Shares in Gulf Keystone Petroleum PLC (LON:GKP) bounced back as news of higher reserves eclipsed the prospect of shareholder dilution from an open offer.
The stock soared 2.71p, or almost 306%, to 3.6p after GKP said net working interest Shaikan 2P reserves had increased from 348 million barrels of oil to 360 million barrels
It followed an earlier 27% fall as the Kurdistan oil producer launched a US$25mln open offer, which will close on September 15, as part of a survival bid.
The group is also slashing its debt to about US$100mln from more than US$600mln by converting the debt into equity.
The moves are part of a shake-up designed to help it ride out a crisis caused by falling crude prices.
GKP has also faced difficulties in securing regular payments for its oil from the government of the semi-autonomous region in northern Iraq.
It claimed the open offer would enable shareholders “to re-invest in a well-capitalised company...for 10% of GKP’s equity at closing of the restructuring.”
Chairman Andrew Simon said last month: "Our shareholders, and those of the other Kurdistan focused operators, have suffered significant value destruction over recent months, as a result of the low oil price and extraordinary regional geo-politics.
“Following months of negotiation, and in the absence of deliverable alternatives, the board believes the proposed restructuring offers the best possible outcome for all."
The move will dilute investors’ ownership of the company to 5%, sparking concerns that their stakes will be worth virtually nothing.
It also comes after GKP received a US$300mln cash-and-share takeover bid from Middle East-focused Norwegian oiler DNO, which the company has still to decide upon.
DNO is one of the biggest operators in the volatile region, owning 55% of the Tawke Field, which produces 120,000 barrels of crude a day.
GKP owns another premier asset, Shaikan, which churns out 40,000 barrels.
Analysts pointed out that if it could sort out its financial problems, it still had intrinsic value due to the amount of oil in the Shaikan fields.
Richard Jennings at Align Research said the equity was “likely to be all but worthless” following the overhaul.
“This is different to saying that the company is worthless, however,” he said.
“There is value in the company, patently. The question is where that value will revert and I believe this is going to the bondholders and/or any new capital provider.”
Jennings added, however, that he did not think it would be worthwhile for an average investor in GKP to take part in the open offer unless they had a six-figure number of shares.
The only other scenario that might justify the investment was if the board staged a robust defence to the DNO bid or a fresh takeover offer came in.
He said: “It doesn’t really make sense for ordinary shareholders in GKP to take up the open offer while the DNO bid is on the table at its current level.”
Still, oil analyst Malcolm Graham-Wood said the open offer would be worth watching.
“Although it comes into the ‘shutting the stable door’ category, it should also be taken up, if only for insurance purposes,” he said.
The stock topped out above 400p in 2012 when GKP first began to enjoy success at Shaikan, at a time when Kurdistan was seen as an exciting new oil frontier.
The company funded growth by raising debt based on the potential of its world-class assets.
However a perfect storm of falling prices, political instability and rather modest export income that was inadequate to fund its business hit the group.