Is Gulf Keystone Petroleum Limited In Freefall?

Things are going from bad to worse for Gulf Keystone (LSE: GKP) (NASDAQOTH: GFKSY.US). In fact, the Kurdistan/Iraq-focused oil producer has now seen its share price fall by a whopping 48% since the turn of the year, with a further 4% drop coming in the last week alone.

The reason for the decline is a series of negative news flow items, which have caused investor sentiment to decline significantly. Looking ahead, are things about to dramatically improve for the company? Or, is it on a downward spiral with no end in sight?

Board Changes

In just the last few days, Gulf Keystone has announced the departure with immediate effect of its Chairman, Simon Murray. This is not good news for the company, since it has caused investor sentiment to worsen and has also caused further instability at the company during what is undoubtedly a very challenging period.

Clearly, Gulf Keystone will be able to find a suitable replacement but, during tough times for any business, it can be advantageous to have a stable management team in place so as to provide investors with confidence in the board’s strategy and in the future prospects of the business. As such, further board changes could have a destabilising impact on Gulf Keystone’s share price.

Share Placing

After a great deal of speculation, Gulf Keystone conducted a £30m share placing just a few weeks ago, with the proceeds being used to shore up the company’s short term cash flow requirements. This could help the business to attract a buyer (it has been up for sale and not yet attracted a formal bid), but does not solve the main issues of a lower oil price and a lack of clarity regarding future payments for the oil it produces. As such, the placing seems to be a temporary measure rather than being conducted for investment purposes, which for many investors is often a red flag, since it shows that the company is more concerned with short term survival as opposed to long term growth.

Looking Ahead

While Gulf Keystone does have a relatively appealing business model and significant potential in Kurdistan/Iraq, events seem to have transpired against it. The conflict in Iraq has caused payment problems, a lower oil price has meant lower revenues and investor sentiment in the oil sector has weakened and put the company and its share price under considerable pressure. While all are external factors, there is little prospect of them improving significantly in the short run. As such, unless a bid is forthcoming, Gulf Keystone’s share price looks set to decline further, which makes it a stock to avoid at the present time.

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Peter Stephens 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.