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Gulf Keystone Oil (LSE: GKP) was one of my favorite oil stocks at one time, but just look at what happened to the share price.
We have seen a 55% drop in the last five years, mainly in the last two. And GKP stock is down 99% from its all-time high in 2012.
Valuation drop
Forecasts for 2024 put the stock at a price-to-earnings (P/E) ratio of just 1.7. And the big dividends that shareholders used to enjoy have stopped, at least for now.
So what went wrong? Well, many. Gulf Keystone operates the Shaikan oil field in the Kurdistan region of Iraq. Everything was going well, paying its share to the regional government and exporting mainly through a pipeline through Turkey.
But then the Iraqi government asserted its authority over oil exports. And the Kurdistan Regional Government (KRG) would no longer be able to export oil itself.
The pipeline was closed.
Will it reopen?
The existence of the company is at stake here. And with the export taps closed, the board is trying to keep the lights on as long as possible.
There have still been some local sales, but only small volumes at low local prices. Still, in its January 31 update, Gulf told us that “We are actively working to increase volumes and remain focused on at least covering our estimated monthly capex and other costs of c.$6 million in 2024.“.
Talks with the Iraqi government to reopen oil exports drag on. But at least they are happening.
And the GKP board of directors was sufficiently optimistic: “With the resumption of exports and normalization of KRG payments, GKP will consider incremental investment in the field to tap Shaikan's substantial reserve base and return to previous production levels.“.
Obvious purchase?
As of Jan. 30, Gulf had $82 million in cash on its books, with no debt. So it looks like it can cover its reduced operating costs, but maybe not for long.
The company is also owed $151 million outstanding from the KRG for the six months prior to the pipeline interruption. It must be in doubt whether it will succeed unless there is an agreement to resume exports. But it's a little more liquidity if things move again.
Would you buy it? Well, the oil exploration business has always been risky. And operating in politically unstable parts of the world is one of the big risks.
However, I'd say this is probably the closest to a 50/50 bet I've seen.
Multibagger or bust
“If the export taps are opened again, and especially if the Gulf returns to the expected levels”previous production levels“I see a decent chance for a good multibagger.
But if it doesn't happen, the only real alternative I see is a complete removal. If I bought now, I would only do so with money I could afford to lose… with a pretty good chance of losing it.
For those brave enough to spend a few quid now, I think the key question is: “I feel lucky”?
