SMALL CAP IDEAS: What does the future hold for former punters' favourite Gulf Keystone after its week of trauma?
From 400p a share to less than 4p in four horrible years, Gulf Keystone Petroleum, a former favourite with the bulletin board warriors but now the day trader’s bête noire, has enjoyed a remarkable fall from grace.
At one point it was worth enough to be considered for the FTSE 100 - though it didn’t at that point meet the regulatory requirements for inclusion.
Last week, however, was horrific for GKP, with 40 per cent wiped from its market capitalisation, taking it below £50million.
Share price: In four years, GKP's price has gone from 400p a share to less than 4p
We already knew the Kurdistan-focused oil producer was facing a debt crisis – it owes around £405million.
Last week it revealed its need for capital injection is more pressing than investors realised and institutions lost patience. So just what happened?
GKP needs support from lenders
The interest payment that had been scheduled for April was delayed for two weeks, as the company exercised an option for a ‘grace period’.
Two payments will now be due early next month.
Gulf Keystone’s balance sheet is creaking under the weight of debt due to mature next year.
It said last Thursday that the grace period allows the company to finalise fundraising plans and the restructuring of the balance sheet.
GKP does have cash
Last week, the company told investors that for March the Kurdistan Regional Government paid £11million for crude deliveries from the Shaikan field.
This means its cash position is £49million. That’s obviously enough to meet the interest payments.
But …
Heavy burden: Gulf Keystone’s balance sheet is creaking under the weight of debt due to mature next year
More money is needed for the Shaikan field
Forget about the massive debt for a moment (if you can), and there’s a more immediate need for funding.
Gulf Keystone investors were told the Shaikan field in northern Iraq would go into decline without new investment.
Some £51million is needed simply to keep Shaikan ticking over.
And in fact the plan to upgrade the field would bring the cost up to £62million.
So, investment is needed and it is needed quickly.
Words, rather than actions
Last week the company set out a number of potential investment scenarios 'to build a common foundation for stakeholder discussion'. Nothing really struck a chord with the market.
'We are working to achieve the best possible way to restructure our balance sheet,' said GKP chief executive Jon Ferrier.
'Addressing our funding needs will ensure the company's longer term future and ability to continue developing the Shaikan field for the benefit of all our stakeholders."
Keeping afloat: GKP's Shaikan field project needs £51million just to keep ticking over
Institutional investor throws in the towel
Regulatory statements on Wednesday revealed that Prudential’s M&G funds had sold its entire 5 per cent shareholding in the company.
Some 49.2 million shares were offloaded by the institution, which was the activist investor that began spinning the revolving door on the Gulf Keystone board back in 2013, amid criticism over the old management team’s corporate governance and excessive pay.
Where does that leave the company?
Well, it has £49million of cash. Remember, that’s sufficient to make the interest payment, but not enough to make the necessary investment into Shaikan.
The bonds maturing (becoming due) poses the biggest risk. And there are some that say the current battered share price still presents too optimistic a picture.
'A tough corner' was the title of a broker note penned by the analysts at Canaccord Genuity.
Notching its target price down from 15p a share to just 4p it moved to a sell on the stock.
'Gulf Keystone is in a very difficult position with limited time to find a solution to the overhanging debt issues,' said analyst Charlie Sharp.
That’s probably an understatement.
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