The market was inundated by announcements and updates from Gulf Keystone Petroleum (LON:GKP) last year, which left City brokers breathless and playing catch-up.
If anything the flow of news will probably increase in the next 12 months as we see the results of a fairly aggressive drilling programme in Kurdistan.
From that deluge of information it is a case of picking out the potential value triggers. So it is with an element of relief we welcome the first piece of GKP research in the new year.
The 12-page note, penned by Daniel Stewart’s Richard Nolan, is a step-by-step guide to the company and its prospects for 2011.
It comes also with a re-assessment of Gulf Keystone’s valuation, which has been hit by the threat of legal action by Excalibur Ventures.
Nolan has raised his price target by 50 pence a share to 200 pence, though he sees further scope for upgrades as the year goes on.
One potentially massive trigger point will be the completion of drilling on the Shaikan-2 well due in May, which ought to give the oil/water contact depth.
Referring to this milestone, John Gerstenlauer, the company’s chief operation officer, recently told Proactive Investors: “In the success case, we hope for, as a minimum, a significant increase in our current P90 volume of 1.9 billion barrels of oil in place, thus narrowing the possible range of oil in place numbers.
“In the upside case, we would, of course, also hope for a further upward movement of our P10 volume which is currently independently estimated at 7.4 billion barrels of oil in place."
And that independent estimate would benefit from being updated, according to Daniel Stewart’s Nolan, who believes there is enough fresh information to commission a new report.
The last document, prepared by Dynamic Global Advisors, was published a year ago.
“We believe that a new report, written by a firm that the UK market is more familiar with, will assuage any niggling questions that the market may have stemming from their unfamiliarity with DGA,” Nolan said in a note to clients.
“We would not be surprised if a firm more familiar to the City such as Gaffney, Cline or DeGloyer and MacNaughton are used.”
Looking at the current valuation, GKP would appear to be expensive. However, Nolan reckons a small incremental increase in reserves would bring the stock back into line with its peer group.
And he believes there is plenty potential this year for upgrades. Shaikan-2 is an obvious trigger as is Bijeel.
“As most public companies operating in Kurdistan are at a fairly early stage, the market appears to be valuing their oil at $2 - $3/bbl,” Nolan added.
“Using that metric and Gulf Keystone’s market cap the market is clearly anticipating additional volumes in Gulf Keystone’s blocks.
“That being said, for valuation to return to the $2 - $3/bbl range, the market is pricing in additional volumes of between 0.8 – 1.5bnbbl.
The analyst addresses the thorny issue of potential litigation, with Excalibur laying to a 30 per cent interest in the Gulf Keystone’s Kurdistan blocks.
Nolan has spoken to Excalibur’s legal representatives, though the conversation seems to raise more questions than it answers.
However he adds: “With the information presently available we are not placing any value to the suit but of course will review our assessment when further details emerge.
“The range of damages could be a nuisance but tolerable to an equity investor. If an award is given.... (it) could be as little as 1.5 percent of the Shaikan production sharing contract.
“Of course, an award could be settled in cash and thus just a one-off issue which does not retard the economics of Gulf Keystone. The upper limit is unknown.”