The new chief executive of Gulf Keystone Petroleum (LSE: GKP) has one issue dominating everything else, he reckons — ‘commercial sustainability.’
In other words, the firm needs to make sure the Kurdistan Regional Government (KRG) pays regularly for the oil Gulf Keystone exports from the region. The oil boss said, “A huge amount of effort is being put into getting regular payment.”
This is not a minor problem, it’s a big, destabilising issue, which has been dragging on for a long time, and it wouldn’t surprise me if it drags on for a long time to come, perhaps never being fully resolved.
A chink of sunlight refusing to cloud over
The director’s strong focus on commercial sustainability implies, of course, that commercial operations are unsustainable as things stand. What commercial business can carry on delivering a product or service without knowing for sure when, or even whether, it will receive any payment?
Yet, despite high debts, Gulf Keystone manages to keep the cogs turning thanks to piecemeal cash flow. For example, there was a big share placing earlier in the year, and in yesterday’s update the firm fleshed out details of payments it received from the KRG — a first payment of US $3.9 million net to Gulf Keystone, which arrived last week, and a second payment of US $5.4 million for crude oil exported during June 2015 by truck to the Turkish coast.
On top of that, the firm is generating income by selling oil into the domestic market through what it calls a ‘domestic offtaker’ — don’t you just love all these nominalised ‘zombie’ nouns so beloved of directors!
Gulf Keystone had US $72.1 million of cash on 8 July, and anticipates more cash inflow thanks to the ongoing contract with the domestic buyer and continuing dialogue with the KRG’s Ministry of Natural Resources (MNR). As long as the MNR keeps bunging the odd wad of wonga to Gulf Keystone there’s an ongoing chink of light, which could be the aim of such payments in the first place!
‘Diversified’ marketing strategy
In a video presentation, Gulf Keystone’s chief executive laid out the firm’s plan, but not before saying, rather worryingly, “We are far from achieving a regular payment cycle.”
There’s a risk that ‘far’ could stretch to a ‘never’, but we’ll have to see. In the meantime, the company has a marketing strategy with three strands:
- domestic sales through a domestic offtaker;
- export sales by trucking to the Turkish coast; and
- export sales by injection into an international pipeline.
Once injection into the pipeline commences Shaikan crude will be sold as part of the internationally traded blend and higher netback prices should result, the firm says. However, once again, that route to market, along with the other two, requires the KRG to sanction payments through its contractual obligations — we are back where we started!
Why I remain interested
Gulf Keystone aims to move into the large-scale phased development of the Shaikan field targeting 100,000 bopd of production capacity. Operationally, things are going well; financially, less so. However, I’m heartened by recent cash-flow developments and encouraged by the fact that the share price has been flat for some time and has stopped falling (at least for now).
