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Is It Game Over For Gulf Keystone Petroleum Limited?

It’s been a rough few years for Gulf Keystone Petroleum (LSE: GKP) and the company’s shareholders. Indeed, even though the oil explorer and producer has made significant operational progress since 2012, corporate scandal and geopolitics have weighed on the corporation’s shares. 

And now, after several years of mismanagement, it looks as if Gulf Keystone is on its last legs. The company is living from hand-to-mouth, relying on payments from the Kurdistan Regional Government to keep it afloat as receipts from oil production struggle to cover operating, admin and finance costs. 

Burning cash 

Gulf Keystone’s precarious cash position has become increasingly concerning over the past few months. With regular updates from management, the company has kept investors abreast of its financial situation. And while there’s cash in the bank, the level of capital available to the company is dwindling. 

Gulf Keystone desperately needs money to sustain its operations. The company has been able to sell some oil into the domestic market but it’s still burning through cash reserves at an alarming rate.

For example, at the beginning of April, Gulf Keystone had a cash balance of around $127m, including the proceeds of a placing, which raised $40.7m. At the end of August the company reported a cash balance of $63.9m, which included $32.5m to meet debt service obligations. By mid-October, the group’s cash balance had risen to $76.2m (including payments from the KRG), $26.4m of which was earmarked for debt interest payments. Then at the beginning of this month, Gulf Keystone’s cash balance had dwindled to $54.6m. That was down by $72.4m from the position reported at the beginning of April, despite the fact that the company has received $45m from the KRG since September. 

What’s more, Gulf Keystone is overloaded with debt. At the end of the first half, the company’s debt pile amounted to $520m. Unless the price of oil returns to $100 a barrel very quickly, it’s clear that the company is going to struggle to pay off this debt. Gulf Keystone’s debt service obligations of $32.5m, as reported during August, were $2.4m more than the company’s $30.1m in revenue reported for the first half of the year.

Taking a step back

It’s easy to cross your fingers and believe Gulf Keystone is on track to stage a dramatic recovery sometime soon, but the figures suggest a different outcome.

The company’s cash balance is falling, and unless there’s a dramatic recovery in the price of oil, it’s going to be almost impossible for Gulf Keystone to report a profit. Meanwhile, the company’s cash balance continues to get smaller every day.

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Rupert Hargreaves 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.