2014 has been an interesting year for Gulf Keystone Petroleum (LSE: GKP) shareholders.
The company has made solid operational progress, and has benefitted from major political developments accelerating the growth of oil exports.
On the other hand, none of this has been reflected in Gulf Keystones share price, which moved steadily lower all year. The shares finally found a bottom at about 43p in October, since when they have risen by about 30%.
Why have the shares fallen?
The biggest blow for Gulf shareholders came in March, when the firms first Competent Persons Report (CPR) was published.
Investors were very disappointed with the CPR, which assigned proven and probable reserves of just 299 million barrels of oil to the firms prized Shaikan asset. Gulfs share of these was just 163m barrels.
This highlighted the downside of former chief executive Todd Kozels hype-laden emphasis on oil in place, rather than estimated resources.
Shaikan has around 12 billion barrels of oil in place. However, so far, Gulf has only actually discovered 702m barrels of oil through drilling, of which only 299m have been shown to be commercially viable, and become reserves.
What about production?
If Gulf Keystone can fund more drilling, its reserves will almost certainly rise.
In the meantime, investors can take comfort from the firms rising production.
Earlier in December, Gulf confirmed that it would hit its 40,000 barrels of oil per day (bopd) 2014 production target before the end of the year. Thats good news, especially as the Kurdistan authorities are now starting to clear the backlog of payments owed to the firm from export sales.
Is Gulf Keystone a buy?
One thing we dont yet know is how Gulf Keystones finances will be affected by the price of oil, which has fallen by about 40% since June.
Gulf had a cash balance of $177m at the end of June. We dont know how much the firm has spent since then, but a possible guide is that it spent $100m on capex during the second half of last year, and $109m during the first half of this year.
I suspect that Gulf may not be able to fund the build of its third production facility needed to take production up to the next milestone of 66,000 bopd without more debt.
On this basis I think the firms shares, which trade on 14 times 2015 forecast earnings, lookfully valued.
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If you’d spotted Gulf Keystone’s potential early and timed your exit well, you could have made a 3,000% profit between 2009 and 2012.
Gulf Keystone won’t provide that kind of opportunity again, but there are other firms that could.
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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.
