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Gulf Keystone Petroleum Limited “Close” To Solving Payment Problems

Gulf Keystone Petroleum (LSE: GKP) lost $248m in 2014, according to the oil producer’s results, which were published this morning.

One of the main factors behind the loss was the $100m in arrears owed to the firm by the Kurdistan Regional Government, which has failed to pay for most of the 6m barrels of oil exported by Gulf Keystone in 2014.

Sale talks ongoing

There was no new information about possible assets sales or a sale of the whole company, but Gulf’s new interim chairman, Andrew Simon, confirmed that talks are ongoing with “interested parties” regarding possible transactions.

More ominously, the firm confirmed that it is also in talks about the possibility of another share placing, if regular payments for oil exports are not established.

Payment situation improving

There was some good news. Annual production rose by 1,200% to 6.5m barrels in 2014, and the firm is currently producing 37,000 barrels of oil per day (bopd) against a pre-payment of $26m, which was received in February.

Further pre-payments are expected this year, suggesting that ongoing production may now be fully funded.

Negotiations are ongoing to address repayment of the arrears due on past production, but I don’t expect any progress here until the price of oil has recovered significantly, perhaps in 2016.

Can Gulf survive without help?

By my reckoning, Gulf’s cash balance is currently around $120m, including the proceeds of last month’s $40m placing. Although this sounds ample, I’m not sure that it is.

In today’s results, the company says that if regular payments for oil exports are not established by August 2015, it will need to raise more money to fund everyday operations — which means another discounted and dilutive share placing.

The numbers make the scale of the problem clear: based on today’s figures, Gulf appears to have burned through $24m of cash during the first quarter of the year, and has operating costs of around $13m per month, at current production levels.

In addition to this, Gulf has $52m of debt payments due in 2015.

Is Gulf Keystone a buy?

It’s tempting to think that Gulf shares are cheap at around 37p, especially with the prospect of a bid or asset sale on the horizon.

However, it’s important to remember that the firm has $527m of debt, which ranks above shareholders’ interests, and that it may need to raise more funds by issuing new shares.

In my view, Gulf shares are fully priced and carry considerable risk: I'm pretty sure there are better buys elsewhere.

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Roland Head 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.