Gulf Keystone Petroleum Ltd Drops 30% On Balance Sheet Restructuring Plan

Financially troubled oil producer Gulf Keystone Petroleum’s (LSE: GKP) share price has been sinking since the beginning of 2012, but today’s news caused the shares to plummet a further 30% or so to trade below 5p.

Double trouble

The company sets out details on potential interim investment scenarios to build what it describes as “a common foundation for stakeholder discussions” regarding the firm’s need for near-term fundraising, upcoming debt obligations and possible restructuring of the Company’s balance sheet.

The reaction of the firm’s shares this morning suggests that many investors were hoping that such news would never come and that Gulf Keystone petroleum might be able to trade out of its financial difficulties without raising further funds.

However, the double troubles of high debts and poor cash flow have long plagued the firm.  Although the company’s Shaiken oil field in Kurdistan is producing lots of oil, the company has struggled to get the Kurdistan Regional Government (KRG) to actually pay for it. The KRG has contractual obligations to pay up, but the cash has been piecemeal in its delivery and the KRG owes Gulf Keystone for past production.

Maintaining operations

The company explains today that without additional capital expenditure the Shaikan wells may begin decline later in 2016. The potential interim investment scenarios that the firm sets out in its announcement aim to maintain Shaikan production at 40,000 barrels of oil per day (bopd) with an option to increase production to 55,000 bopd.

The firm first communicated these investment proposals with its full-year results on 17 March and says it developed the scenarios to bridge and complement its revised Shaikan Field Development Plan (FDP), which the company’s partners are reviewing.

The firm’s chief executive, Jón Ferrier, said:

“The additional detail on the potential interim investment scenarios being released today ensures an orderly market and represents an important step as we prepare to embark upon detailed discussions with stakeholders.  We are working to achieve the best possible way to restructure our balance sheet.  Addressing our funding needs will ensure the Company’s longer term future and ability to continue developing the Shaikan field for the benefit of all our stakeholders.”

 A rock and a hard place

As we are seeing with Gulf Keystone, the challenge of finding oil can be the least of an oil companies’ problems. Getting the stuff out of the ground, especially when it’s located in challenging locations, can be just as problematic. Now that the firm is involved with the Shaiken field, going forward seems like the only way out of financial difficulty.

Despite the firm producing plenty of the black stuff, Gulf Keystone has been a poor stock market investment so far, which underlines the uncertainties of playing the speculative small-cap space in the oil and gas sector.

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Kevin Godbold 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.