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Is A Takeover Bid For Gulf Keystone Petroleum Limited On The Cards?

Gulf Keystone Petroleum (LSE: GKP) is charging higher today after the company revealed that it’s exploring a potential sale, amid lengthy talks with the Kurdistan Regional Government. 

The group released a strategic update this morning, stating that:

“Gulf Keystone, the operator of the world class Shaikan field in the Kurdistan Region of Iraq, is announcing today that it has recently engaged in discussions with a number of parties in relation to possible asset transactions or a sale of the Company.”

However, as usual these talks are:

“… preliminary and, as such, there can be no certainty that any offers will be received and any transaction concluded, or any certainty as to the terms on which any offer might be made. Further announcements will be made by the Company as and when appropriate.”

So there’s no guarantee that a deal will be made to sell the company just yet, or, indeed, at all.

What’s more, the strategic update contained information regarding Gulf Keystone’s current liquidity position: 

“… in view of strategic discussions and its current liquidity position, and with the intention of meeting its existing debt payment obligations, the Company is undertaking a review of its financing options and in that context will engage in discussions with its key stakeholders.”

The company’s cash balance currently stands at $69.3m — down from $177m reported at the end of August — although income of $26m is on the way ($20.8m net to Gulf Keystone). So it’s quite clear that the low oil price and political situation in Iraq are taking their toll on Gulf Keystone and the company is running out of options.

In talks  

Gulf Keystone is currently stuck between a rock and a hard place. The company is producing oil from its flagship Shaikan oilfield in Northern Iraq, but selling the oil at an attractive price is proving difficult. 

For example, the most lucrative option for the company is to export the oil, to sell into the international market. However, earlier this month Gulf Keystone suspended oil exports from the Shaikan oilfield following a dispute with the Kurdish Regional Government (KRG) regarding the delayed payments for oil exports — the KRG owes Gulf Keystone in excess of $150m for oil exports. 

Now Gulf Keystone sells all of its oil in the local market — a risky strategy. By selling into the local market Gulf Keystone receives prompt payment for its oil, but some  analysts have suggested that the company many now be receiving as little as $20 per barrel for these local sales.

The bottom line

A partial or complete sale of the company could be Gulf Keystone’s best bet. Over the past six months the company has burnt through more than $100m in cash and, at this rate, the group will be out of money in a few months’ time. 

And with this being the case, it’s clear that Gulf Keystone is a risky stock. There’s no guarantee that an offer will be made for the company, and as a standalone entity its future is uncertain. So, if you are thinking about buying Gulf Keystone, you need to be prepared for volatility — this is a high-risk/high-reward company, not suitable for widows and orphans.

The safest way to protect your wealth with such a company is to use a "basket" approach. A basket approach involves using a basket of risky high-growth shares and reliable dividend-paying stocks, reducing risk and allowing you to sleep soundly at night.

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Rupert Hargreaves 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.