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Does putting any more money into Gulf Keystone make sense?

Investors will be asking themselves whether they’ll be putting good money after bad if they pony up US$25mln sought by Gulf Keystone.

business man hands over cash
LA-based Capital Group is reportedly backing the new share sale.

Putting more money into Gulf Keystone Petroleum Limited (LON:GKP) doesn’t make sense for the average investor, but there is definitely still value left in the Kurdistan based oiler, so says one debt holder.

Align Research’s Richard Jennings, who says he bought some Gulf Keystone’s convertible bonds at a ‘material discount’ to face value, also dismisses the US$300mln takeover approach from DNO as undervalued and opportunistic.

“If you look quite simply at the reserves that Gulf Keystone holds, 360mln barrels, and you apply a conservative industry metric value per barrel to those reserves, most analysts would agree that the value of those reserves and henceforth the company ex- any debt issue is anywhere upwards of around US$600-700mln,” he told Proactive Investors.

Undoubtedly many investors wish that it was still as simple as valuing the oil in the ground at Shaikan, Gulf Keystone’s world class heavy oil field in northern Iraq.

Debt funding choices made by Gulf Keystone’s former management, as well as the shifting economic and geopolitical sands, mean valuing resources and reserves is no longer a simple equation.

The company’s incumbent shareholder base is braced to be diluted down to just 5% of the enlarged register because of a debt for equity swap.

So many investors will be asking themselves whether they’ll be putting good money after bad if they pony up US$25mln of additional capital requested by the current team at Gulf Keystone.

According to Jennings, the proposition simply doesn’t add up for many existing equity holders.

Based on the terms of the cash call, existing investors would be allowed to acquire around £18 of new shares for every 1,000 existing shares they own.

“It is illogical, in my opinion, for an ordinary shareholder – who holds a thousand shares or less – to actually spend £18.80 to make 20%, which is what £3.20,” Jennings said.

Capital Group, the Los Angeles based investor and major GKP shareholder, is reportedly backing the offer, and is expected to mop up unwanted shares as an effective underwriter to the open offer.

Press reports over the weekend claimed Capital Group would put in around US$20mln of new capital. 

It is suggested that Gulf Keystone will need the cash injection from the open offer to finance a defence against a low ball takeover offer.

Jennings, as a debt holder, says he would’ve preferred it had the DNO approach not emerged.

“The DNO bid is unwelcome, and it is opportunistic on their part.”

In the company’s restructured form, with US$100mln of debt remaining and notwithstanding the group’s unfunded plans to raise output to 55,000 barrels of oil a day at Shaikan, Jennings says Gulf Keystone could command a value of US$400-500mln.

“DNO offered the equivalent of US$300mln. That, to me, undervalues the company by a material amount,” he added.

Whilst Jennings doesn’t see the point for the “average investor” to throw good money after bad, he sees good reason for Capital Group to back Gulf Keystone.

“It is a very different story, of course, [for Capital Group] because they have got their average value down to a level which is probably not too far away from where the current stock price is,” he said.

“Therefore taking up a meaningful millions of new shares, in fact hundreds of millions of new shares, at the 0.83p level, it is very definitely worthwhile taking up.”

Quick facts: Gulf Keystone Petroleum Limited

Price: 199.2 GBX

LSE:GKP
Market: LSE
Market Cap: £439.22 m
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