Fox-Davies Capital reiterates Gulf Keystone 'buy' recommendation, targets 200p

Following the announcement of Gulf Keystone’s comprehensive 2010 work program earlier today, London-based stockbroker Fox-Davies Capital issued a note to investors reiterating its 'buy' recommendation targeting 200p per share. Earlier today, Gulf Keystone completed a fully subscribed placing of 20.9m new shares at a price of 76.5p per share, raising gross proceeds of approximately £16 million.

The company said it intends to use the proceeds to fund its ongoing activities in Kurdistan, with a 2010 work campaign planned for the Shaikan and Sheikh Adi blocks.

The 2010 campaign has a considerable focus on the company’s most advanced project, the Shaikan block, with further evaluation and testing of Shaikan-1 and three further appraisal wells planned. Gulf Keystone also intends to drill the first exploration well on the Sheikh Adi block, to explore all zones down to and including the upper Permian. The exploration well is planned to spud in the third quarter of 2010

According to Fox-Davies, the company will be required to raise between US$130 and 140m within Q2/Q3 2010 to fund the 2010 work programme and the ETAMIC/GKPI equity reorganisation, announced last week. The analyst noted that its 200p price target incorporates an equity dilution of approximatelyUS$150m, and highlighted that this estimate anticipated a lower price than achieved in today’s £16m placing.

According to Fox-Davies, Gulf Keystone has approximately US$52m available to it and the company has the option to raise the balance of US$75-85m through the equity market and/or by diluting some of the equity in its exploration licences. The stockbroker estimates that Gulf Keystone’s 20% interest in Akri Bijeel is worth between US$50 and 60m, and by selling the holding to the block’s operator, MOL, the company could raise about half of the outstanding balance.

Whilst the stockbroker acknowledged that the funding requirement represents a ‘hefty commitment’, the broker reminded investors not to forget the size and value of the multi-billion barrel Shaikan discovery. According to the broker, its valuation for the Kurdistan oil play includes ‘a lot of oil for free’ with discounted barrels and prospective resources not considered in the 200p price target.

Fox-Davies said that Gulf Keystone’s current market capitalisation, just above US$600m, equates to about US$1 for each equity barrel of the Shaikan discovery compared to an estimated NPV (net present value) of US$2.4 per barrel, based on certain assumptions. Moreover, based on current pricing assumptions and forecasts, Fox-Davies said that Gulf Keystone’s current market capitalisation already represents a 50% discount to the existing, albeit not appraised, oil discovery.

The broker also noted that its price target does not account for any prospective resources in the two licences of Sheikh Adi and Ber Bahr, which are contiguous and on trend to the NW of Shaikan. According to Fox-Davies the licenses have been materially de-risked by the back-to-back discoveries of Shaikan and Akri Bijeel. With Gulf Keystone’s fully diluted interests of 80% in Sheikh Adi, and 40% in Ber Bahr, the analyst’s combined estimate values these assets at an additional 90p per share.

Similarly, the valuation does not include the prospective 1Bbbl oil-in-place resources in the lower Triassic and Permian zones. These prospective resources were assessed by a third-party, and were encountered as high pressure light oil shows in the Shaikan-1 well, although they have not as yet been tested.

Fox-Davies Capital said that whilst there are some unresolved political, commercial and financing issues, the stockbroker sees the current share price as a good entry point, before these issues are resolved and more discoveries are struck. According to Fox-Davies its 200p price target represents a worst-case-scenario and the broker said it remains very comfortable with it.