentions are entirely honourable, but maybe they have no choice than to delay, because of all the calls on cash during straitened circumstances.

What next?

Operating in troubled parts of the world is fraught with challenge, and I suspect that Gulf Keystone Petroleum may face an ongoing battle to secure timely payments of its rightful earnings for some considerable time. I hope my worries prove unfounded, but it’s an issue worth considering when investing in Gulf Keystone Petroleum right now.

I’ll feel more comfortable when the firm starts putting out news that it is receiving cash, rather than that it’s about to receive cash.

Gulf Keystone Petroleum seems set to see production underpinning potentially robust cash flow, if all goes to plan. Real profits and real cash generation drive most successful investments -- even those with a great 'story'.  Our team of dedicated analysts at The Motley Fool agrees, and they've signposted a promising stable of companies to buy now.

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Kevin Godbold 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.