Gulf Keystone looks tempting as production expands

Gulf Keystone Petroleum is returning cash to shareholders but still has plenty of cash in the bank to fund further expansion, writes Mark Watson-Mitchell.

Although this company has been involved in the Kurdistan Region of Iraq since 2007, it was not until 2009 when it found a very interesting prospect – what was to become the Shaikan oil field.

That field was declared to be a commercial discovery just over seven years ago. It went into commercial production after a Field Development Plan was approved in June 2013.

Since then, the Shaikan field, which covers an area of over 280 sq. km., has produced over 60m barrels.

Gulf Keystone Petroleum (LON:GKP) is now a leading operator and producer in the region. It also has blocks in the Ber Bahr area as well as operating an office out of Erbil, some 85km south-east of Shaikan.

As operator of the Shaikan field it now has the capacity of producing some 40,000 barrels of oil per day and is aiming at pushing that figure up to 55,000 bopd in the second quarter of 2020.

For the 2019 year it is currently averaging around 32,000 bopd.

The recently announced interim results to the end of June showed that the company has been increasing its cash operating costs, with $18.4m expended against $14.1m in the corresponding H1 result for 2018.

Cash operating costs on a per barrel basis have increased from $3 per barrel to $3.9 per barrel in the first half-year.

Net capital investment in Shaikan was $32.4m, against just $6.9m in H1 2018. For the full year the company expects its capital investment to stand at around $100m.

Very encouragingly, it boasted a big cash balance of $302.7m as at 30 June; however, that had dipped to $263.6m by 9 September.

Total capital expenditure to get it up to the 55,000 bopd capacity is expected to be in the region of $215m.

For the year to end-December 2018, the company reported $191.47m of revenue and a quadrupled pre-tax profit of $58.20m, worth 25.88p in earnings per share.

The current year, for various reasons, will see revenues fall to around $180m, whilst estimates suggest just $45m in pre-tax profits, with earnings easing to 20p per share. Interestingly, brokers are looking for a near 13p maiden but special dividend being declared for the full year.

Next year, to end-December 2020, revenues are expected to bounce significantly, reflecting the increased capacity and production at Shaikan, with a near-$256m revenue and 36p of earnings, but a lower dividend of 8.5p per share.

In due course the company expects to be able to push ahead with both its operations and its expansion plans by way of using its own production cashflow, so it can look to get generous with shareholders.


The company is currently underway with a massive $25m share buyback programme. It has spent over $15m so far and is now working on taking out the balance in the short term.

Upon completion of its programme, together with the $50m dividend payment, the company will have returned some $75m to its shareholders during 2019.

As I write it has some 229.43m shares in issue, of which 6.18m are held in Treasury.

Large institutional holders include Lansdowne Partners (approximately 13.12%), Sothic Capital Management (12.54%), Hof Hoorneman (7.02%), Capital Group (6.50%), JP Morgan Chase (5.25%), BlackRock (5.05%), BrightSphere Investment (3.86%), Dimensional Fund Advisors (3.30%), Caius Capital (3.00%) and UBS Group (2.88%).

In the last year or so, the shares have been as high as 290p (last September) and as low as 165p (last November) before recovering to 270p by late April this year.

Now trading at around the 235p level, I do not consider these shares as expensive, far from it in fact. It is next year’s hopes and aspirations upon which I base my appraisal of Gulf Keystone.

Of its two corporate brokers, Peel Hunt are rating the shares as a ‘buy’ looking for 382p, whilst Canaccord Genuity also rate them as a ‘buy’ with a 340p target price.

I see them touching 300p within the next year or so and subsequently heading a lot higher.