Gulf Keystone Petroleum (LSE: GKP) today announced its long-awaited proposals for a balance sheet restructuring. The shares, which closed yesterday at 4.7p crashed as low as 2.36p in early trading.
What do the proposals mean for existing shareholders? And could a restructured Gulf Keystone be an attractive opportunity for new investors.
Debt for equity swap
At the core of the balance sheet restructuring is a debt-for-equity swap that would see debt reduced from $600m to $100m through the conversion of $500m of existing debt into equity. What this means is that shareholders who yesterday owned 100% of the company would end up owning just 5%, though if they want to stump up more cash, they will have the chance to participate in a $25m open offer at 0.82p a share for 10% of the post-restructuring equity.
Chairman Andrew Simon, who today announced he would be retiring with immediate effect, acknowledged that shareholders had suffered “significant value destruction,” blaming the low oil price, the political situation in Kurdistan and the company’s debt burden.
The restructuring deal requires approval from both shareholders and bondholders, and chief executive Jón Ferrier warned: “Without the restructuring and the improved liquidity delivered by the transaction, the company cannot avoid insolvency or capture the significant future potential of the Shaikan field”.
‘New’ Gulf Keystone
Clearly, the massive dilution is bad news for long-suffering shareholders, many of whom have already seen the value of their shares fall from pounds to pence. However, failure to approve the deal would be, as the company puts it, “likely to lead to zero value for the shareholders”.
Galling though it is, shareholders will surely accept the deal with the carrot of the 0.82p open offer providing the potential to mitigate losses if ‘new’ Gulf Keystone goes on to exploit its undoubtedly valuable asset, the Shaikan field.
The company would certainly become a more attractive proposition with its strengthened balance sheet and improved liquidity. The maturity on the retained $100m debt has been put back from next year to 2021, while the $25m from the open offer and the freeing-up of $32.5m will add to cash resources that are “expected” to be sufficient for near-term investment to maintain production at 40,000 barrels of oil per day with “potential” to increase production to 55,000 barrels.
Valuation
I’m inclined to value Gulf Keystone conservatively on its recent cash flows, running at around $15m a month coming in and $6m going out, less a monthly average of $0.83m for the 10% cash coupon on the retained bonds. That gives positive monthly cash flow of $8.17m, or just about $100m a year. With the company being valued at $250m based on the open offer at 0.82p, we’re looking at a multiple of just two-and-a-half times cash flow.
As such, the open offer for existing shareholders looks attractive to me, while new investors may also have an opportunity to buy well below the current 3.25p if, as I suspect, there’s heavy post-restructuring selling by bondholders who ended up shareholders out of necessity rather than by design.