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Gulf Keystone Petroleum Ltd funding crisis marks a crossroads

Gulf Keystone’s future was cast into doubt as its results statement brought forward concerns over future bond repayments, and highlighted a more pressing need for capital investment at the Shaikan field.
Gulf Keystone Petroleum Ltd funding crisis marks a crossroads
It needs $71mln to $88mln to keep Shaikan ticking over

New uncertainty over Gulf Keystone Petroleum Ltd’s (LON:GKP) future has seen a further 50% wipoed off the share price in the past week.

Gulf Keystone’s future was cast into doubt as its results statement for 2015 brought forward concerns over future bond repayments, and highlighted a more pressing need for capital investment at the Shaikan field.

Shaikan’s output may start to decline later this year if a $71-88mln investment programme isn’t funded and approved, GKP warned.

Gulf Keystone had $50mln of cash at the end of December. It will need to refinance or repay $575mln of bonds by October 2017.

The group has now conceded that a rescue via a corporate transaction isn’t likely in the short term, because of low oil prices and the political uncertainties in northern Iraq and surrounding areas.

Thursday's intraday low of 6.25p is worrying marker in the apparent demise of the share that was priced at around 150p in the week’s leading up to its ‘promotion’ to the London Stock Exchange Main Marking in March 2014.

Since then divisive former chief executive Todd Kozel left the group, in July 2014, followed by long serving COO-turned-CEO, John Gerstenlauer, who departed last summer.

GKP has, in the intervening period, been hit by something of a perfect storm - battered by plummeting crude prices and geo-political issues (concerning Kurdistan and its relationship with Baghdad, as well as the rise of ISIS and the broader issues in the Middle East).

Financial results out Thursday were the first from new boss Jón Ferrier, who has held the reins since June 2015, and they reveal a business at a crossroads.

On one hand, GKP has a high quality asset in the Shaikan field and, operationally, it has achieved an awful lot since the project’s discovery in 2009.

Shaikan produced a total of 11mln barrels of oil last year. That equates to an average of 30,500 barrels per day (bopd) over the year, and in February - before a terrorist attack on export pipelines forced a temporary suspension - the field was producing at a rate just above 37,000 bopd.

It is forecast to produce between 31,000 and 35,000 bopd in 2016, subject to the availability of export infrastructure, and the field’s ‘nameplate’ capacity is 40,000 bopd. Payments for oil production are expected to continue. But, Gulf Keystone needs a new injection of money.

The group - which at the current share price is worth just £77mln (about $110mln) - faces $575mln of debt repayments in the next eighteen months.   First some $250mln is due in just over 12 months, and notes amounting to $325mln mature in October 2017.

At the same time, the company needs to invest in Shaikan - not for growth, but just to sustain targeted output levels beyond 2016.

Oil payments keep coming, but are they enough?

Arguably, if oil prices were better or the field was located somewhere else then maybe there would be less pressure.

Indeed, an operating cost of just $5 per barrel in 2015 would suggest that - all other things being equal - Gulf Keystone would be among most adaptable of any producers to deal with current oil prices.

It ended December 31 with £50mln of cash, and had received $92.8mln of cash from the Kurdistan authorities over the course of the year. 

The Kurdistan Regional Government (KRG) has established regular payments since September, but, many observers still look upon these payments as being ‘month-by-month’, hence the temporary bumps up in the share price as each payment is confirmed.

Earlier this week it received a US$7.5mln payment for exported production (US$6mln net to GKP), which will be adeed to a net US$12mln it banked earlier this month.  

Payments now explicitly comprise a mix of payments for production (as per existing contracts with the KRG) and payments for past arrears. The most recent payment was a split of $5.8mln for oil exported in January and $9.2mln for arrears.

A total of $93mln was owed to the company at the end of December 2015.

$71mln to $88mln is needed to keep Shaikan ticking over

Whilst debt deadlines loom on the horizon, the pressing issue at this stage is about being able to put funds into the ground.

It acknowledged in its results statement that Shaikan wells may begin to exhibit natural production declines later this year if additional capital isn’t invested in the field.

An interim project is proposed which, subject to funding and approval, will allow production to be maintained at around 40,000 bopd and could potentially rise to 55,000 bopd.

Such a project would be a stop-gap, or a bridge, to a larger phase of field development work - for which a plan was submitted to the KRG in late 2015.

The interim project has been budgeted between $71mln and $88mln, and, if funding can be secured soon enough Gulf Keystone believes it could be completed within a year.

A strategic review was launched last February and, as part of that process, Gulf Keystone has explored the possibility of selling assets or even the whole company.

It told investors that the process attracted interest from various parties and talks are ongoing. But, it cautioned that a transaction is unlikely in the near term because of low and volatile oil prices and geo-political issues in the region.

A debt crisis is looming, and negotiations are underway

Talks have also been ongoing with bondholders, following a technical covenant breach last spring.

Reports last month suggested bondholders were working on possible restructuring options.

The larger $325mln parcel of debt (due October 2017), according to Bloomberg, is indicated to be priced in the market at about 15 cents in the dollar while the April 2017 $250mln bonds are quoted at 46 cents.

As a side note, some may well look to Kurdistan peer Genel Energy for a read-across, as it planning to buy-back some of its bonds. But, in truth the positions of two companies are almost incomparable.

Genel was created from a £1bn float backed by Nat Rothschild and former BP boss Tony Hayward. Its assets are producing at higher rates than Gulf Keystone and it had some £450mln of cash in the bank at the end of 2015.

Genel, in a statement on Friday, said it was seeking to buy-back at least $50mln (nominal value) of its outstanding $730mln bonds, due in May 2019.

Barclays Capital, which says the producer can be cash-flow positive in 2016, highlighted that the Genel bonds last traded at 52 cents on the dollar - which infers the possibility that a $50mln bond buyback would cost little more than $25mln.

If only GKP had that option, eh?

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