Why Gulf Keystone Petroleum Limited Could Launch A Rights Issue This Week

Gulf Keystone Petroleum (LSE: GKP) officially put itself up for sale last month, revealing that it was in talks with a number of unnamed parties.

Two investment banks, Deutsche Bank and Perella Weinberg, were hired to advise the company on its options.

However, as of yet no offers have emerged for the company and it seems that, for the time being at least, that Gulf Keystone is planning a future alone. 

A future alone

Reports now suggest that Gulf Keystone could reveal a rights issue as early as this week, as the company tries to get to grips with its £384m debt pile. City analysts believe that the company will ask shareholders for £30m — around $44m — from a rights issue, which should help bolster cash balances.

In addition to the rights issue, the company has already asked its bondholders to approve a proposal to change the details of the Trust Deed governing some of its debt. This proposal is related to the group’s $250m, 13% guaranteed notes due 2017, which the company is required to repay in full if its ratio of book equity to total assets falls below the key level of 0.4.

It’s expected that due to the writedown of some asset values, Gulf Keystone’s ratio of book equity to total assets will fall below the key threshold of 0.4 within the next month. 

Gulf Keystone’s management originally stated that the company had received confirmation from multiple bondholders that they were willing to change the rules governing the notes. However, since this statement was issued, the deadline for the restructuring has been extended. This could be an indication that the bondholders’ stance has hardened. 

Analysts believe that Gulf Keystone’s cash balance is around $90m, so clearly it cannot afford to repay the $250m notes any time soon. And, according to analysts, changes to the conditions attached to the bonds will also make the company more appealing to potential buyers.

Restarting production 

Gulf Keystone also recently restarted oil production at its Shaikan oil field after receiving a one-off payment of $26m from an unnamed party. But the company is yet to receive a firm commitment from the Kurdistan government regarding regular payments for oil exports. Until such time as Gulf Keystone receives a commitment for regular payments, the company is going to struggle.

That said, it seems as if the company has the support of both bondholders and shareholders. So Gulf Keystone is not on the rocks just yet. The group has the support of key stakeholders who appear willing to help the company through its troubles.  

Far from clear

Unfortunately, as Gulf Keystone tries to work its way out of a sticky situation, the company’s future is far from clear. 

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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.