Gulf Keystone welcomes cash windfall

Gulf Keystone Petroleum's share price rally Friday has partially unwound and the 32-40p range of the past three months remains intact. The oil company - now run by highly-rated, but largely unknown Jón Ferrier following the departure of well-respected John Gerstenlauer - may have improved the short-term cash outlook, but a long-term solution to ensuring regular payment for crude from its Shaikan field appears no nearer. There's no news of a takeover either.

Production from Shaikan in the Kurdistan region of Iraq has continued at more than 40,000 barrels of oil per day (bopd) following successful de-bottlenecking operations at the PF-1 production facility.

That's good news, but it's the payments situation which is keeping a lid on any significant share price upside. Clearly, long-running talks with the Kurdistan regional government's oil ministers made little progress. It's why the company has adopted a "diversified marketing strategy".

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Currently, Shaikan oil is either being trucked to the Turkish coast, or sold to a domestic buyer under a new six-month 12,000-40,000 bopd contract. Gulf has recently received $9.8 million for oil sales - half from the new deal and half for domestic deliveries.

That's come in handy as Gulf has been running down the cash, from $84.7 million on 8 April to $68.7 million last week. The Kurds will pay up, but a preoccupation fighting IS militants may mean Gulf has to wait for its money.

Remember, too, that in April, Gulf received the required note-holder support to axe the book equity ratio (BER) covenant on its bonds, a requirement for the $40.7 million (£27.5 million) share placing at 32p.

In return for removing the put option, Gulf agreed to retain its debt service reserve account - a security measure to ensure repayments are met - for a year of scheduled interest payments, grant a security interest in favour of the bond-holders, and enter a dialogue with note-holders if its cash balance drops below $50 million.

Next week's AGM in Paris should be interesting, too. Gulf, which is currently reviewing longer term financing options, and potential corporate actions, wants "additional headroom", and 'Resolution 9' proposes the issue of a further 100 million shares, or 10% of the company.

Edison Research said earlier this month: "The current share price reflects uncertainty over receipt of revenues, but we believe the KRG fully appreciates the importance of Shaikan to the region and that a reliable payment cycle will come in time. Our core production and development NAV is 56p/share, increasing to a full NAV of 90p/share. We also examine other valuations given the strategic process now entered into, which reveals potential upside from these estimates."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.