Gulf Keystone Petroleum (LSE: GKP) (NASDAQOTH: GFKSY.US) shares have fallen by 33% so far this year, triggering despair among many shareholders.
However, the game is far from over — and the firm’s distressed valuation could yet trigger a bid from a savvy buyer with a proven interest in Kurdish oil, and a very long-term outlook.
China calling
Last week, Reuters published an exclusive report, revealing that much of the oil that has been exported from Kurdistan is heading to Asia — with ‘trade sources’ suggesting that China may currently be negotiating to buy 4 million barrels of Kurdish oil.
The news makes sense: China is a big buyer of oil from southern Iraq, and is sufficiently large and wealthy to be immune to threats of legal action by the Iraqi government.
Reports suggest that the Kurds are having to sell their oil at a discount in order to find buyers: this too is likely to appeal to China, which is focused on securing reliable long-term energy supplies to power its giant economy.
Why buy GKP?
I’m only guessing, of course, but Gulf Keystone’s combination of a large resource base and a distressed valuation could be appealing to a price-savvy long-term buyer like China.
Gulf Keystone’s rising production has cut its cash operating cost per barrel from $27 to just $9, according to the firm’s half-yearly results, making the firm’s oil quite cheap to produce.
It’s worth remembering, too, that while Gulf has only managed to prove up 2P reserves of 163m barrels of oil equivalent (boe), it has 2C resources — oil and gas that’s proven to exist but is not yet commercially viable — of a further 576m boe, excluding the share to which the Kurdish government is entitled.
The firm’s current valuation makes these resources look pretty cheap, in my view:
|
|
2P reserves |
2C resources |
2P reserves + 2C resources |
|
$/boe* |
$8.16 |
$2.31 |
$1.80 |
*Calculated using Gulf Keystones enterprise value (market cap plus net debt)
These prices obviously reflect the high level of political risk: there’s a possibility that Kurdish oil operators will suffer the same fate as Syrian-based Gulfsands Petroleum, which has been unable to access its oil-producing assets in Syria for a number of years now.
However, Kurdish oil companies are all working fairly normally at present, and US military involvement suggests that this may continue.
Who could buy Gulf Keystone?
State-backed Chinese oil giant Sinopec is an important player in Kurdistan, having entered the region in 2009, when it acquired early Kurdistan explorer Addax Petroleum in a $7.2bn deal.
Of course, there’s no guarantee that Sinopec — or anyone else — will make a bid for Gulf Keystone.