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Will Gulf Keystone’s new owners keep faith or sell out?

Last updated: 11:00 05 Aug 2016 BST, First published: 13:47 02 Aug 2016 BST

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GKP is about to hit reset

Now that Gulf Keystone Petroleum Limited’s (LON:GKP) bondholders have given the green light to its proposed debt restructuring, the question for soon-to-be minority shareholders is quite simple.

Will the new owners stick or twist?

Gulf Keystone has today revealed that 82% of bondholders have approved the debt-for-equity swap. It surpasses the 75% acceptance threshold, and, as such, means Gulf Keystone can proceed with plans to reduce its debts by US$500mln to US$100mln.

The restructuring now awaits the rubber stamp at Friday’s shareholder meeting.

A vote in favour renders those on the current shareholder register as passengers, leaving them with between 5-10% of the company (depending on the take-up of a separate open offer share sale).

Voting against the proposal does nothing other than direct Gulf Keystone into administration.

Once completed, the restructuring puts the current bondholders in control as they will together own the rest of the enlarged share capital.

Will the new shareholders cash out?

What happens after that is uncertain, given last week’s US$300mln takeover approach by DNO, GKP’s neighbour in the Kurdistan region of northern Iraq. All investors can do in the meantime is guess.

Will enough of the new ‘owners’ keep faith in Gulf Keystone and Kurdistan?  And if they do, how long will they be willing hold onto their stake in a stand-alone Gulf Keystone?

Cantor Fitzgerald analyst Sam Wahab reckons the bondholders are “probably a bit torn” on what to do next.

“They could easily make a quick turn, but it will still be below the initial investment,” he told Proactive Investors.

“But, they’re not winning here, especially not for a three-year investment.”

How much faith is there left in Gulf Keystone?

A matter of weeks ago bondholders faced the prospect of a default. Now they may walk away with some value - and quickly.

Wahab highlighted that by engaging in the restructuring process there must have been some appetite among bondholders to support the company.

He also noted that as the bondholders had already engaged in the process weeks before the DNO approach, it is unlikely they were thinking about an immediate sale.

“The reason they entered into it [the restructuring] was to try to extract some value from their initial investment because the company was in real risk of administration,” the analyst said.

“Bondholders had to engage in the restructuring if they wanted to keep the story going.

“I think when DNO came in and offered a price far in excess of the market capitalisation I suppose it would’ve piqued the interest. But, the offer is still well below the offers that potentially came in a couple of years ago.”

The opportunity to walk away will still have some appeal.

Let’s not forget that today’s oil market is worlds apart from the one in which the bondholders initially invested - and that’s before factoring in any of the geopolitical risks that have escalated in the intervening years.

The issue of crude payments (or lack of them) from the Kurdistan regional government and tight cash flow isn’t going away. And Gulf Keystone still needs to come up with a longer-term plan to finance the rest of the development of its flagship Shaikan field.

Such worries could be forgotten by the bondholders if the company is sold.

What is Gulf Keystone actually worth?

If all other things were equal then it would cost vastly more to buy Gulf Keystone than the US$300mln offered by DNO.

Wahab, for example, reckons Gulf Keystone’s Shaikan field has a value similar to the Jubilee field in Ghana, which cornerstoned Tullow Oil’s growth from also ran to £5bn FTSE 100 constituent.

On paper Gulf Keystone could be a valuable onshore producer with Shaikan flowing some 40,000 barrels of oil per day at particularly low costs. And if existing shareholders back the open offer it could expand the operation to 55,000 bopd.

With the passing of time and perhaps even an improvement in export payment conditions and more dependable cash-flow, Gulf Keystone could potentially rehab its valuation.

“The reason that the value is so much lower is largely because they can’t get paid for the crude,” Wahab said.

“It would probably be worth - if a larger entity were to come in - plugging the wells and waiting until the civil situation improves. But, how long that could take nobody knows, it has been going on for so long already.”

Gulf Keystone’s perilous financial position means that DNO’s takeover approach is inevitably a low-ball offer.

The question is whether the bondholders currently accepting the restructuring fancy waiting long enough for something better to come along.

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