GKP slumps on resource estimate

The share price of Gulf Keystone Petroleum (GKP) dipped alarmingly on release of a competent persons report (CPR) compiled by reservoir valuer ERC Equipoise. The report on GKP’s resource base in Kurdistan has been put together ahead of GKP’s planned transfer from Aim to the official list of the London Stock Exchange. The CPR identified a total of 12.5bn barrels of oil in place, which was way adrift of previous estimates that put the gross resource at about 19bn barrels.

ERC confirmed 299m barrels of proven and probable (2P) reserves, as well as 919m barrels of contingent (2C) resources. All of the reserves and most of the contingent resources are located in the Shaikan and Sheik Adi fields. GKP’s chief executive Todd Kozel put a brave face on the figures, claiming that they represent a “conservative estimate based solely on reserves which are being targeted with less than 25 per cent of all wells currently envisaged for the Shaikan development”. There were also more details on operational progress, with GKP announcing production of 10,000 barrels a day (bopd) from the first Shaikan production facility, with a target of 40,000 bopd in 2014 thanks to a second facility expected to begin production this spring.

Mirabaud says…

Buy. Reserve auditors tend to be conservative, and we feel that ERC has adopted a belt and braces approach in its analysis. The changes to our Shaikan 2P asset model feed through into our financial forecasts, triggering lower production and operating cash flow and higher capex throughout the forecast period. Nevertheless, we still see considerable growth potential at Shaikan, with the company's average net production rising from 12,000 bopd in 2014 to 33,000 bopd in 2016, yielding a five-fold jump in cash profits from $57m to almost $300m. Having reworked the numbers, we see fair value at 150p a share – 39 per cent above the current price.

Cantor Fitzgerald says…

Buy. GKP is currently in the process of reviewing its financing options in conjunction with oil production during phase 1 at Shaikan, and is likely to recapitalise following two recent bond issues. Given the explorer's significant updated reserve backing, the company will likely look to access the debt market on more favourable terms. Whilst the CPR report represents a conservative estimate, based on reserves from just a quarter of the total well projects envisaged for Shaikan, we adjust our valuation to take account of this area only. On this basis, we reiterate our buy recommendation but reduce our target price to 183p (from 235p).