Gulf Keystone Petroleum(LSE: GKP) has had a rough 18 months and this week the company revealed the true extent of its troubles.
Gulf Keystone announced yesterdaythat it isinviting the holdersof its $250m, 13% guaranteed notes due 2017, to approve a proposal to change the details of the Trust Deed governing the notes.
The company is being forced to take this action as the notes in question were issued with aBook Equity Ratio Put Option. This option means that the company is required to repay the notes in full, if its ratio of book equity to total assets falls below the key level of 0.4.
If the book equity ratio falls below 0.4 for60 days following the release date of Gulf Keystones 2014 financial statements expected April 2015 the company has to make an offer to repurchase the notes.
Gulf Keystone cannot afford to make this payment. Following the receipt of $26m from oil payments last month, analysts believe that at present Gulf Keystone has a cash balance of around $90m clearly not enough to repay the debt and continue to fund operating costs.
At present, the companys book equity ratio is above the key threshold. However, management has stated that it is planning to write down the value of itsAkri-Bijeel block to zero, which will reduce Gulf Keystones asset base significantly, and push the ratio below the 0.4 threshold.
Bondholders in control
So, just like peer Afren, Gulf Keystones future is now in the hands of the companys bond holders. Bondholders dont have a reputation for leniency.
Still, looking at this weeks news release from Gulf Keystone, it seems as if the company has already reached somewhat of a preliminary agreement with significant noteholders, and based on responses during those discussions, expects them to be supportive. On that basis, it looks as if the company will be able to restructure its debt to remover the repayment clause for the time being.
Nevertheless, a deal may come at the expense of shareholders. Gulf Keystone has warned thatit is considering issuing new shares to raise cash.
However, Gulf Keystones position is precarious. Now the company is starting to engage bondholders, in an attempt to renegotiate debt repayment terms,other counter parties will begin to view Gulf Keystone with an increasing amount of scepticism.
Creditors will start to ask if Gulf Keystone is planning to renegotiate any other payment contracts. Can creditors continue to trust the company?
All in all, things dont look good for Gulf Keystone. The company still has attractive set of assets, but whether or not the company can survive long enough to enable the assets to live up to their full potential, is something only time can tell.
That said, Gulf Keystone may turn out to be a hidden gem. If oil prices improve and the situation within Iraq stabilises, the company could return to growth. But the company has a long way to go.
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