Shares in Gulf Keystone Petroleum (LSE: GKP) fell by nearly 10% this morning after the Kurdistan oil producer announced that it was suspending export sales and diverting its oil production to the local market.
The reason given for the decision is that the firm is still not receiving regular payments for exported oil from the Kurdish authorities.
A costly trade-off
By selling oil into the local market, Gulf will receive prompt payment. The only downside is the price the firm receives will be around 20% lower than the export price, based on the figures provided in Gulf’s interim accounts last year.
Indeed, my calculations suggest that Gulf may now be receiving as little as $20 per barrel for local oil sales.
Although this should be enough to generate positive operating cash flow, based on Gulf’s reported cash operating cost of $9 per barrel, it won’t solve the firm’s financial problems.
Cash squeeze
Now isn’t a good time to throw in the towel and accept lower prices for domestic sales — but Gulf clearly has no choice.
As I warned recently, the firm appears to be facing a desperate cash crunch. Gulf has spent the money needed to ramp up production to 40,000 bopd, but the firm isn’t being paid for its hard work.
At the end of June 2014, Gulf was owed $165m for export sales. Since then, the firm has received a one-off $15m payment, but in the meantime production has risen — so the total owed is almost certainly now much greater than $165m.
Spent up
Gulf raised $240m in April 2014 from a new bond issue. By the end of August, the firm’s cash balance was down to $177m, and I suspect that the current total is now below $50m, possibly much lower.
To make matters worse, Gulf Keystone has to repay $52.8m of its $520m debt by the end of June.
John Gerstenlauer, Gulf’s chief executive, said today that “a number of longer term financing options are currently being progressed by the Board”.
The reality is that new lending is going to be hard to find and very costly. Gulf Keystone may have to try and raise money from shareholders, or attract new investors.
The firm’s decision to suspend export sales is correct and logical — but I’m not sure it will be enough to stabilise Gulf’s finances: until we know more, I’d steer clear of this stock.
