60% Price Drop Makes Gulf Keystone Petroleum Limited A Brave Buy

If you thought Tesco had a rough 2014, spare a thought for investors in Gulf Keystone Petroleum (LON: GKP) (NASDAQOTH: GFKSY.US).

It started 2014 trading at around 190p, but by December had crashed to below 50p.

Sudden slumps go with the territory when you’re investing in oil explorers, of course, but there were signs of hope at the end of the year.

Shipping Out

Gulf has bet the farm on striking it rich in Kurdistan, and the news flow has improved lately, after the Kurdish government approved plans for the 43 million barrel Akri-Bijeel block at the end of October, which Gulf partly owns, and made an initial $50 million payment for oil shipments routed through Turkey (it’s always nice to get paid).

There was more good news from its Shaikan operation, now on course to produce 40,000 barrels of oil per day (bopd) by year end.

Despite that, at today’s 64p Gulf is more than 60% cheaper than it was a year ago. Buying after a price shock reduces some of the risks of investing in risky stocks like these, but you still need to be brave.

Well On Course

Gulf Keystone started 2015 optimistically, announcing that it was producing from all seven wells at Shaikan and nicely on course to hit its challenging 40,000 bopd production targets. An additional well, Shaikan-8, should also begin production this month.

The news was welcomed both by investors and analysts at Cantor Fitzgerald, who said it sets the company on course to become a “material producer” in the Kurdish region.

Encouragingly, Hungary’s oil and gas group MOL, which has a 20% stake in Shaikan, was talking this week of “huge” further upside.

News that Kurdish fighters are making gains against ISIS in the battle for Kobani, backed by US air strikes, may also boost confidence.

Brave Or Crazy?

All of which explains why Gulf Keystone has posted a 36% rise in its share price in the past three months, while so many stocks have crashed with the oil price, from oil majors BP and Royal Dutch Shell to explorers such as Premier Oil and Tullow Oil.

While Kurdistan has almost unparalleled political risks, at least the oil is cheaper to extract than Arctic, tar sand, North Sea and many shale deposits.

Investors always need a degree of bravado to put their money into frontier oil explorers like Gulf Keystone Petroleum. But today’s combination of a discounted share price and rising production makes this a brave buy in a good way, rather than a crazy way.

If you are not brave enough to take a punt on this stock, don't worry, there may be far safer ways to make big money in 2015.

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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.