Beast from the Middle-East..

Gulf Keystone Petroleum LTD

Gulf Keystone Petroleum Limited is an independent oil company and the operator of the Shaikan Field, one of the largest developments in the Kurdistan Region of Iraq. The company potentially has around a 2P reserve of 450 MMstb (million stock tank barrels of oil).? The current Market capital of this company is around GBP 290 million and is listed on the London Stock Exchange.

In AI and technology era why bother looking at an old oil-producing company?? The reason is a disconnect between the intrinsic value and the current value set by the market.

·???????? The company’s cash balance was $99 Million as of 20th June 2024

·???????? There is no debt on the balance sheet as of 20th July 2024

·???????? The company announced a U$ 15 million interim dividend in June 2024 and a share buyback programme of up to U$ 10 million (completed as of the 20th of July).

·???????? On the trade receivables side there is an outstanding payment of U$ 140 million

·???????? The company has monthly net capex (total outgoings) in 2024 around U$ 6 million

·???????? Revenue in 2023 around U$ 123 million compared to U$ 460 million in 2022

Bull Case:

·???????? The company has no debt on its balance sheet

·???????? The company can generate profit by selling oil for around U$ 30/bbl in the local market

·???????? Excellent management team is running the company (evidence-making profit and keeping the capex so low in a difficult operating environment)

·???????? You can buy the shares at less than the cost of PPE on the balance sheet

·???????? Current gross production potential of 43 to 45K of bopd with minimal investment

·???????? This company will be a dividend hero when it can sell the oil at international market prices in the future which might be double the current price it sells in the local market

·???????? Low risk in terms of ramping up the production when the issues are resolved as the company did have sales of U$ 460 million in 2022

Bear Case:

·???????? The pipeline takes longer than six months to resume the oil exports

·???????? The outstanding trades receivable amount (U$ 140 million on the B/S) from KRG is reduced by a larger amount or is not paid at all.

·???????? The geopolitical situation in the region might deteriorate and the current production might be impacted

·???????? There are renegotiations on the royalty payments, or the selling price is controlled by the authorities

I have bought these shares in my personal portfolio thinking on balance of probability the turnaround might take longer than expected.? But the chances of permanent loss to my capital are limited due to the “margin of safety”.? In my opinion, the management has done a good job at navigating the company since the oil pipeline (which was their main source of exporting the oil) was shut.? They have reduced the capex to only U$ 6 million per month which cannot be an easy task in a capex-heavy industry.?

This company made a net profit of U$ 164.6 million in FY 2021 and U$ 266.1 in FY 2022.? The free cash flow was U$ 122.2 million in FY21 and U$ 266.5 million in FY22.? So, when the pipeline does start operating again, we should expect the company to be able to ramp up the production (slowly) to those historic levels and deliver satisfactory Return on Equity for the shareholders.