Shares in Gulf Keystone Petroleum (LSE: GKP) spiked almost 10% higher on Friday, for no apparent reason. Several large trades went through in the late afternoon, but who was buying — and why?
An announcement this morning suggests a possible explanation. Gulf says that production remains “in excess of 40,000 bopd” and that it has recently received payments totalling $9.8m for domestic oil deliveries in Kurdistan.
The payment follows the adoption of a new marketing strategy, which will split oil sales between a new domestic sales contract and export markets, in order to improve cash flow.
The firm’s new domestic contract will take between 12,000 bopd and 40,000 bopd per day. This suggests to me that the goal is to sell as much oil domestically as possible, while exporting any surplus.
Payment is quicker and more reliable for domestic sales, so this strategy makes sense. Gulf urgently needs cash.
Despite this, Gulf shares have fallen by 10% this morning. This suggests to me that shareholders may have been expecting something else, most likely takeover news.
Gulf’s new chief executive, Jón Ferrier, has only just started work at the firm. I’d argue that it’s a little too soon to expect a deal, and that today’s news is actually pretty good.
Clearing the backlog?
One of Gulf’s biggest problems is that $100m+ backlog of money owed to the firm for past oil sales. The good news is that the firm may finally be making some progress in this area.
Today’s announcement stated that of the money received recently, half ($4.9m) relates to 2014 oil sales, while the remaining half is the first payment for deliveries under a new six month contract for domestic oil sales.
These payments leave Gulf with a cash balance of $68.7m. That’s not enough to solve the company’s funding problems. But it is enough to keep operations going and perhaps to meet the next round of interest payments, which totalled $36m in 2014.
A good start for Mr Ferrier
In my view, today’s statement suggests that Gulf’s new CEO has made a solid start. The company now has some breathing space in which to focus on finding a partner or buyer for its Shaikan asset.
News on that front could come quite soon. The Kurdistan Regional Government (KRG) is considering selling up to $5bn of bonds in the international market, according to a report in the FT last week.
The FT says that the money would be used to finance infrastructure projects. One possibility is that the KRG would use some of this money to take up its 20% optional interest in Shaikan.
By doing this, it could fund the next stage of Shaikan development and guarantee substantial future oil revenues.
This would be excellent news for Gulf shareholders, as it would make it far easier for the firm to refinance its bonds on acceptable terms, protecting shareholder value.
I think today’s news is very positive for Gulf Keystone shareholders. Events do appear to be moving in the right direction. At this stage, I’d rate the shares as a hold.