We’ve seen at a 55% fall in the past five years, mostly in the past two. And GKP shares are down 99% since their all-time high in 2012.

Valuation crash

Forecasts for 2024 put the shares on a price-to-earnings (P/E) ratio of just 1.7. And the big dividends that shareholders used to enjoy have stopped, at least for now.

So what went wrong? Well, plenty. Gulf Keystone operates the Shaikan oil field, in the Kurdistan Region of Iraq. All was going well, paying the regional government its share and exporting mainly via a pipeline through Turkey.

But then the Iraqi government asserted its authority over oil exports. And no longer could the Kurdistan Regional Government (KRG) export oil itself.

The pipeline closed.

Will it reopen?

The existence of the company is at stake here. And with the export taps closed, the board is trying to keep the lights on for as long as possible.

There have still been some local sales, but only low volumes at low local prices. Still, in its 31 January update, Gulf told us that “we are actively working to increase volumes and remain focused on at least covering our estimated monthly capex and other costs of c.$6 million in 2024“.

Talks with the Iraqi government to reopen oil exports are dragging on. But at least they’re happening.

And the GKP board was sufficiently optimistic: “With the resumption of exports and normalisation of KRG payments, GKP will consider incremental field investment to realise Shaikan’s substantial reserves base and return to previous production levels“.

No-brainer buy?

As of 30 January, Gulf had $82m in cash on the books, with no debt. So it sounds like it can cover its reduced operational costs, but maybe not for long.

The company is also owed an outstanding $151m from the KRG for the six months before the pipeline was switched off. Whether it will get that unless there’s an agreement to resume exports must be in doubt. But it’s an extra bit of liquidity if things do get moving again.

Would I’d buy? Well, the oil exploration business has always been risky. And operating in politically unstable parts of the world is one of the big risks.

I’d say this one though is probably about as close to a 50/50 gamble as I’ve seen.

Multibagger or bust

If the export taps open again, and especially if Gulf gets back to those hoped-for “previous production levels“, I see a decent possibility of a nice multibagger.

But if it doesn’t happen, the only real alternative I see is a wipeout. If I bought now, I’d only do so with money I could afford to lose… with a fair chance of losing it.

For those with the courage to stump up a few quid now, I think the key question is, “do I feel lucky”?

The post As the Gulf Keystone Petroleum (GKP) share price keeps falling, is it too cheap to ignore? appeared first on The Twelfth Magpie.

Gulf Keystone is one such producer, with its most notable exploration and production field in the region being Shaikan. For me, this means that the stock is a huge risk/reward play.

Huge legal risk

For years, the federal government of Iraq has disputed the right of the semi-autonomous Kurdistan government to sell oil independently. The oil from fields in Kurdistan has historically been transported through a pipeline running into the Turkish port of Ceyhan.

Consequently, the Iraq-Turkey Pipeline (ITP) was shut down on orders from Iraq’s federal government in Baghdad on 25 March.

This followed a ruling by the International Court of Arbitration that Turkey cannot allow independent oil exports from Iraqi Kurdistan. Instead, all such exports must be approved by the federal government of Iraq.

There seems little chance of this approval being granted. In February 2022, Iraq’s Federal Supreme Court ruled that independent sales of oil and gas by Iraqi Kurdistan were unconstitutional.

Massive blow to independent firms

Gulf Keystone looked on track to deliver another year of strong profitable growth in production and robust cash flow generation. March production before the pipeline suspension averaged around 53,700 barrels per day. There were also plans to bring on further production in the second half of this year.  

The suspension of the ITP has also resulted in a gross production deferment to date of around 1.6m barrels. It has also exacerbated delays in payments to Gulf Keystone from the Iraqi Kurdistan government of $102m.

Fighting a rear-guard action

Given all this, Gulf Keystone is focusing on preserving liquidity and is targeting a reduction of costs across the business. At the same time, it is ensuring the long-term reliability of its oil and gas assets in Iraqi Kurdistan.

From now to the end of the year, the firm expects net capital expenditure of $35m-$40m. For the whole year, net capital expenditure is currently estimated at $80m-$85m. Before the ITP shutdown, the estimate was $160m-$175m.

Dividend under review

Before the closure of the pipeline, Gulf Keystone had offered a very healthy dividend yield in addition to strong share price growth. In 2022, the dividend yield was over 9%, in 2021 over 39% (yes, thirty-nine), and in 2020 over 7%.

As of now, the company is ‘considering’ the previously declared final 2022 dividend of $25m.

The company believes that the pipeline shut-in is temporary, and that the Iraqi Kurdistan government will resume more normal payments.

For me, the Iraq oil sector, north and south, is a particularly uncertain operating environment. It is beset by legal wranglings between the federal government in the south and the semi-autonomous government in the north.

Gulf Keystone may be right that this dispute will end at some point. However, there is no telling when and in my view it is only likely to be replaced by another dispute.

I have holdings elsewhere in the oil sector, which offer good dividend yields and share price growth potential. For me, the risks in Gulf Keystone outweigh the rewards. For others, it may be worth a very speculative punt.

The post The Gulf Keystone Petroleum (GKP) share price is down 40% this year, so is it time to buy? appeared first on The Twelfth Magpie.