Why I think the GKP share price could be the best oil stock bargain of the decade

In the depths of the oil price slump, I was pondering how best to play the recovery that I was confident would happen. The best long-term approach, I reckon, is to buy shares in BP or Royal Dutch Shell, put them away and just forget about them.

But I also fancied a more geared prospect, albeit with more risk, with a small amount of my cash. I went for Premier Oil (LSE: PMO), but I can’t help feeling that Gulf Keystone Petroleum (LSE: GKP) could be the best mid-cap oil prospect out there right now.

Updates

Since I last looked at GKP in January, we’ve seen Shaikan payments continuing nicely, with a total of $35.3m being paid by the Kurdistan Regional Government for crude oil sales during November and December 2018.

But the firm’s update earlier this month made for more interesting reading. The 2019 de-bottlenecking programme at Shaikan is on track to achieve a production target of 55,000 bopd by the first quarter of 2020. And a new pipeline should be completed by the middle of this year, which will eliminate the need for trucking of crude oil.

Combined, those two developments should make for smoother and less risky production and shipping.

The firm’s relationship with the Kurdistan Regional Government is continuing to look healthy too, as the two parties have signed a renewal of their crude oil sales agreement, which is now effective up until 31 December 2020.

And even though production was hit in the first quarter by work to install larger bore tubing to enhance production, the company is still expecting to record gross average production of 32,000 to 38,000 bopd in 2019.

Premier

The big story at Premier Oil has been full-year results released in early March, which chief executive Tony Durrant summed up with: “2018 saw higher production, positive free cash flow and a return to profitability,” and that “the group is ahead of plans to restore balance sheet strength and remains focused on consistently delivering free cash flows.”

With Premier’s focus necessarily being on its debts, that has to be good news.

The company achieved a record production of 80.5 kboepd, and posted an after-tax profit of $133.4m — and that’s a much better result than 2017’s post-tax loss of $253.8m.

Cash

Operating cash flow grew by 64% to $777.2m, and that helped get year-end debt down to $2.3bn from $2.7bn a year previously.

Premier is certainly not out of the woods yet, with the oil price only tentatively holding up at still under the $70 per barrel that I’d feel more comfortable with. World production is still expected to be in surplus throughout 2019, and any fall in demand as global economic growth appears to be slowing would exacerbate that problem.

Future oil price weakness would put more pressure on smaller oil companies, but as my colleague Roland Head estimates, Premier should be cash flow positive at about $45 per barrel.

I think that provides a sufficient safety margin for Premier Oil shares, and I’m becoming more confident that I’ve made a good 10-year investment.