Development in sight for Gulf Keystone. Edison increase core and risked NAV to 224p and 280p respectively

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Edison Investment Research – one of our recommended research partners have just released a new note on GKP. Below is a quick overview with a link to the full note –  a must read for holders of the stock. 

The first half 12 results underlined the two key areas of focus for Gulf Keystone (GKP). The development of Shaikan is starting to take shape with funding for 2013 now in place and early production facilities due for start-up in January and March 2013. Meanwhile, exploration wells continue in Sheikh Adi, Ber Bahr and Akri-Bijeel. Adjusting for these factors, we nudge our core NAV to 224p and RENAV to 280p. 

First major steps in Shaikan development close

The H112 results more fully revealed the changes in the company catalysed by the end of the appraisal process of Shaikan. The most obvious impact is the increase in capex from previous modelling and the lack of production revenues due to the May shut-in. Early production facilities should start up in January and March 2013, giving valuable information about the nature of the reservoir together with first meaningful revenues. The submission of the field development plan, due in January, will be another step and we expect the company to lay out its plans more fully at that time. It has also reiterated its intent to list on the London main board.

Spend $275m to get to 100mbbls/d by end 2013 

The $275m+ convertible issue allows the company to invest heavily to get to its planned production rate of 100mbbls/d by the end of 2013, an initial step towards full field plateau. As indicated in GKP’s 2011 results report, the cost to get to this production level is around $350-500m (gross). As a result, the money raised on 4 October will likely be spent by the end of 2013. If all goes to plan, the company should then be in a position to self-finance the rest of the development of Shaikan due to production revenues and senior debt financing availability. 

Valuation: Look out for Sheikh Adi 2 

We have tweaked our core NAV, which now stands at 224p. Our RENAV of 280p, which includes risked exploration value for Ber Bahr, Sheikh Adi and Akri-Bijeel, could increase with successful well results from the many wells currently being drilled, and we are particularly keen to hear the results of the Sheikh Adi 2 testing programme later in Q412. We currently model the block as having 1.9bnboe with a CoS of 35% and risked value of 18p. In a more de-risked scenario, with a lower discount rate and successful exploration, the company’s entire asset portfolio could achieve 580p. At this stage we do not model a dilution to the share base due to the convertible, but if converted it would represent 7% dilution.

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