Investors in Gulf Keystone Petroleum (LSE: GKP) will be relieved now that the company has moved away from shipping all its oil overseas and not getting paid for it — the revenues were allegedly just not getting back to the company from the government of the Kurdistan region of Iraq. Instead, Gulf is diverting oil sales to the local market, where it gets less per barrel but at least it’s cash coming in.
Big debts
Even with that, Gulf Keystone is still in a perilous state, with no profits expected before 2016 at the earliest, and it’s going to run out of cash before then if it doesn’t do something drastic. Debt is building up and has reached more than $500m already, and the possibility of taking on more is remote as lenders are increasingly expecting defaults on some of that current debt.
What Gulf is trying to do instead is sell off some of its oil assets to raise some needed cash. With the recent oil price uptick stalled and Brent Crude settling at around $60 a barrel, now is really not the best time to get top money for those assets, especially as others in the same boat are trying to do the same.
But times are desperate, and Gulf really is sitting on some very big oil fields. Even from its existing productive wells, the company is able to pump more than 40,000 barrels per day, and there’s plenty more exploration to come. It can spare some for sale.
Creditors on board?
The low price of oil assets works both ways too. Should Gulf default on some debt, as many expect now, its creditors would be reluctant to pull the plug as they’d be left with all its oil assets and have to try to raise as much cash as they can themselves. We’ve seen the same thing happen at Afren, the Nigeria-based oily that defaulted on some debt only this week, but with an informal agreement from creditors not to pursue their claims while the company seeks a rescue package.
The big question is whether Gulf Keystone is worth an investment now. There are no earnings upon which to based a valuation, but that’s pretty standard when you’re investing in oil startups, so it shouldn’t worry experienced investors.
The share price is down 68% over the past 12 months to 49.3p, but it has been lower — today it actually stands 39% up on its 24 February low of 35.5p, since Gulf announced its plans for an asset sale.
Buy the shares?
If it can get the price right, Gulf seems likely to find a buyer. And even if that price is low by historical standards, if it keeps the company going until the profits arrive, we could be at a turnaround point now.
It’s a risky investment, but oil investors should be used to risk by now, and if you know what you’re doing it could be one to go for.