At first investors were afraid. In fact, they were petrified. But, now there’s growing optimism that Gulf Keystone Petroleum Limited (LON:GKP) can survive.
A pivotal bond and note holder vote takes place on Thursday, which, if passed, will clear a big hurdle in Gulf Keystone’s plan to alleviate $500mln of debt in exchange for new equity in the company.
There is a quiet confidence among those close to the company that there is a willingness among bondholders to support Gulf Keystone’s management team, led by Jón Ferrier, who has been fighting fires since joining just over a year ago.
GKP’s improbable act of escapology may be more than just a glimmer of hope for other indebted oil firms. In fact for some it may provide a blueprint.
Xcite Energy Limited (LON:XEL), Premier Oil PLC (LON:PMO) and IGas Energy Plc (LON:IGAS) face varying degrees of peril as they work through their own debt negotiations, and at least one is said to have contacted Gulf Keystone directly for counsel.
Gulf Keystone’s blueprint is fairly easy to grasp, albeit so is blunt force trauma to the face (a punch in the mush to you and I).
Debt holders need to be convinced there is more value in the asset with the company, than without it.
Oh, and perhaps most importantly, the company has to hand over a very significant portion of equity (and ultimately control) in the restructuring.
Ordinary shareholders - in both senses of the words – will be demoted to minority stakeholders, and can, frankly, be glad the company still exists. After all 10% of something is a lot more than 100% of nothing.
Gulf Keystone: A painful yet necessary procedure is nearly over
The bruising reconstruction will allow it to carry on developing the potentially world class Shaikan oil field.
This would leave the group, which produces around 40,000 barrels a day, with a much more manageable though not insignificant US$100mln debt position.
It is understood there is a willingness among most bond holder to back a deal that would swap the remaining half a billion dollars borrowings for shares.
The existing investors seemed to be resigned to their fate. In fact some (notably the US giant Capital Group) were even willing to follow their money as they backed a US$25mln cash call.
The timeline outlined by the company indicates the ‘new’ Gulf Keystone will be together and its shares trading in London by mid-October.
Assuming it is done it will mark the end of a painful period for Gulf Keystone and its backers.
Restructuring will also open up fresh takeover speculation.
Last month management dismissed a ‘low ball’ US$300mln offer from DNO, ostensibly to concentrate on the securing the financial restructuring.
DNO, an ambitious oiler, is one of the biggest operators in the volatile region of Northern Iraq, owning 55% of the Tawke Field, which produces 120,000 barrels of crude a day.
Analysts see the value of Gulf Keystone over and above the sum offered by DNO with GKP’s assets worth as much as US$600-700mln.
The expectation is that takeover interest will re-emerge, though those close to the company don’t expect the deal offered by DNO to pass muster.
There is, of course, the most optimistic scenario where the restructured business comes firmly ‘in play’ and the interest from DNO draws other potential acquires into a bidding war.
It is also important to remember that any deal for Gulf Keystone will need the blessing of the Kurdistan Regional Government, and it remains to be seen what their wishes would be.
Recent history should by now have taught GKP shareholders not to get too carried away.