New management, a restructured balance sheet and a more regular payment schedule for its crude exports makes now the perfect time to reappraise former retail favourite oil stock Gulf Keystone Petroleum (GKP).

Through a period which has seen the company nearly go bust and its share price fluctuate between little more than a penny and more than £4, one thing has remained consistent about the company: the quality of its asset.

‘Three times the size of the Shard’

The Shaikan field in Kurdistan, northern Iraq contains an ‘oil column three times the size of the Shard’ according to chief executive Jon Ferrier. ‘The asset is fantastic with a huge in place resource and recoverable reserves delivering steady production,’ he adds.

The plan is to boost output from the current 33,000 barrels of oil per day (bopd) to 55,000 bopd which Ferrier explains is the upper limit at which it would no longer be feasible to truck crude.

This is not a cost issue, chief financial officer Sami Zouari says the unit cost of trucking its oil is as low as $2 per barrel but rather a safety and environmental consideration given the number of trucks on the road required to carry this amount of crude oil.

Realising the full 100,000 bopd potential of the field therefore means tapping into a pipeline instead. Ferrier believes there could be progress on this front as early as next year.

Production uplift 

Cannacord analyst Charlie Sharp explains how the company can achieve the uplift in production: ‘We believe that achieving this 60% or more production growth through application of straightforward technology - new drilling, placement of pumps in wells, debottlenecking of surface facilities - should have several important impacts.

‘It would increase the cash flow stream to provide a strong internal financing source for full field development, which is expected to result in gross production of 110,000 bopd around ‘21; substantially reduce field operating costs to less than $4 per barrel; and demonstrate the field’s scale and quality to market and industry alike.’

Ferrier intimates that by discovering Shaikan the previous entrepreneurial management bit off more than they could chew and its certainly true that a company of Gulf Keystone’s size would never gain access to a field of this scale in a more stable postcode.

Sharp at least seems confident that the Ferrier and Zouari are up to the job: ‘In our view, this team is now fit for the scale of the company and the tasks ahead.’

Volatile postcode

Located just 50 miles from the battle raging between the Iraqi army and Kurdish Peshmerga militants to regain control of Mosul from Islamic State militants, it is noteworthy that for all the other issues which have dogged Gulf Keystone in recent years its operations
have never been affected by security issues.

Kurdistan is controlled by the semi-autonomous Kurdistan Regional Government (KRG) which after years of wrangling now exports significant quantities of crude through a pipeline network to the port of Ceyhan in Turkey.

The reserves downgrades and poor production performance endured by fellow Kurdistan operator Genel Energy (GENL) on its Taq Taq field could set alarm bells ringing but Ferrier points out Shaikan is producing from a completely different reservoir.

Among the other risks prospective investors in the stock have to weigh is that an indebted KRG may struggle to maintain regular payments for Gulf Keystone’s crude exports. Ferrier says it is not in the interests of the KRG to place its key producers under financial stress.

The background

We have tracked Gulf Keystone’s progress for a number of years, previewing the results from the initial discovery well at Shaikan in August 2009 when the shares were trading at 12p. In January 2011 we interviewed then-CEO Todd Kozel and suggested investors should steer clear at 173.2p.

In early 2012 the shares moved higher on bid talk and further bullish drilling reports and briefly topped 400p. It has been downhill since then as progress in securing export payments from the Kurdistan Regional Government (KRG) stalled and oil prices collapsed, putting extreme pressure on the balance sheet. Against this backdrop we also said to sell at 70p in November 2014.

The company managed to avoid liquidation through a debt-for-equity swap which completed in October 2016 but this did dilute existing shareholders down to 15% of their original stake. The company’s borrowings fell from $600m to $100m, putting the company in a modest net cash position once you factor in the $108.9m of cash on the balance sheet.

Ferrier acknowledges the pain felt by shareholders and says among the most difficult parts of his job has been dealing with investors who are both emotionally and financially invested in the story. He says this was the best outcome he could achieve for all parties.

Planets aligned

His predecessor John Gerstenlauer made the same argument and the KRG is still missing some monthly payments but Zouari says ‘the planets are aligned as never before’ for a consistent payment schedule, conceding higher oil prices would help underpin this.

Longer term the company hopes to negotiate a production sharing contract or PSC which would see it market its own crude.

We are positive on the relaunched Gulf Keystone. Canaccord has a price target of 2.6p, implying more than 100% upside at the current 1.26p.

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