At the end of Friday, shares in Gulf Keystone Petroleum (LSE: GKP) were down 63% over a 12-month period, and had slumped by more than 90% from their February 2012 peak. But on Monday afternoon the price spiked upwards, and at 35p as I write they’re up 21% on the day so far. So what’s happened?
Apart from the crashing price of oil, Gulf Keystone’s big problem has been getting paid for the oil it exports via the Kurdistan Regional Government (KRG) — it’s been shipping the oil, but not getting the cash. And while the company has not yet reached profitability and has been having to make do with the lower prices it can get selling its oil domestically, that can obviously only go on for so long.
Payments soon?
The possibility of proper payments has taken a step forward today, after an announcement from the KRG’s Ministry of Natural Resources (MNR). On Monday, the MNR said that “From September 2015 onwards, the Kurdistan Regional Government (KRG) will on a monthly basis allocate a portion of the revenue from its direct crude oil sales to the producing international oil companies (IOCs), and as export rises in early 2016, the KRG envisages making additional revenue available to IOCs“.
Gulf Keystone’s CEO Jón Ferrier hailed the move as “a further important step towards the establishment of a regular payment cycle for Shaikan crude oil sales pursuant to the Shaikan Production Sharing Contract“.
Promises, promises
All is not settled yet, mind, as the MNR pointed out that the regional government has not been receiving its monthly budgetary dues from Baghdad. It has taken on direct crude oil sales itself instead, and the expectation is that those September payments will come from that. So the KRG does appear to recognize that some cash from crude oil sales must go back to the companies producing the stuff “to cover their ongoing expenses“, or they’ll end up killing the golden goose.
But does it make Gulf Keystone a good investment now?
For me, the risk is still way too high — and it’s unquantifiable. With no real idea when profits are likely to arrive, there are no income-based valuation metrics available to us right now. The company’s shares are on a Price-to-Book-Value ratio of around 1.4, but the value of its assets is very hard to determine with anything approaching confidence — it will hinge on the price of crude and the ongoing unrest in Iraq, amongst other things.
Cash is critical
And that hoped-for payments cycle, well, it’s a very positive update today. But it’s still words rather than hard cash, and Gulf’s financial viability has been on a knife-edge for some time now. Even if the promised cash does materialize, there’s still the question of how much short-term debt Gulf might need to take on until it happens, and how much dilution current shareholders might face before they see a profit.
I would still not buy Gulf Keystone shares myself, even after the latest news.