Does Oil Price Crash Make Gulf Keystone Petroleum A Buy?

Pity the poor investor in Gulf Keystone Petroleum (LON: GKP) (NASDAQOTH: GFKSY.US), they’ve had a rough year. They embarked on 2014 with high hopes, with the oil explorer’s Shaikan operation in Kurdistan ready to start gushing.

And although there has been good news on that front, the share price is down 70% this year as nervous investors flee political and economic uncertainty, and the oil sector meltdown.

Gulf Keystone Petroleum is down 20% in the last week alone. Does that make it a buy?

That Petrol Emotion

Actually, I don’t really investors pity in Gulf Keystone Petroleum. They knew what they were getting into, and accepted the risks, just as they will accept potential rewards.

This year, gambling on Gulf backfired. Next year it could be different.

2014 could easily have ended on a higher note. After years of exploration, the Kurdish government approved plans for the Akri-Bijeel block at the end of October, which Gulf partly owns. The block holds reserves of around 43 million barrels.

Gulf also announced that its Shaikan operation is on track to produce 40,000 barrels of oil per day (bopd) by the end of this year, up from 23,000.

And at the start of December, it received an initial payment of $50 million from the Kurdistan regional government for shipments rooted through Turkey, with further payments to follow.

State of Independence

The flurry of good news took Gulf’s share price to 69p on 2 December. Just over a week later it is languishing at 51p, down 26%. Oil exploration is a risky exercise when the world is suddenly swimming in a glut of over-supply.

Markets welcomed the news that Gulf hopes to lift its Shaikan output to 60,000 or 70,000 bopd over the next two years, assuming Kurdish government payments keep flowing.

In one respect, the rise of Islamic State may have done the Gulf a favour, despite the added instability. The Iraqi central government in Baghdad daren’t get too heavy over Kurdish oil exports, because it needs its support against the jihadists.

Especially since the West appears to have committed itself to making Kurdistan a buffer against the malignant spread of IS.

Troubled Waters

If you think the oil price is reaching the bottom, now could be an exciting time to make a high-stakes gamble on Gulf. If you think oil is heading to $40 a barrel, then it’s fast-growing Kurdish production won’t be worth as much as it was.

Gulf may be a lot cheaper than it was one week ago, but it is just as dangerous.

If the Gulf share price recovers, brave investors could end up dripping in black gold. Potential multi-baggers like this are a great way to turbo-charge your investment portfolio.

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Harvey Jones 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.