Im heartened to see that shortly after I last wrote about Gulf Keystone Petroleum (LSE: GKP) in early February, the firm stopped its headlong dash to truck as much oil as possible for export.
Without regular payments, that expensive and convoluted method of production seemed detrimental to the firms progress.
Running on fumes
Indeed, the firm is positively gasping for income and ended up putting itself up for sale. In an announcement on 25 February, the firm said it is discussing with a number of parties either possible asset transactions or a sale of the Company. We loved it, and the shares soared!
Loved it, we might have but such drastic action speaks volumes of GKPs cash-flow predicament. At the time of the announcement, the company had US$69.3 million stashed away and burning fast and the day after received a further US$20.8 million as a pre-payment for Shaikan crude oil sales, presumably from a rich, sympathetic, avuncular-like customer.
Thats not enough wonga, though. In fact, its a drop in the ocean when compared to the firms $520 million or so debt pile, which costs an arm and a leg to service. Thats why, in view of its existing debt payment obligations, GKP is engaged in a review of its financing options with its key stakeholders, whilst engaging financial advisers to help ram home the seriousness of the affair.
And thats where we stand with news flow. Grim, right?
A chink of light
Yet theres always a half-full glass to swig from if you look for it, and todays positive voice comes courtesy of avid Motley Fool reader and long-term Gulf Keystone Petroleum shareholder Steve, who kindly wrote in to pitch his view. Steve makes some good points and I have the pleasure in running over them here.
Firstly, Gulf Keystone Petroleum is sitting on a lot of oil in the ground. Estimates vary, but its a lot. The firm is capable of producing around 40,000 barrels of oil a day, which it confirmed in an early-January statement. Back then, GKP said it was producing from seven wells with Shaikan-8 expected to come online during January 2015. Indeed, increasing production hit the companys 40,000 gross barrels of oil per day target on 27 December. On top of that, on 24 December, Shaikan-11 spudded, which can be tied in to future production schedules. When that pipeline access solution for Shaikan is done, rather than having to truck production to port for export, the operational set-up will be magnificent.
Steve points out that GKP is still managing to deliver oil for the domestic market despite operating in what became a war zone. The Kurdistan Regional Governments (KRG) has a contractual obligation to pay for the oil Gulf Keystone trucked for export and owes the firm, and fellow producer Genel, a lot of money. Steve reckons the KRG will pay up in the end. The price of failing to do so, he argues, is an end to foreign investment in the region.
Attractive bid target
Putting it all together, Steve reckons that Gulf Keystones potential to produce exportable oil at around one tenth of the cost of some offshore producers makes the firm an attractive bid target.
What do you think? After all, its your money youre investing. Gulf Keystone Petroleum may be on the cusp of seeing production underpin potentially robust cash flow, if all goes well and the firm sorts out its immediate cash problems. There are positives, but Gulf Keystone Petroleum remains a high-risk proposition.
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