At first investors were afraid. In fact they were petrified. But now it looks like Gulf Keystone Petroleum will survive but what about Xcite Energy?
Gulf Keystone Petroleum Limited’s (LON:GKP) act of escapology is more than just a glimmer of hope for London’s other indebted oil firms. It potentially offers a blueprint.
Xcite Energy Limited (LON:XEL), Premier Oil and IGas Energy face varying degrees of peril as they work through their own debt negotiations, and at least one is said to have contacted GKP 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 me).
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.
Can Xcite follow the Guf Keystone blueprint?
With borrowings in the order of US$174mln, a market valuation of less than US$9mln and no revenue; Xcite Energy has a problem that has no easy solution.
Investors following the sector will know that the North Sea heavy oil specialist has a lot in common with Gulf Keystone.
They were both immensely popular among AIM’s private investors as the potential of their respective world-class assets emerged.
Each loaded up with debt in easier markets, instead of allowing shareholders to take the dilutive hit of equity investment.
Both are, at present, poster boys for investor dreams unfulfilled. And both need to make a pact with their lenders if they are to survive.
Aside from the leagues of sea surrounding Xcite’s Bentley field there is one other fairly big difference compared with GKP’s Shaikan.
Save 150,000 barrels of crude sold via BP back in 2012, Bentley isn’t a producing field.
The lack of a revenue stream, and a need for large amounts of new capital, may well be a significant factor as the negotiations get down to the nitty-gritty in the coming weeks.
Time is running out with September 30 set as the deadline for Xcite’s negotiations.
And earlier this month it warned there would be a “minimal residual equity stake” remaining for existing shareholders even if a restructuring could be agreed.
Investors, the hundreds of private buyers who ploughed hard earned cash into the firm, may be left to ponder what might have been.
Gulf Keystone: A painful yet necessary procedure is nearly over
The bruising reconstruction will allow Gulf Keystone to carry on developing the potentially world class Shaikan oil field.
This would leave the group, which aims to produce around 40,000 barrels a day, with a much more manageable though not insignificant US$100mln debt position.
Bond and note holders have supported the debt-for-equity restructuring proposal, which will see Gulf Keystone swap half a billion dollars of borrowings for new shares.
The existing investors seem 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, this will mark the end of a painful period for Gulf Keystone and its backers.
In the words of chief executive Jón Ferrier, Gulf Keystone will then be in “the strongest position it has been in for a number of years”.
The ‘relaunch’ of Gulf Keystone 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.