Reasons To Buy, Hold Or Sell Gulf Keystone Petroleum Limited

Gulf Keystone Petroleum (LSE: GKP) is an oil and gas exploration company, which operates in the Kurdistan region of Iraq.

A series of setbacks — the first Competent Persons Report on the company only confirmed a much lower than hoped-for volume of reserves, the loss of five directors (including founder Todd Kozel), and parts of Iraq close to Gulf Keystone’s operations being seized by the Islamic State militia — has resulted in the company share price plummeting 63% so far in 2014.

So,  what reasons might there be to buy shares in the company? Or, of you already own some, why might you want to hold on them, or even sell?

Buy

Yesterday the company announced that it’s working on bringing three more production wells on-line before the end of the year, and that it’s looking forward to reaching its target of 40,000 gross barrels of oil per day. It also said that, despite the continuing hostile working environment, staffing levels in the Kurdistan Region have now returned to normal 

The update saw Gulf Keystone’s share price jump almost 15% by lunchtime yesterday, although it’s since fallen back to around 3% above Tuesday’s close.

True, it’s always going to  a high-risk investment, but if Gulf Keystone can meet its production target, and if further wells show that reserves are close to expected, improved market sentiment could push the share price up significantly, making now an excellent time to have bought.

Hold

If you’ve been holding Gulf Keystone for a while — having originally bought in the full knowledge that it was a risky proposition — you may well take the view that, as things are now starting to look more positive, holding onto your shares makes sense.

There’s always going to be a huge downside to this sort of investment — the reserves may not prove to be as large as was hoped, the situation in Iraq could easily get much worse before it gets better, or a completely unexpected problem could strike at any time — but you knew that to begin with.

However, with the share price having fallen so far, the potential upside (albeit on a now much-reduced amount of your original investment) is arguably that much greater.

And there’s always the chance (but definitely no certainty, of course) that an oil-giant might make a bid for Gulf Keystone, which could put a healthy premium on its value.

Sell

It’s an oil company that’s operating in a war zone. What better reason do you want?