gulfsands petroleum – a balanced overview and sneak preview from this months forthcoming edition of our magazine…

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Gulfsands Petroleum shares have been hit heavily in recent months primarily due to the spillover effects of the Arab uprising and in particular the civil strife in Syria – a region where the Company’s main exploration operations are based. Unfortunately for Gulfsands, the EU sanctions imposed on the Syrian Government resulted in the suspension of their Syrian activities – the main part of the company that was currently cash generative and profitable. That said, the company does have interests in Tunisia, other parts of the Middle East, North Africa & the Gulf of Mexico.

From a high of over 400p in early 2011 the shares recently touched a low of 105 and, in looking at the chart below, one could surmise that they are mightily oversold. At the current price of 115p (time of writing), the market capitalisation is just a shade over £134m and the company sits with around £68m of net cash. General Petroleum Company (GPC) a Syrian Government owned corporation which is Gulfsands effective joint partner in the Syrian operations (known as Block 26) has continued to pump oil and, at the beginning of February Gulfsands was owed approximately $25m from GPC.

Interestingly, and before the Syrian issue flared up, the company was embarking upon a share buy-back exercise and was happily purchasing their own shares at prices in excess of 200p. This indicates that the Board believed the shares undervalued at this level. This type of situation where there has been forced and nervy selling resulting a material undervaluation to its NAV is a classic ‘catalyst/re-appraisal’ purchase story. Should improvements in the political situation in Syria come to pass in the ensuing months then there could be a sharp re-rating indeed.

On the 11th May Mr Mahdi Sajjad purchased 30,000 shares at 111.75 on behalf of a Discretionary trust his children are beneficiaries of, taking his total beneficial holding up to 8.65m shares. Back in February, Chairman Andrew West also purchased 17,500 shares at 179p. What has really piqued my interest however, relative to the frankly disgusting treatment of shareholders by great swathes of listed corporate UK these days, is the deferral of cash bonuses and also the suspension of share option awards until the Syrian situation is resolved. I applaud this approach and only wish the likes of Simon Fox at HMV would show similar morality and appropriate behaviour.

There is a further intriguing spin on the Gulfsands story and that is the stakebuilding by both Michael Kroupeev, the Russian oil financier who has amassed a stake of 18% of the shares in the past few months and also Soyuzneftegaz, a group headed by Yuri Shafranik, Russia’s former energy minister, that has picked up 3.4%. Clearly these boys see value and they each have prior ‘form’. I am minded to follow them and will shortly commence building a holding in Gulfsands Petroleum – adding on any weakness below 100p particularly as rumours of predatory takeover interest by CNOOC (China National Offshore Oil Corporation) has sporadically broken out in recent months.

Finally, to whet the investment apetite even further, reflect upon the situation in April 2010 where Gulfsands received an unsolicited bid proposal from Oil India Ltd & Indian Oil Corp Ltd at a price of 315p (nearly 3 times the current price) that was unanimously rejected as undervaluing the company at that time. Should political signs of stabilisation and or Government change in Syria become apparent then I fail to see how the shares cannot re-rate or alternately be swooped upon by a predator.

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