Today’s news from Gulf Keystone Petroleum (LSE: GKP) is encouraging. The firm has struggled for some time to get the Kurdistan Regional Government to pay for the oil the firm produces. Kurdistan has contractual obligations to pay up, but the cash has been unforthcoming.
A regular payment cycle
However, Kurdistan Regional Government (KRG) reckons it has authorised a payment of US$12 million net to Gulf Keystone and will be wiring it to Gulf Keystone’s account during the next seven days. Thank goodness — positive cash flow is needed urgently.
Jón Ferrier, Gulf Keystone’s chief executive since June, welcomes the payment, saying it comes at a critical time for the firm and for the entire oil industry in the Kurdistan Region. Yet, there’s no doubt that for him, establishing a regular payment cycle with the KRG for the oil Gulf Keystone produces and exports is front and centre of the urgent issues facing the firm. He said so in a recent video presentation.
However, today’s announcement still leaves the issue of a regular payment cycle unresolved, even though the KRG appears to be talking about it. Without a regular payment cycle, Gulf Keystone’s business in Kurdistan may be commercially unsustainable — it’s a very big issue that continues to over-shadow the large production numbers the firm is hitting.
For now, payments remain piecemeal, although welcome and essential when they come. Jón Ferrier reckons he and the other directors are putting a huge amount of effort into getting a regular payment cycle sorted out.
Will a positive announcement follow soon?
The uncertainty over regular payments keeps Gulf Keystone’s share price depressed, despite operational progress with at the producing Shaikan oil field in the Kurdistan Region of Iraq. The news release today has it that Gulf Keystone now looks forward to the establishment of regular payments for Shaikan export sales. However, looking forward to it, even expecting it, isn’t the same as saying that it’s imminent, and there’s the possibility that Kurdistan could keep stringing Gulf Keystone along for some considerable time to come.
That, of course, is the crux of the investment risk with Gulf Keystone. An announcement asserting that a proper payment cycle is running will see the shares soar, probably. More payments that are sporadic will likely leave the shares languishing.
Gulf Keystone remains a high-risk investment proposition despite the potential for large-scale phased development of the Shaikan field. The firm reckons it’s targeting 100,000 bopd of production capacity. If the directors can get the finances on track investors now will be glad they kept faith. However, the oil is in Iraq and not the North Sea, which complicates things somewhat, as we are seeing.