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Why Gulf Keystone Petroleum Limited Keeps Falling

When I last wrote about Iraq-focused oil producer Gulf Keystone Petroleum (LSE: GKP), back in November, the shares were at 79p. Today they stand at 52p so, apart from weak oil prices, what’s happened?

Production up

One thing that’s happened is Gulf Keystone’s rush to ramp up production from its key asset, Shaiken, in the Kurdistan region.

In an early-January statement the firm said it is producing from seven wells, with Shaikan-8 expected to come online during January 2015. Increasing production hit the company’s 40,000 gross barrels of oil per day target on 27 December. That led to, on 29 December, a record number of 354 trucks transporting nearly 58,000 gross barrels of Shaikan crude to the Turkish coast for further export sale.

That’s not all! On 24 December, the company spudded Shaikan-11, an additional producer, which it plans to tie in to the production schedule. Up and up goes production as the firm throws everything it’s got at pumping the black stuff and delivering it to market.   

It’s an impressive operation — impressive and expensive, which leads me to the point of this article, and why I think Gulf Keystone’s share price fell when it should have risen.

A thorny issue

Gulf Keystone’s chief executive officer sounded upbeat in January, as chief executives so often do. He reckons Gulf Keystone began 2015 on the back of a positive end to the previous year with record daily production and crude oil export sales.So far, so good.

2014,  he confirms, saw challenges for the Kurdistan Region. Nevertheless, the firm sets out its immediate focus as three specific items on the agenda. The first and second sound admirable without the third. The third destabilises the rationale for the first and second, I reckon, and might be why Gulf Keystone’s share price is down.

Item one is to ensure a stable daily production rate of 40,000 gross barrels of oil per day, which is a base for future production growth.

Item two is to finalise a pipeline access solution for Shaikan, rather than having to truck production to port.

Item three is to maintain a regular payment cycle for Shaikan export oil sales by truck.

Hang on… one of the immediate priorities is to chase the money for work done. That’s not a good situation. Not good at all. A smaller business might put a stop on further delivery until payments are up to date — ramping up production does the opposite, and the more a debtor can build up the debt, the more power it wrests from its creditor.

If Gulf Keystone lets non-, or slow-payment get out of hand, it will probably end up dancing to the tune of its debtor, the Kurdistan government, who will end up pulling all the strings.

What’s up?

The Kurdistan Regional Government’s (KRG) has a contractual obligation to pay for the oil Gulf Keystone trucks for export.

The last mention I can find of Gulf Keystone taking receipt of any money came with a company announcement on 1 December when the firm said, “further to the recent statement by the Ministry of Natural Resources (MNR) of the Kurdistan Regional Government (KRG) regarding payment to producers for crude oil exports, an initial payment of $15 million gross has been made to the Company.”

The next mention came at the beginning of January with the firm’s immediate priority already mentioned. Here it is again: Gulf Keystone’s priority is to ‘maintain’ a regular payment cycle for Shaikan export oil sales by truck.

‘Maintain’ strikes me as an odd little word in this context. Wouldn’t words such as ‘get’, ‘secure’ or even ‘demand’ fit better?

However, let’s not be one-sided on this dilemma. It always pays to consider things from both parties’ perspective. On that score, the Ministry of Natural Resources of the Kurdistan Regional Government recently said of its oil revenues:

“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.”

There are clearly many demands on incoming cash flow for the KRG, and that problem could be fast becoming Gulf Keystone’s problem, too.

What next?

Gulf Keystone Petroleum is a, so far, loss-making business with around £147 million in the bank at the last count back in August. The cost of operations will probably be depleting that figure.

Without regular payments for production, it’s conceivable that the firm may return to shareholders for more funds. Let’s hope that doesn’t happen and that things work out well for the firm in the end. The fact that some money has arrived is encouraging.

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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.