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 company’s interim results earlier this morning.
So what’s 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 Keystone’s 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 that’s required.
What about cash?
It’s 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, that’s pretty much what I expected, but I think that the firm’s 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.
Today’s results contain several clear hints that capital expenditure may be slowed to avoid a cash crunch, and I think that the firm’s planned third production facility, PF-3, is now likely to be delayed.
A screaming buy?
At today’s 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 today’s price doesn’t reflect the near-term potential of the firm’s assets, and investors who bought in at higher prices should sit tight, in my view, and wait for better times.
