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What does the future hold for Gulf Keystone after week of trauma?

Last updated: 03:00 19 Apr 2016 EDT, First published: 03:40 18 Apr 2016 EDT

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GKP shares fell as low as 3.5p on Friday.

The destruction of Gulf Keystone Petroleum Ltd’s (LON:GKP) value continued late into Friday’s trading, with the Kurdistan oil share collapsing as low as 3.52p at the end of last week.

It ended Friday down 23% at 3.95p – though Monday’s trading has initially begun positively.

GKP fell some 45% last week, and is now down about 75% in 2016 to date.

We already knew the oil producer was facing a debt crisis, and last week it revealed it needed more capital, prompting long-holding institutions lost patience with the stock.

Here we breakdown the key points from a traumatic week for the once mighty oil share.

It wasn’t all bad: The KRG paid up for March

On Tuesday, April 12, Gulf Keystone confirmed the receipt of crude oil payments for exports in March.

The company told investors that a US$15mln gross payment was received for the Shaikan field, in the Kurdistan region of northern Iraq.

GKP said its cash position will amount to US$69.5mln following the payment from the Kurdistan Regional Government (KRG).

The KRG’s payment comprised US$5.5mln (US$4.3mln net to GKP) as the contractual revenue entitlement, under a production sharing contract, for the month of March, as well as US$0.6mln towards outstanding entitlements for past deliveries and US$8.9mln towards the recovery of Gulf Keystone’s past costs associated with the Shaikan Government Participation Option.

Broker saw some bright side

Richard Savage, energy analyst at Mirabaud Securities, in a note said Gulf Keystone could “comfortably” make its biannual interest payment of US$26mln (which was due this month) without debt covenants.

He added that the payment from the KRG meant the interest payment would not trigger a ‘default event’ in regards to liquidity and cash reserves.

As a result, the company could avoid a ‘worst case scenario’ Savage said.

He added: “the company has avoided a worst case scenario under which it stumbles into a restructuring with its bondholders, and, with sufficient liquidity until at least the next interest payment (due in October), there is a window of opportunity to find the best possible solution ahead of US$575mln of debt maturing in 2017 (April & October).”

Institutional investors and fund managers throw in towel

Regulatory statements on Wednesday revealed that Prudential’s M&G funds had sold out their entire 5% shareholding in the company.

Some 49.2mln shares were sold by the institution, which was the activist investor that began spinning the revolving door on the Gulf Keystone board.

Back in 2013, M&G had been critical over the old management team’s corporate governance and excessive executive pay.

Interest payment put back & it needs support from lenders

The aforementioned interest coupon payment that had been scheduled for April was delayed for two weeks, as the company exercised an option for a ‘grace period’.

Two payments will now be due in early next month, May 3 & 4.

Gulf Keystone’s balance sheet is creaking under the weight of debt totalling US$575mln, and is due to mature next year.

It said on Thursday that the delay was part of a series of actions ahead of stakeholder discussions regarding its need for a near-term fundraising, as well as the company’s upcoming debt obligations and a possible restructuring of its balance sheet.

Jón Ferrier, Gulf Keystone chief executive, said the aim is to ensure an orderly market, and said the investor update was an important step as the company embarks on stakeholder discussions.

“We are working to achieve the best possible way to restructure our balance sheet,” he said in a statement.

“Addressing our funding needs will ensure the company's longer term future and ability to continue developing the Shaikan field for the benefit of all our stakeholders."

More money needed for Shaikan

Forget about the US$575mln debt for a moment (if you can), and there’s a more immediate need for funding.

Gulf Keystone also told investors on Thursday that the Shaikan field would go into decline without new investment.

Some US$71mln is needed simply to keep Shaikan ticking over.

The company said that three electric submersible pumps will have to be installed into existing production wells in order to maintain production at 40,000 barrels of oil per day.

It is has previously flagged intentions to increase the field’s capacity to 55,000 bopd, as an interim measure whilst a longer term second phase field development plan is worked on and approved by the Kurdish authorities.

To achieve the uplift, Gulf Keystone must install an additional production facility – as well as install the three pumps. The company estimates that this plan would cost a total of US$88mln.

Either way, the capital investment would be needed in the second half of 2016 if the Shaikan operation is to avoid a decline in output (which would further hinder GKP’s debt pressures).

So, where does that leave the company?

Well, it has about US$69mln of cash. So, that’s sufficient to make the interest payment, but not enough to make the necessary investment into Shaikan.

Next year’s bond maturities are naturally a big risk. And whilst there’ll no doubt be a degree of ‘optionality’ for the company, for existing equity investors the outlook is possibly as bleak as the recent price action suggests.

Whether or not Gulf Keystone shareholders find themselves as the latest casualties of the crude market’s collapse remains to be seen - but, the days in which Gulf Keystone shares changed hands for pounds rather than pence are fading further into distant memory than ever.

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