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Can the Gulf Keystone Petroleum (GKP) share price double your money?

A few short years ago, Gulf Keystone Petroleum (LSE: GKP) was tottering on the edge of going bust, with the company delivering oil to the Kurdistan Regional Government (KRG) without being paid. The money owed was building up and Gulf’s cash reserves were dwindling, and it looked like the only thing that could save it was an about-face from the KRG and the commencement of payments.

Turnaround

Thankfully, that’s exactly what happened, and the KRG has been good to its word ever since – it must sooth the heart of every Gulf Keystone investor to see that “Shaikan Payment Update” headline every month.

On top of that, under the leadership of chief executive Jón Ferrier, the company has refinanced its debt, is generating steady profits, and has even reached the point of paying dividends – a situation that must turn investors in a lot of other small oil companies green with envy.

A few factors have resulted in a share price retrenchment in recent months, as earnings are expected to fall this year. There have been some delays, and a maintenance and upgrade phase has led to some production capacity being taken temporarily offline.

But that’s clearly short-term stuff and it should leave the company in a better state to raise its production levels in the future.

Healthy production

And even after the downgrade, Gulf’s estimated production rate still comes in at 30,000 to 33,000 barrels per day. I think it’s interesting to compare that with UK Oil & Gas, whose test well production of Portland and Kimmeridge hydrocarbons at Horse Hill has reached a little over 71,000 barrels – total, ever.

The faltering oil price hasn’t helped as the world production glut continues, and prices around $60 aren’t inspiring confidence.

Still, even on reduced earnings expectations for this year, the shares are trading on a forward price-to-earnings (P/E) ratio of under 12. What’s more, if the mooted 70% jump in EPS for 2020 comes off, GKP shares would be on a P/E ratio for that year of only 7 – unless, of course, the price doesn’t rise in the meantime.

Buyback

It’s not just me who thinks Gulf Keystone shares are on a bargain price now. The company itself does too, and it’s been steadily purchasing its own shares since a buyback programme was announced in July.

So what we’re looking at here is a smaller oil company that’s raking in cash, saw its year-end cash balance reach $295.6m last year (from $160.5m a year previously), says it’s fully funded for all phases of its Shaikan expansion, and has enough of the folding stuff to be paying dividends and buying back its own shares.

Expansion

Add to that the planned expansion of production capacity, and as long as we see no major disasters in the meantime, if 2020 profits come close to what is currently being anticipated then I can see a significant share price up-rating on the cards.

The chance of Gulf Keystone doubling your money over the next five years? I reckon it’s probably higher than with any other oil company on the market right now.

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Alan Oscroft 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.