Production up, cash down: that’s not a nice combination for oil producers, particularly when their net leverage is sky high!
Of course, I am talking about Gulf Keystone Petroleum (LSE: GKP), whose shares rose both before and after its half-year results were released on Thursday. In fairness, I’d be tempted to place a highly speculative trade on its stock — but I’d buy it only if it plunged anywhere between 9p and 15p a share.
It currently changes hands at 30p.
Downside, What Downside?
Yesterday’s results confirmed that Gulf Keystone is not exactly in a sweet spot. Its shares rose 10% on the day, but that vote of confidence is not an indication that trading will be smooth for its shareholders in the near future.
I estimate that its equity could be worth less than 50% of its current market value, based on the fair value of its core assets, unless all its receivables are collected in about 75 days from now.
Significant downside risk is confirmed by the level at which its stock trades: it is now worth more GKP’s net asset value per share, which signals that the drop could be really painful — between 30% and 50% — even under a base-case scenario.
With regard to a few other metrics, consider that its market cap plus net debt (enterprise value, or EV) is about 9x the value of its expected revenues for 2015, while its EV is 50x the value of its expected, adjusted operating cash flow.
These are multiples for a high-tech play growing revenue at 500% a year rather than for an overstretched oil producer!
Managing Expectations
“The company has estimated, subject to audit, arrears amounts outstanding of $283m at 30 June 2015. These amounts are comprised of S$117m unbooked revenues, $76m of past costs associated with the Shaikan Government Option and US$90m past costs associated with the Shaikan Third party option,“
GKP said yesterday.
This is what it said at the end of 2014:
“Following a number of payments received for crude oil exports in 2014 and the most recent pre-payment of $26m in February 2015, the arrears amount for crude oil export sales has not increased significantly in the past six months and we believe that we are close to achieving a steady and stable payment cycle for present and future crude oil export sales.”
Now, the market seems to be betting on the company’s ability to collect its credits, given that GKP anticipates the establishment of a regular payment cycle for all crude oil export sales from September 2015, with arrears “being addressed from early 2016”, but I need more evidence that the Kurdistan government in Iraq will ever pay its bills when they are due.
Moreover, it’s pretty easy to suggest that there will be more costs associated to the recovery of millions of dollars that GKP is owed. On top of that, its operating cash flow in the first half indicates that during the period the amount of cash flow used in its operations (-$32m) was roughly in line with the cash-burn rate for the entire 2014!
Why would you buy into anything like that, really?