Shares in Gulf Keystone Petroleum (LSE: GKP) received a jolt to the system after positive noises from the Kurdish Regional Government (KRG) concerning future revenues. The business has seen its value improve by a third since last Friday, bucking the broad downtrend of recent years — the Middle East-focused explorer’s stock is now worth less fifth of the value seen just two years ago.
Like fellow London listed explorer Genel Energy, Gulf Keystone has benefitted from the Kurdish lawmakers announcing that “from September 2015 onwards, the Kurdistan Regional Government will on a monthly basis allocate a portion of the revenue from its direct crude oil sales to the producing international oil companies (IOCs)“.
The KRG added that extra revenues should be made to IOCs in early 2016 as exports move higher.
Revenues set to rise?
Following the news Gulf Keystone’s chief executive Jón Ferrier commented that the news “represents a further important step towards the establishment of a regular payment cycle for Shaikan crude oil sales pursuant to the Shaikan Production Sharing Contract“.
Indeed, after years of tussles between the Kurdish authorities and lawmakers in Baghdad, the news marks an important step for the region’s black gold industry — it is believed that the oilfields on Northern Iraq contains some of the world’s largest oil reserves.
So although last week’s news is the latest chapter of an uneasy alliance between lawmakers in Kurdistan and Baghdad, and therefore should not be taken for granted, it at least provides the likes of Gulf Keystone with the prospect of a welcome revenues boost after many months of exports with scant reward.
Risks from all quarters
But the big question is: does last week’s news make Gulf Keystone a possible ‘buy’ candidate? Well, while the KRG’s announcement is a step in the right direction, questions over the size and timing of payments remains up in the air.
And Gulf Keystone needs more concrete assurances given that its wafer-thin capital strength leaves its existence hanging in the balance — cash and cash equivalents clocked in at just $68.7m as of the end of June, down from $87.8m at the end of 2014.
Meanwhile, intensifying civil unrest across Northern Iraq adds another layer of uncertainty over Gulf Keystone’s production outlook. When you also throw in the issue of tanking crude prices — Brent fell back below $50 per barrel this week to fresh multi-month lows — I believe the fossil fuel colossus remains a risk too far for shrewd investors.