Gulf Keystone Petroleum to take full control of Kurdistan operating subsidiary

Gulf Keystone Petroleum (AIM: GKP) is set to increase its interests in Kurdistan by assuming 100% control of its GKPI operating subsidiary, following a material default by the company’s investment partner in Kurdistan, ETAMIC. Subject to total expenditure of US$52m the company will increase its net interests in each of the four Kurdistan based oilfields - Shaikan, Sheikh Adi, Ber Bahr and Akri Bijeel.

After extensive negotiations with the Kurdistan Regional Government (KRG), Gulf Keystone has agreed the main components of a re-organisation of its interests in GKPI, the proposed reorganisation is subject to KRG approval and discussions remain ongoing.

According to London-based stockbroker, Fox-Davies Capital the news represents a very positive development for Gulf Keystone, as it clarifies the PSC structure and also contributes a net value increase to the broker’s risked NAV. Fox-Davies said it continues to be very confident on the investment story, retaining its ‘Buy’ rating on the stock and targeting 200p per share.

In July 2009, Gulf Keystone agreed the ETAMIC partnership as part of its acquisition of interests in Ber Bahr and the Sheikh Adi. ETAMIC, a middle-eastern investment fund, successfully negotiated the award of the Sheikh Adi PSC (Production Sharing Contract) and the assignment of an interest in the Ber Bahr PSC. Subsequently, Gulf Keystone issued new shares in GKPI to ETAMIC, representing 50% of the subsidiary’s equity.

Currently under the new agreement, ETAMIC’s 50% shareholding in GKPI will revert to Gulf Keystone, making the Kurdistan based company Gulf Keystone’s wholly-owned subsidiary. Consequently, the company will pay ETAMIC’s overdue US$40m Infrastructure Support Payment to the KRG. This payment relates to the Sheikh Adi and Ber Bahr oilfields, and subject to the payment, GKPI will retain its interests in the oilfields, of 80% and 40% respectively. The company is also required to make a termination payment of US$12m to ETAMIC in full and final settlement of all of their rights to the joint venture.

The KRG is also entitled to an Additional Infrastructure Support Payment, amounting to 40% of GKPI's entitlement to ‘Profit Petroleum’ derived from all four of its Kurdistan PSCs.

Fox-Davies noted that previously, GKPI’s ‘Profit Oil’ was split 70% for KRG and 30% for the company, of which Gulf Keystone would receive 15% net. Subsequently under the new agreement the KRG will receive 82% of Profit Oil (70% + 40% of GKPI’s profit oil), as such Gulf Keystone will now receive 18% net, a 3% absolute increase in its ‘Profit Oil’ entitlement and a 20% increase on the share previously due to Gulf Keystone.

As a result of the deal, Gulf Keystone has effectively doubled its working interests throughout its Kurdistan operations. Upon completion of the reorganisation, the company’s current interests (subject to certain back-in rights and profit sharing agreements) are - 75% of Sheikan Oilfield, 80% of Sheikan Adi, 40% of Ber Bahr and 20% in Akri Bijeel.

Gulf Keystone said it will update the market once final agreements have been signed by all relevant parties. Additionally the company recognised that additional funding would be required, and said it is considering its funding strategy in this regard.

The Fox-Davies analyst estimates that the deal’s net benefit to Gulf Keystone is US$225m or 25p per share, which is partly compensated by a larger than expected funding requirement.

Yesterday, Gulf Keystone closed the trading day strongly after the group announced that the operator of the Akri Bijeel, concluded a successful oil test in the Bijeel-1 exploration well. The tested zone is in the upper Jurassic and flowed at rates of up to 3,200 barrels of oil per day with associated gas rates of 933,000 standard cubic feet of gas per day.  Oil gravity was 18 degrees API and flowing wellhead pressure was 420 psi on a 48/64" choke.

Drilling operations are still in line with previously announced plans.  Following completion of the full test cycle, drilling will resume from the current depth of 3,831 metres to a final planned depth of approximately 4,400 meters, pending actual well results.

The Bijeel-1 well is targeting prospective intervals in the Cretaceous and the Jurassic.The well is the first exploration well being drilled on the Akri Bijeel block which is adjacent to Gulf Keystone’s Shaikan block. In December, Gulf Keystone was forecasting that the well would take approximately four to five months to complete.

In relation to the Akri Bijeel test, Fox-Davies said it is an interesting result because the targeted prospect was different from Shaikan. Furthermore, the stockbroker noted that the oil quality is similar to the one encountered in Shaikan at this level and is flowing at very decent rates. It looks like a structure in that part of the world has been charged by a very prolific source rock, Fox-Davies said.

Fox-Davies believes that the most interesting part of the well is yet to come as it penetrates the deeper section, where the broker expects lighter oil and gas to be present. According to the analyst report, the result also de-risks the two other nearby licences of Sheikh Adi and Ber Bahr in which Gulf Keystone has a substantial interest.