Is The Tide Turning For Gulf Keystone Petroleum Limited?

It’s all very well having assets and great potential, but if you can’t turn them into cash then they’re not worth a carrot.

That’s been the problem for Gulf Keystone Petroleum (LSE: GKP), which is pumping an average of 40,000 barrels of oil per day from beneath the Kurdistan Region of Iraq, yet still recorded a $77.7m loss after tax in the first half of this year. The thing is, exports of oil have to go through the Kurdistan Regional Government (KRG), and it’s been taking the oil without paying for it — arrears to the tune of $283m had been racked up by the end of June.

Money, money, money!

We’ve been hearing noises about setting up a regular payment schedule for months now, as even the KRG had to take notice when Gulf started selling its oil domestically for low prices rather than for the nothing it was previously getting. But talk still isn’t cash.

Things, however, could be looking up, after we heard on Monday that there is an actual payment, of actual cash, set up to arrive in the company’s account within the next seven days. Gulf should net $12m from the transfer, and while that’s not a scratch on the arrears (which, according to the plan, wont start to be addressed until early 2016 at the soonest), it’s something. But it’s still not cash, yet!

Should the twelve big ones actually turn up in a week’s time, Gulf will not be out of the woods by a long stretch — just as one swallow does not a summer make, so is one sack of cash not a regular income. It could be quite some time yet before shareholders can be confident that regular payments are actually going to happen.

Risk upon risk

I don’t mean to be hard on the government of that wretched place, but its resources are understandably stretched and its priorities are properly more focused on things like making sure its citizens aren’t murdered in their beds rather than on Gulf shareholders’ profits. And in that climate, I can see the juggling of what cash the KRG has leading to Gulf getting just the minimum payments needed to keep the wolf from the door.

Others seem to share my perhaps cynical view, as the Gulf Keystone share price nudged up a mere 1p on the day of the latest announcement, to 33.75p. That’s a significant advance on the 21.5p they were fetching a couple of week ago, but it still represents a 56% fall over the past 12 months — and a 93% collapse since that peak in February 2012.

With no indication of when the first profits are set to arrive, and with the oil price slipping under $50 again, it’s impossible to meaningfully quantify Gulf’s investment prospects right now — and that’s just the risks associated with being a cash-burning oil explorer and producer. When you add the enormous extra risks of where Gulf is operating and upon whom it relies for payments… well, it’s looking more like Russian Roulette to me than an investment.

It’s hands off for me!

Buying Gulf Keystone shares could come good, and I sincerely hope it does. But when I see so much risk concentrated in just one company, it’s bargepole time for me.

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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.