Should You Sell Into The Spike At Gulf Keystone Petroleum Limited (Before It Dives)?

Shareholders in Gulf Keystone Petroleum (LSE: GKP) awoke on Wednesday to a nice surprise.  The announcement, copied below, sent the share price soaring — at 55 pence, it closed 55% higher than the previous day’s close.

Why the sudden pop?

This was the opening line: “Further to the Company’s RNS of 6 February 2015, Gulf Keystone, the operator of the world class Shaikan field in the Kurdistan Region of Iraq, is announcing today that it has recently engaged in discussions with a number of parties in relation to possible asset transactions or a sale of the Company.”

I think that it fair to say that the opening line of this release is what has caused the surge in price.  However, in order to get a fuller picture, you have to read on…

“Stakeholders are advised that these discussions are preliminary and, as such, there can be no certainty that any offers will be received and any transaction concluded, or any certainty as to the terms on which any offer might be made. Further announcements will be made by the Company as and when appropriate.”

So, as is usually the case, shareholders are warned that this is early days and there is no certainty that a deal will be done.  Whilst this is standard stock market speak, investors should tread with caution — the interested parties may not like what they see, while they may also be looking for a larger-than-normal margin of safety, given the risks that come with doing business in this part of the world (look at what happened with Seplat and Afren).

Saving the best until last

So, everything seems to be heading in the right direction… then I read this:

“As at today’s date, the Company’s cash balance is US$69.3 million and it has been informed that a further US$26 million gross payment (US$20.8 million net to Gulf Keystone) for Shaikan crude oil sales has been received by the Company’s bank and is expected to be credited to the Company’s account shortly.

“Concurrently, and in view of strategic discussions and its current liquidity position, and with the intention of meeting its existing debt payment obligations, the Company is undertaking a review of its financing options and in that context will engage in discussions with its key stakeholders.”

These last five lines fill me with dread.  Let me explain.  This tells me that the company is burning cash faster than it is making it.  At some point, it will run into trouble with its bondholders. Again, I would point you in the direction of the current situation playing out with Afren.

It is true that things could be different here — after all, this is a ‘world class’ oil field and I’m sure that there is a company out there with deep pockets and political sway wishing to add the assets to its portfolio.  The question for me is: at what price?

Where do we go from here?

For me, there is too much uncertainty to make me want to take the plunge, despite the promised payment landing in the bank today.  I think unwary investors could get their fingers burnt here, should a bidder walk away.  Personally, I prefer to preserve my hard-earned cash and look for investments that keep me warm at night.  As such, I’ll be sitting and watching from the sidelines.