Gulf Keystone Petroleum (LSE: GKP) rose by 5% to 68p when markets opened this morning, after the firm said that it had received a $15m payment from the Kurdish authorities towards the arrears it is owed for oil exported from the Shaikan field.
Gulf shares have now risen by 41% after hitting a 44p low in October, as the outlook for the firm has improved, thanks mainly to a long-awaited agreement on oil exports between the Kurdish government and the Iraqi central government.
How much more money is owed?
We don’t know how much Gulf is currently owed for oil exports, but we do know that at the end of June, the firm was owed $35m in back payments.
This figure is likely to have risen substantially since then, but even so, I reckon that $15m should be enough to reduce these arrears significantly.
Will the payments continue?
The Kurdistan Regional Government (KRG) has promised that “further payments will follow on a regular basis”. However, the KRG is seriously short of cash, thanks to its long-running budget dispute with the Iraqi government, and the impact of the conflict with ISIS.
As a result, the KRG seems to be aiming to pay oil producers just enough of the backlog owed to them to stimulate further production growth, without necessarily promising the full amount — in a recent statement, the KRG said “[W]ith further production increases, producers will receive the full contractual entitlements.”
To me, the implication is clear: producers may not receive full payment for oil sold to date unless they continue to crank up production.
Balancing act
Gulf receives around 25% more per barrel for export sales than it does for domestic sales, but the downside is that payment is much slower and less certain.
The firm is targeting production of 40,000 bopd by the end of this year, which appears to be on track, and then plans to increase production to 66,000 bopd, and ultimately to 100,000 bopd.
However, this will require significant investment, which will only be possible if Gulf starts to receive regular payments for exported oil.
Buy GKP?
Trading on 13 times 2015 forecast earnings, Gulf looks fairly priced to me.
Realistically, I believe further upside will be dependent on improved cash flow from export sales being available to fund further production growth. This is a challenge that won’t be made easier by lower oil prices.