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Strong 2017 sees Gulf Keystone address its demons – will it continue to recover? (GKP)

Gulf Keystone (LSE:GKP) has reported a healthy return to form in 2017, prompting a rise in the Iraq-based oil company’s share price today. Gulf’s shares have risen by more than 41pc since ValueTheMarkets suggested taking advantage of weakness in December, but does the firm have even further to go now the wheels are in motion?

Gulf, which operates the Shaikan Field in the Kurdistan region of Iraq, rose 5.7pc, or 7.4p, to 137.8p after reporting its first profit since entering Kurdistan. It made a net profit of $14.1m in 2017, up from a net loss of $122m in 2016. Despite a small drop in overall revenues from $194m to $172, the business also revealed that the cash component of its revenues increased by nearly a third to $157m last year. Meanwhile, its overall cash balance rose from $93m in 2016 to $160m. As of 10 April 2018, cash had increased a further $43m to $203m, against $100m of debt.

Average gross production came in at 35,298 barrels of oil per day (bopd) over 2017, dead in the middle of the organisation’s 32,000-38,000bopd guidance for the period. Guidance for 2018 is set at 27,000-32,000bopd. Gulf put positive cash flows in 2017 down to stable operating activities and 11 regular payments from Kurdistan’s government, which continued into Q1 2018. A reduction of operating costs further boosted the firm, with costs falling to $2.8 per barrel from $3.5 per barrel in 2016.

Jón Ferrier, chief executive officer at Gulf Keystone, said: ‘We made considerable commercial progress during the year and into 2018, with the signing of the Shaikan Crude Oil Sales Agreement being a key milestone for the Company. ‘We were pleased to achieve average gross production of 35,298 bopd at Shaikan, in the middle of our target guidance of 32,000-38,000 bopd for 2017.  We are confident that once we can restart investment into Shaikan, we will be able to lift production towards our near-term target of 55,000 bopd, a step towards the full field development.

Ongoing changes

Fundamentally, the results show the company has truly turned a corner since 2016 when its shares dropped to as little as 1.2p. The firm has consistently battled cash flow problems at its Iraqi oilfields and, at one point was owed as much as $100m from the Kurdistan government for oil exports. Daesh’s continuing threat against the Kurdistan Region of Iraq was the main driver of these problems. With Kurdistan’s security forces forced to defend Kurdistan’s border, the area’s financial position suffered, reducing its ability to meet the revenue requirements of Gulf and other oil players in the region.

Problems reached a head in April 2016 when the firm defaulted on a $26m (£19.5m) debt payment. In response, Gulf launched a balance sheet restructuring in July 2016, which saw its creditors agree to a $500m debt for equity swap. The restructure, which completed in October 2016, resulted in a massive dilution for Gulf’s shareholders, increasing its total number of shares in issuance to 23bn, considerably more than its peers. However, in December that year, shareholders agreed to consolidate this to just 229.4m shares, resulting in a repricing of shares from 1.2p to a far more palatable 123p. Although undoubtedly painful for shareholders, Gulf’s moves reduced its debt from over $600m to just $100m, increased its liquidity, and allowed it to enter 2017 back in line with its peers, ready to start again.

In December last year, we suggested that well-placed punt could prove to be highly lucrative at 91p. We felt the company’s financial situation had improved vastly since its restructure, while a substantial investment in increased production on the horizon was providing upside potential. At 137.8p, shares have risen by 41pc since that buy call.

In its latest results, Gulf’s balance sheet shows the business had current assets of c.$239m and current liabilities of c.$64m as at 31 December 2017, giving it net current assets of around $175m. Adding the c.$43m of additional cash generated so far this year provides Gulf present net current assets of approximately $218m, assuming no significant expenses since the end of the results period. With a market cap of £298m, or c.$422m, Gulf is still not trading at much of a multiple despite its improvements. This low valuation is presumably due to the market’s lingering perception of heightened geopolitical risk and worries over the firm’s troubled recent history.

Although conditions remain challenging, things have calmed down somewhat for Gulf geopolitically with the defeat of Daesh in Mosul, which is near the firm’s major operations. Furthermore, the business has repeatedly claimed it can reach its 40,000bopd nameplate capacity at Shaikan in the near-term by performing ESPs and maintenance on existing wells. With these points in mind, perhaps more upside could be on the horizon.

Since breaking out of the Falling Wedge formation, the share price has continued to rise in a new upward channel. A run to 140p recent followed the recent checkback of 128p which is current support.

Author: Daniel Flynn

Disclosure: The author of this piece does not own shares in any of the companies covered in this article.

 

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