Gulf Keystone and the rumour mill

After losing a third of its value over the past three months, the share price of Gulf Keystone Petroleum (GKP) – at 168p – is now over 60 per cent adrift of February’s 12-month high. The reversal may seem somewhat perplexing given the progress made by GKP towards the development of its multi-billion-barrel Shaikan oil discovery in Kurdistan.

Ironically, the recent volatility of the shares may be partly linked to GKP's rapid exploration success. February’s price spike, for instance, was largely attributable to takeover speculation generated in the wake of an upbeat assessment of the Shaikan-4 appraisal well. This speculation is not without merit and could intensify if it’s thought that GKP is insufficiently funded to advance its wider development programme. Admittedly, the company is fully funded until the end of 2013, but it was forced last month to threaten legal action in response to bulletin board rumours of a planned placing of shares at 160p that sent its share price tumbling. Though management is reportedly keen to maintain independence, it’s highly probable that more oil majors will look to gain a foothold in Kurdistan in coming months, and GKP’s assets are of sufficient scale to warrant their attention.

Daniel Stewart...

Buy. The Kurdistan Regional Government, which initially backed smaller players, is likely to favour consolidation and the entry of larger companies to the region as demonstrated by the entrance of Exxon. We apply a variety of metrics to obtain an indicative range of valuations for GKP (assuming a $95/barrel oil price). A risked sum-of-parts valuation, taking all four of GKP’s blocks into account, yields a risked valuation of 245p a share (432p unrisked). Valuing the company using a price per barrel metric would imply a higher valuation: assuming a profit per barrel of $3.60, GKP’s assets are valued at £4.7bn, or 538p/share.

Peel Hunt...

From Hold to Buy. The main reason GKP currently trades at a discount to its implied NAV is due to country-specific political risk and uncertainty associated with the impending court case with Excalibur Ventures. We feel that an acquisition of the entire business will transpire eventually. Earlier this year the market behaved as if a takeover was afoot, but it turned out to be a red herring... the timing was not right primarily because of the upcoming court case where there is a chance (albeit very slim) that GKP may lose 30 per cent of its assets.