SIF Folio: Gulf Keystone Petroleum could be a bargain super stock

Tuesday, Sep 10 2019 by
SIF Folio Gulf Keystone Petroleum could be a bargain super stock

It may not be a fashionable view, but I like to have some oil exposure in my portfolios. I’ve enjoyed some decent profits from this sector over the years. I also expect oil and gas to remain an important part of the energy mix for several decades to come.

However, one company I wouldn’t have expected to consider buying is Kurdistan-focused oil producer Gulf Keystone Petroleum (LON: GKP). This firm started out as a frontier explorer and was one of the early players in the Kurdistan oil sector. 

Back then, GKP was a bulletin board favourite with a charismatic American CEO. When the firm discovered the Shaikan field in 2009, the shares rocketed. But although development of the field was successful and production started in 2013, the company struggled to receive payment for the oil it produced from Shaikan. 

In 2016, Gulf Keystone nearly collapsed under the weight of more than $600m of high-yield bonds. However, replacement chief executive Jon Ferrier managed to persuade the firm’s lenders that Shaikan would produce cash as well as oil. He secured a $500m debt-for-equity swap plus fresh cash for working capital. Existing shareholders saw their ownership of the company reduced to 5%, but Gulf Keystone lived to fight another day.

A cash machine?

Since 2016, payment issues have gradually been resolved while Shaikan’s operating performance has been maintained. 

The firm’s latest presentation shows 591m barrels of proven and probable reserves, with production running at about 38,000 barrels per day. Operating costs remain very low, at just $3.20 per barrel. 

Work is underway with partner MOL to increase production to c.55,000 barrels/day in 2020. 

Although Shaikan’s sour crude sells at a discount to the Brent crude benchmark, the firm realised an average price of $49 per barrel in 2018. Net cash reached $191m by the end of the year and the firm made its maiden dividend payment.

The stock’s fundamentals continue to look strong to me and it now qualifies for the SIF screen. With a StockRank of 93, Stockopedia’s algorithms also take a positive view:


Since the departure of Total SA a few weeks ago, the SIF Fund has had no exposure to oil. This week, I’m going to decide whether to buy Gulf Keystone to address this shortfall.

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Gulf Keystone Petroleum Limited (Gulf Keystone) is a holding company, which is engaged in the oil and gas exploration and production. The Company operates in the Kurdistan Region of Iraq. It operates through segments, including Kurdistan Region of Iraq and United Kingdom. The Kurdistan Region of Iraq segment consists of the Shaikan, Ber Bahr blocks and the Erbil office, which provides support to the operations in Kurdistan. The United Kingdom segment provides geological, geophysical, engineering and corporate services to the Company. It operates in the Shaikan oil field. The Shaikan block is situated over 85 kilometers northwest of Erbil, covering an area of over 280 square kilometers. more »

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5 Comments on this Article show/hide all

andrea34l 10th Sep 1 of 5

Interims from Gulf Keystone Petroleum (LON:GKP) are out today - the future looks promising, potentially, and August production looks good, as does a rising oil price. But there is something in the results people don't like, as they are currently off 4% - the largest trades are sales so far.

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Roland Head Wed 8:56am 2 of 5

In reply to post #511731

Hi Andrea,

Thanks for your comment. As you say, yesterday's half-year results from Gulf Keystone Petroleum (LON:GKP) looked okay, albeit with a slight fall in earnings (expected). Most importantly, production remains stable and cash generation is strong, reflected in a c.$260m cash balance.

My feeling is that the selling was more down to profit taking/unchanged guidance than any specific bad news. I note that the share price did recover somewhat later in the day.


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rhomboid1 Wed 9:44am 3 of 5

I agree that Gulf Keystone Petroleum (LON:GKP) is v attractive on the numbers alone but how can you invest without having an in-depth view of how Kurdistan politics are likely to unfold along with Iraq & Turkey events?

If you don’t have that regional politics insight then you are investing blindly in the hope that nothing really bad far the region has offered many really bad scenarios on a regular basis

To me it appears possible that politics/war could decimate this business so an appropriately deep discount on valuation is essential...just what that discount should be will only be apparent in hindsight

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Roland Head Thu 12:39pm 4 of 5

In reply to post #511976


Thanks for your comment. It's very true that Kurdistan/Iraq has been a troubled part of the world for a long time. I agree that this stock will only ever deserve a modest valuation.

However, despite the events in this region in recent years, both Gulf Keystone Petroleum (LON:GKP) and Genel Energy (LON:GENL) have developed successful businesses over the last decade.

The fact that they've been able to achieve this suggests to me that they have developed networks of influence and information channels which enable them to continue operating in difficult circumstances.

The dependence of the Kurdish/Iraqi economies on oil exports is probably a positive factor, as is the relative lack of domestic expertise in this sector. No one wants to bite the hand that feeds.

I don't have any expert insight into regional politics, but I have followed the development of the Kurdistan oil sector and am aware of some of the obstacles that have been overcome.

Whether this situation will remain stable is uncertain. I agree that future events could leave the firms unable to operate, or even threaten ownership of their assets. But political risks apply to most non-diversified resource stocks operating in emerging markets. I'm not sure that Kurdistan is so much riskier than most African countries in this regard.

The SIF folio's exposure to GKP is less than 5%. Based on the group's history and current operating performance, I'm comfortable with this at the moment.

Of course, this is only my opinion - not a recommendation. I would suggest anyone considering the stock do their own research before reaching a decision.



Disclosure: I hold GKP

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rhomboid1 Thu 3:40pm 5 of 5

In reply to post #512541

Thanks Roland
I agree with your response entirely

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About Roland Head

Roland Head

I'm a private investor, analyst and writer on stock markets, with a particular fondness for free cash flow, dividends and value. My main interests are UK and US stocks. I also have an interest in (profitable) commodity stocks.  I have passed the CFA Level 1 exam and hold the CFA UK Investment Management Certificate (IMC). One of my investment interests is developing rules-based strategies such as my Stock in Focus portfolio. This reflects a significant part of my personal portfolio and is the subject of my weekly column here at Stockopedia. In earlier life, I worked as an engineer in telecoms and IT. The rules-based and quantitative approach required for this kind of work undoubtedly influenced my investing style.  I also learned a lot from seeing the tech bubble deflate in 2000-1, when I was working for a very large and now defunct Canadian telecoms firm.  more »


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