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Is Gulf Keystone Petroleum Limited An Unmissable Bargain?

Gulf Keystone Petroleum (LSE: GKP) is something of an enigma. It’s sitting on very large oil reserves in the Kurdistan region of Iraq, and it’s built significant infrastructure for the extraction and transport of the stuff. Yet it’s beset by problems every step of the way, is experiencing pressure on its cash resources while it fights to produce its first profit — and it’s seen its share price collapse by more than 90% since a peak in 2012 to under 36p, with a 60% fall in the past 12 months alone.

The big question is should investors load up with the shares, or run for the hills?

In the year to December 2014, Gulf enjoyed a gross production of nearly 6.5 million barrels of oil, up from less than half a million a year previously, and told us it expects significant growth in 2015 after reaching a key production milestone of 40,000 barrels per day in December. On that score, it looks as if the fairytale ending that investors hope for is just around the corner — the time when a company turns from a cash-consuming explorer into a profit-generating producer.

Where’s the cash?

But the resulting finances make for less attractive reading. Headline revenue of $38.6m was a lot better than 2013’s $6.7m, but the real worry came from “additional revenue in the region of $100 million owed but not yet recognised for crude oil export sales” and a bottom line loss after tax of $248.2m. The problem is, Gulf Keystone has been exporting oil via the agency of the Kurdistan government — but it hasn’t been getting paid for it!

And that led to the firm having to take on another $240m in debt funding during the year, and since year-end shareholders have seen their ownership further diluted by another $40m as a result of a share placing in March.

The firm’s cash balance as of 8 April stood at $84.7m excluding the share placing proceeds, but with operating costs mounting up that’s not going to last very long if the company can’t start getting the cash from its sales flowing in.

Making ends meet

To that end, Gulf is increasingly pushing for pre-payment for some of its crude oil sales, and received a $26m installment in February — and one of its key goals for 2015 is to establish a regular payment cycle while trying to recover the vast sums it is already owed.

But that might not be enough, with interim chairman Andrew Simon noting that Gulf is “…continuing to engage in discussions with interested parties in relation to possible asset transactions or a sale of the company, as well as considering additional routes to secure further funding“.

With the sheer amount of oil present at Gulf’s Shaikan reserves, it seems inevitable that a sustainable profit will be achieved sooner or later. But the big question is who is going to get it? With further dilution of ownership apparently inevitable and with the firm at the mercy of an apparently untrustworthy third-world government, the fear is it will not be Gulf’s current shareholders who get to laugh all the way to the bank.

Buy or sell?

I couldn’t possibly call this, but if you know the risk and are happy to take it, there could be great riches to be had from Gulf Keystone — and 2015 will surely be a make-or-break year.

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Alan Oscroft 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.