The share price for Gulf Keystone Petroleum Limited (LON:GKP) has backed off in response to an apparent cooling of takeover interest.
Kudistan focussed DNO International last week said it would still be “prepared to consider” a cash offer for Gulf Keystone but it would be at an even lower price than before.
Any offer would be “at a meaningful discount” to the US$300mln offer which was previously deemed too low by Gulf Keystone’s management.
WATCH: Sam Wahab on the prospects for GKP
On paper Gulf Keystone is on a stronger footing now compared with before, when it was still working to rebalance the books with a debt-for-equity switch. So, why has DNO’s interest cooled?
1- Uncertainty continues over payments in Kurdistan
As the major producer in the semi-autonomous region DNO is already the most exposed by the inconsistent flow of payments for crude exports out of Kurdistan.
Indeed, DNO last week revealed the arrears amounted to US$1bn.
It described the payment situation as “irregular and delayed”, noting that a total of US$255mln had been paid by the Kurdish authorities for crude produced at its flagship Tawke field (US$184mln of that went to DNO).
2 – How much can DNO afford to pay in cash?
DNO ended the third quarter of 2016 with US$266mln of cash, and its reported US$9mln of operating profit from US$49mln of revenue. In the year to date it has made US$33mln of operating profit.
Cash is meanwhile earmarked for investment into Tawke.
A new work programmes – contingent on regular payments from the Kurdistan Regional Government – foresees wells costing an estimated US$7mln each.
DNO is waiting to “take the brake off” at Tawke.
Logic dictates that an all cash offer would indeed have to be pitched a lot lower than US$300mln, or DNO would have to seek to raise capital for the deal.
3 – DNO cites uncertainty over GKP and Shaikan field
Whatever the subtext of the statement, here's the reasoning: “Given the resulting uncertainties about Gulf Keystone's asset, commercial outlook and future rights and obligations at the Shaikan field, and following a careful review of Gulf Keystone's latest reserves report, DNO is prepared to consider an all cash transaction but at a meaningful discount to the previous...equivalent cash-and-shares offer.”
4 – Gulf Keystone has support … for now
The recently completed recapitalisation, as bruising as it was, clearly demonstrated that there was support for Gulf Keystone’s current management team led by Jón Ferrier.
Whilst bondholders took control, receiving the vast majority of the ‘new’ company’s equity they did so at a very substantial discount to the original face value of the debt.
Some US$400mln of debt was exchanged for the vast majority of a company that’s now worth £265mln in the market. They effectively had the opportunity to sell up via DNO’s US$300mln offer but alas that offer lapsed.
It is, of course, tricky to second guess anything in volatile markets nevertheless one would assume that having agreed to back management just a few weeks ago it would take a premium offer to convince a sale.
5 - Cash is less of a problem for Gulf Keystone than before
So, if DNO is backing away - as their most recent announcement suggests - what does that mean for Gulf Keystone and its investors?
The recapitalisation and debt-deal means that the balance sheet is now in a much better positon, albeit there’s still US$100mln of debt left to service.
The wolf is no longer at Gulf Keystone’s door and, significantly, the company has capital ready to invest in the Shaikan field.
Management can, as analysts have highlighted, for the first time in a long time focus entirely on operations and getting the most out of Shaikan.
The field is technically far more complex than what was thought all those years ago, when resource estimates tallied in excess of 12bn barrels, nevertheless, there is still an awful lot of easy to produce lighter crude at Shaikan and the there’s now more time to solve the heavy oil riddles in the longer term.
Cash proceeds secured in the restructuring were earmarked for a programme that will maintain Shaikan’s production a 40,000 bopd and potential help Gulf Keystone expand to 55,000 bopd.