It’s not every day that Gulf Keystone (LSE: GKP) shareholders get good news, but today is one of them. And it was enough to give the shares a 15% boost to 44p, so what’s happened?
The oil explorer and producer told us it has recommenced production and trucking operations at its Shaikan field in the Kurdistan Region of Iraq, which holds very serious reserves — there’s already an installed production capacity of 40,000 barrels per day.
The resumption comes after Gulf received a $26m gross advance payment (from which it will net $20.8m) on 25 February to cover future crude oil sales, and the firm now says it expects another similar payment — February’s news caused a price spike, too, but the shares settled back again disappointingly quickly.
Why is the latest news so important?
Show us the cash
Well, Gulf Keystone’s problems are not concerned with its reserves or its ability to exploit them, but with the difficulties of getting payments for exports returned via the Kurdistan government. That’s put the company in a dire cash situation with respect to its bondholders, leaving it unable to make some due payments and effectively pushing it close to insolvency.
A tentative agreement has been reached with some bondholders to stave off the immediate crisis, so there’s going to be some debt restructuring. But there’s almost certainly got to be a new equity issue some time, and that would dilute existing shareholders’ interest — by how much, we have no way of guessing just now.
Steady revenue?
Still, anything that looks like it could create steady revenues will offer a boost to Gulf’s longer-term survival hopes. And the firm’s current strategy of selling to the local market (albeit at lower pre-barrel rates) coupled with its insistence on seeing the colour of its customers’ cash should add confidence to that.
Chief executive John Gerstenlauer said that “We remain confident of a regular payment cycle for Shaikan crude being established in the near term“, and production looks set to ramp back up to full capacity shortly — and the additional news that a new production well at Shaikan-11 looks set to be “potentially prolific” means there should be further boosts to capacity coming.
Is Gulf Keystone a good investment now?
Not for widows and orphans
It would still be a very risky punt, as the company is very much in the grip of its bondholders now — and they’re unlikely to be especially charitable towards shareholders. We learned that hard lesson very recently as Afren shareholders effectively lost pretty much everything they owned, and even at 3p per share Afren still looks overpriced to me.
But a steady income arrangement could just make the difference if Gulf can pull it off, and investing now could turn out to be a good move — but definitely not one for novices.
