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Gulf Keystone Petroleum Limited Noteholders Help Potential Asset Sales

Today’s news from Gulf Keystone Petroleum (LSE: GKP) confirms the firm managed to get the changes it needs to agreements affecting its noteholders — notes are a type of debt security, so noteholders are those lending money to the firm.

Easier to sell assets now

Gulf Keystone wanted the removal of the Book Equity Ratio Put Option in the noteholder agreements because it strengthens the firm’s ability to negotiate with interested parties regarding corporate actions, and strategic and funding options.

Thankfully, compliant noteholders — with little realistic option to do otherwise under the firm’s straightened circumstances — completed the consent solicitation to remove the book equity ratio covenant from the trust deed constituting the notes and from the conditions contained therein. In legal speak, that happy situation is referred to as simply Consent Solicitation in Gulf Keystone’s news release and in its official papers.

It doesn’t seem like the noteholders had to think about it much; holders of over 89% of the principal amount of notes outstanding participated in the Consent Solicitation, with over 99% of votes cast in favour of the amendments the company proposed.

Fighting hard

I last wrote about Gulf Keystone around a month ago and the news seemed grim back then. However, today’s 40p share price is down just a fifth. I expected more. Back at the beginning of March, the firm had stopped its export activity and put itself up for sale thanks to a massive cash- flow problem.

Since then production and truck-loading operations at Shaikan — the firm’s producing-oil field in Kurdistan — resumed, but even today the firm still fights to get a regular payment cycle established from the Kurdistan Regional Government. However, the directors expect a flexible and prudent approach to ensure maximisation of revenues from Shaikan. A US $20.8 million pre-payment for Shaiken export sales helped the decision to restart operations; along with a share placing that raised a gross $40.7 million or so.

A glittering prize continues to lure

The directors reckon that, from an operational perspective, Shaikan performs well and initial results from Shaikan-10 and the recently completed Shaikan-11 well are encouraging. The potential is staggering. Gulf Keystone plans to move into the large-scale phased development of the Shaikan field targeting 100,000 bopd of production capacity during Phase 1 of the Shaikan Field Development Plan. If the firm can just secure steady payment for such production the shares will surely soar — it’s a situation keeping patient investors interested, to say the least.

That ray of intense sunshine struggles to pierce the dark clouds of the well-documented macro geo-political challenges facing Gulf Keystone and the Kurdistan Region of Iraq, where all of the company’s assets reside. The firm’s debt mountain, cash-flow travails, and a fallen oil price all compound the problems. In many ways, it’s an investor’s dream, with a great asset potentially undervalued thanks to, hopefully, short-term problems hanging around the firm’s neck. If Gulf Keystone manages to resolve its money woes, we could see the shares take off. That said, it’s a big ‘if’, even though the company inches forward with positive progress.  

Gulf Keystone certainly has potential, but there's also risk, particularly dilution risk if cash flow doesn't improve soon and the firm goes for another share placing. In some ways, Gulf Keystone 'feels' like something of a binary bet just now -- win or lose with perhaps no middle ground. However, if you click the link that follows, you can find out more about three hidden factors that our analysts think make an alternative investment proposition a potentially lucrative play for 2015. There's potential for growth here, but without the same level of apparent risks displayed by Gulf Keystone. You can follow this up right now by clicking here.

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.