The moment of truth has arrived for Gulf Keystone Petroleum Limited

What does Gulf Keystone Petroleum Limited’s (LON:GKP) balance sheet restructuring mean for investors?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Gulf Keystone Petroleum (LSE: GKP) today announced its long-awaited proposals for a balance sheet restructuring. The shares, which closed yesterday at 4.7p crashed as low as 2.36p in early trading.

What do the proposals mean for existing shareholders? And could a restructured Gulf Keystone be an attractive opportunity for new investors.

Debt for equity swap

At the core of the balance sheet restructuring is a debt-for-equity swap that would see debt reduced from $600m to $100m through the conversion of $500m of existing debt into equity. What this means is that shareholders who yesterday owned 100% of the company would end up owning just 5%, though if they want to stump up more cash, they will have the chance to participate in a $25m open offer at 0.82p a share for 10% of the post-restructuring equity.

Should you invest £1,000 in Tesco right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Tesco made the list?

See the 6 stocks

Chairman Andrew Simon, who today announced he would be retiring with immediate effect, acknowledged that shareholders had suffered “significant value destruction,” blaming the low oil price, the political situation in Kurdistan and the company’s debt burden.

The restructuring deal requires approval from both shareholders and bondholders, and chief executive Jón Ferrier warned: “Without the restructuring and the improved liquidity delivered by the transaction, the company cannot avoid insolvency or capture the significant future potential of the Shaikan field”.

‘New’ Gulf Keystone

Clearly, the massive dilution is bad news for long-suffering shareholders, many of whom have already seen the value of their shares fall from pounds to pence. However, failure to approve the deal would be, as the company puts it, “likely to lead to zero value for the shareholders”.

Galling though it is, shareholders will surely accept the deal with the carrot of the 0.82p open offer providing the potential to mitigate losses if ‘new’ Gulf Keystone goes on to exploit its undoubtedly valuable asset, the Shaikan field.

The company would certainly become a more attractive proposition with its strengthened balance sheet and improved liquidity. The maturity on the retained $100m debt has been put back from next year to 2021, while the $25m from the open offer and the freeing-up of $32.5m will add to cash resources that are “expected” to be sufficient for near-term investment to maintain production at 40,000 barrels of oil per day with “potential” to increase production to 55,000 barrels.

Valuation

I’m inclined to value Gulf Keystone conservatively on its recent cash flows, running at around $15m a month coming in and $6m going out, less a monthly average of $0.83m for the 10% cash coupon on the retained bonds. That gives positive monthly cash flow of $8.17m, or just about $100m a year. With the company being valued at $250m based on the open offer at 0.82p, we’re looking at a multiple of just two-and-a-half times cash flow.

As such, the open offer for existing shareholders looks attractive to me, while new investors may also have an opportunity to buy well below the current 3.25p if, as I suspect, there’s heavy post-restructuring selling by bondholders who ended up shareholders out of necessity rather than by design.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Older couple walking in park
Investing Articles

Could £300 a month invested in US and UK shares reach a million by retirement?

Could an investor retire with a million pounds just by dedicating £300 a month to US and UK shares? Mark…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

Is £800 enough to start an ISA?

Is it worth bothering with an ISA with less than £1,000 to spare? This writer believes it may be --…

Read more »

Investing Articles

3 reasons Tesla stock may be a long-term bargain

This writer is keen to buy Tesla stock at the right price. He doesn't think it's there yet -- but…

Read more »

Investing Articles

Nvidia stock is a lot cheaper than before – or is it?

Nvidia stock has been caught in the whirlwind of market volatility. This writer has been waiting to buy, so might…

Read more »

Top Stocks

3 FTSE stocks Fools are eyeing up for choppy markets

A selection of companies listed on the UK stock market on the watchlists of four Foolish investors.

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

A £10,000 investment in Rolls-Royce shares last week is now worth this…

Harvey Jones says Rolls-Royce shares couldn't escape the volatility of recent weeks, but wonders if the recent dip is a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Prediction: in 2 years these S&P 500 stocks will be much higher than they are today

These two S&P 500 stocks have been beaten down in recent weeks. But Edward Sheldon expects them to move much…

Read more »

Investing Articles

10% yields! Why a volatile stock market is great news for passive income investors

The recent stock market volatility has given passive income investors the chance to earn double-digit returns. But they still need…

Read more »