The story of oil producer Gulf Keystone Petroleum (LSE: GKP), which operates in Kurdistan, Iraq, used to be one of crippling debts, strained cash flow and a falling share price. But that all changed after the company’s massive financial restructuring in the Autumn of 2016, which saved it from insolvency, albeit at a cost for existing equity and debt holders.
Part of GKP’s problem had been the plunging price of oil, but oil reversed its downtrend near the beginning of 2016. So, with its rebuilt balance sheet, the firm found itself in a strong position when the oil price really took off again last year. The cash flowed into the company coffers and to their credit, the Kurdistan Regional Government (KRG) managed to keep up regular payments to GKP for the oil produced after a long period of intermittent payments that were often deep in arrears before – a situation that had compounded GKP’s previous cash flow problems.
A reversal of fortunes
Since the beginning of 2018, the firm’s improved financial situation and operational outlook have combined with a growing pile of cash and pushed the share price around 120% higher. At first glance, it looks like the business and the shares have finally turned the corner and a decent recovery is under way. Indeed, today’s half-year results report is upbeat and details strong operational progress.
The report’s headline trumpets “record profit achieved and on track for production uplift at Shaikan.” The firm’s operations focus on the Shaikan oilfield in Kurdistan, which isn’t an ideal geographic location given the trouble in the region over the years. However, the company said in the report that operations “remained safe and secure” during the first half of the year, which has allowed production to progress according to plan and the firm is confident of hitting its goal of producing between 27,000 and 32,000 barrels of oil per day (bopd) for the rest of 2018.
GKP has extracted more than 50m barrels from Shaikan since production began and said in the report that the well behaviour matches its expectations and gives the company confidence in its geological model of the field. A new pipeline looks set to reduce operating costs and the company plans to invest in projects aimed at increasing production at Shaikan to 55,000 bopd during the second half of 2019, which raise the tantalising prospect of even greater profits and cash flow going forward.
Today’s financial figures are good. Profit after tax exploded up to $26.7m from just $0.7m in the equivalent period the year before and net cash from operations moved to $61.2m from $30.1m last year. At the end of June, the cash balance stood at $219m, but we can see how fast the coffers are filling by the cash figure on September 7, which was $240m. Offsetting that is around $100m of debt.
Chief executive Jón Ferrier told us in the report that the firm signed a Shaikan crude oil export sales agreement at the start of the year, which “paved the way for the commercial progress that has been achieved.” The directors are confident about the outlook and I think the stock is well worth visiting now.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.