Shares in Gulf Keystone Petroleum (LSE: GKP) (NASDAQOTH: GFKSY.US) tanked when the market opened this morning, and were down by 9% at 75p at the time of writing, following the publication of the companys interim results earlier this morning.
So whats the story?
In a nutshell, production and export oil sales are progressing well, but payment for oil sold is slow and unpredictable, and restricted cash flow could slow further production growth.
Production
Gulf Keystones big commitment for 2014 was to crank Shaikan production up to 40,000 barrels of oil per day (bopd).
So far, things are pretty much on track. Production has doubled since January, and is currently running in excess of 20,000 bopd, according to the firm.
However, the 40,000 bopd target is now officially in jeopardy: Gulf Keystone said today that this milestone could slip to Q1 2015, due to the current conflict, which is limiting the availability of the international contractors needed to perform some of the specialist technical work thats required.
What about cash?
Its not all good news on the cash flow front, either.
Gulf Keystone reported revenues of $18.7m for the first half of this year, with a further $35m owed for export sales. The firm says that it is trying to establish a regular payment cycle with the Kurdistan Ministry of Natural Resources in other words, payments are currently slow and irregular.
Although not great, thats pretty much what I expected, but I think that the firms slowing production growth has raised another warning flag: cash burn.
Over the last three months alone, Gulf Keystone has burned through $93m of its $270m cash pile, leaving it with a cash balance of $177m at the end of June.
Todays results contain several clear hints that capital expenditure may be slowed to avoid a cash crunch, and I think that the firms planned third production facility, PF-3, is now likely to be delayed.
A screaming buy?
At todays share price of 75p, I believe Gulf Keystone is a screaming buy.
Kurdistan remains risky, but I believe the Gulf Keystone story will play out well, over the long term.
Yes, there probably will be further delays at Gulf Keystone, and perhaps a cash crunch, but todays price doesnt reflect the near-term potential of the firms assets, and investors who bought in at higher prices should sit tight, in my view, and wait for better times.
Millionaires need not apply
Today’s share price offers the potential for 100%-200% gains, in my view — but anyone looking to repeat the 1,424% gain in Gulf Keystone’s share price seen between August 2008 and February 2012 needs to look elsewhere.
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Roland Headowns shares in Gulf Keystone Petroleum. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
