Balance sheet strong enough to fund increases in production and dividends
Thursday 18 Apr 2019 Author: Tom Sieber

It may have something of a chequered past but the future for Kurdistan oil producer Gulf Keystone Petroleum (GKP ) looks bright in the near-term. 

This is not an investment for the faint-hearted, given the company operates in semi-autonomous region of Northern Iraq which has been affected by geopolitical turmoil.

However, Gulf Keystone has a very strong balance sheet, the Kurdistan Regional Government (KRG) has a good recent track record of paying on time for its oil, and the company has come up with a clear plan to increase production from its flagship Shaikan field threefold in the coming years.

Strong cash generation underpins a pledge to pay $50m in ordinary and special dividends in 2019 and, if approved at a meeting in June, this generous shareholder reward implies a dividend yield of nearly 7%.

The company first made a discovery at Shaikan in August 2009 and bid talk and further bullish drilling reports helped lift the shares to such dizzying heights that is was on course to qualify for the FTSE 100 when it made a proposed move from AIM to the Main Market.

Some of the heat had already come out of the share price by the time it did change listing category in March 2014. Slow progress in securing export payments from the KRG and a subsequent collapse in oil prices put the balance sheet under strain until a debt-for-equity swap in September 2016.

The company finished 2018 with a $196m net cash position. Its plan is to increase output from Shaikan in phases, the first phase running until the first quarter of 2020 will aim for an increase from the current base level of around 30,000 barrels of oil per day (bopd) to 55,000 bopd and the eventual target is for a full field development to get to 110,000 bopd.

Canaccord Genuity believes that if it were to reach this point by 2024, then in 2025 the company could have net cash of $1bn at a $75 per barrel oil price.

By summer 2019, all Shaikan production is expected to be transported to Fishkabour for transfer to a pipeline and ultimately to the Ceyhan oil terminal on the Mediterranean.

As well as political risks, which could disrupt that supply route, investors need to consider exposure to a volatile oil price. Canaccord estimates that if oil were to dip below $55 per barrel for the long-term (it currently stands at around $70), Gulf Keystone might need to slow its spending or take on more debt.

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