Struggling oil minnow Gulf Keystone Petroleum (LSE: GKP) announced this morning that the company has managed to buy itself more time with bondholders as its interest costs mount up and cash reserves dwindle.
Gulf Keystone is currently struggling to keep its head above water as the business is reliant on sporadic payments from the Kurdistan Regional Government for its oil, while high operating costs and low oil prices are also biting.
Standstill Agreement
Management signed a Standstill Agreement with the owners of 75% of the company’s bonds earlier in the year to help relieve it from the bonds’ onerous interest demands. While the Standstill Agreement is in place, Gulf Keystone doesn’t intend to make the April 2016 coupon payments on its bonds. Technically, such a refusal to pay the interest due constitutes a default.
However, under the terms of the Standstill Agreement, signatories to it have promised not to push the company into bankruptcy if it doesn’t meet its interest obligations. Signatories have agreed not to vote in favour of any resolution that would request the relevant trustee to declare the principal amount of the bonds due and payable — usually the next step after a failure to make interest payments.
Can kicking
At first glance, this renewal of the Standstill Agreement seems to be good news for Gulf Keystone and the company’s shareholders. Yet the deal only seems to be kicking the can down the road. Gulf Keystone will still have to meet its obligations at some point in the future.
With this being the case, it’s impossible to assess whether or not Gulf Keystone is an attractive investment. The company has a mountainous pile of debt to deal with and as long as oil prices remain depressed, then it won’t be able to deal with these liabilities. Moreover, Gulf Keystone needs another massive infusion of cash this year to continue operating at its current capacity.
To maintain production at 40,000 to 55,000 barrels of oil per day, management has warned that it needs $45.4m to $56.3m as the company’s flagship Shaikan field will show natural output declines towards the end of 2016 without additional investment. Administration costs this year are expected to total $19m, and interest expense (including the April payment) could come to more than $50m. Just because Gulf Keystone has managed to defer its April interest payment doesn’t mean that the company won’t have to honour its obligations.
The bottom line
Overall, a rough back-of-the-envelope calculation shows that Gulf Keystone will need around $120m or £85m just to stay in business this year. Some of this cash will come from oil payments but it’s likely shareholders will have to foot the bill for the rest of the company’s spending. Considering that Gulf Keystone’s market capitalisation is only £44m at time of writing, its liabilities for 2016 could be almost double its current market value.
Simply put, it might be wise to avoid Gulf Keystone.
