I haven’t often seen a turnaround story as impressive as Gulf Keystone Petroleum (LSE: GKP).
The company — which owns the Shaikan oil field in Kurdistan — was on the brink of failure in 2016. It had a massive pile of unpaid invoices and needed to refinance more than $600m of debt.
Since then, chief executive Jon Ferrier has refinanced the business and turned it into a profitable, dividend-paying oil producer.
It’s been an impressive turnaround story, but GKP shares fell by 4% in September, and have since fallen by another 10%. Should shareholders be worried? Or is this a buying opportunity?
I’ve been looking at the group’s latest accounts to find out more.
Short-term disruption
September’s half-year results were pretty mixed. Gross oil production fell by 8% to 29,362 barrels of oil per day (bopd), as wells were taken offline for maintenance and upgrades. The oil price was also lower than during the same period last year, cutting the average realised price per barrel from $47.90 to $44.80.
Revenue fell by 18% to $95.6m and after-tax profit was 9% lower, at $24.2m.
That wasn’t all. Delays to certain equipment upgrades and drilling operations mean that although production is expected to be higher during the second half of the year, full-year production guidance was cut.
Mr Ferrier now expects production to average between 30,000 and 33,000 bopd this year. The firm’s previous guidance was for 32,000-38,000 bopd.
I’m looking ahead
I think that the firm’s disappointing interim results have played some part in its falling share price. Rising tensions in the region and a weaker oil price may also be to blame.
However, as a shareholder, I’m still very comfortable with the situation. Profits are stable and cash generation remains strong. The group’s net cash balance rose by $7.2m to $198.3m during the period, despite spending of $32.4m on capital projects.
Profit margins are also high — Gulf Keystone has generated an operating margin of 33.8% over the last 12 months. By contrast, the equivalent figure for BP was just 5%.
Management says that the firm is still on track to increase production to 55,000 bopd in the second quarter of next year. In my view, that’s the next big milestone shareholders should focus on.
Buy, sell or hold?
One thing that’s special about Shaikan is that it’s very cheap to run. This large field has operating costs of less than $4 per barrel of oil. This should mean that Gulf Keystone can generate free cash flow at almost any oil price.
Investing in this firm obviously carries some geopolitical risks. It’s basically a single-asset company in a region that has a long history of instability.
However, if you’re comfortable with this risk, I think Gulf Keystone remains an attractive buy. The shares look cheap to me, trading close to their net asset value and on just 6.5 times 2020 forecast earnings.
If Mr Ferrier can deliver the production growth he’s promised, I think shareholders are likely to see decent returns from current levels. I remain a buyer, although the geopolitical risks mean that this isn’t a stock I’d depend on too heavily.
