Like a virus, Gulf Keystone Petroleum’s (GKP) cash problems are spreading to all corners of its business. The Kurdistan-based oil producer has re-iterated that wells in the Shaikan oil field “may begin to exhibit natural declines later in 2016” without “additional capital expenditure”.
Unfortunately, Gulf Keystone has little chance of meeting those capital expenditure plans as well as its enormous debt obligations, based on current cash flows and revenues. The company also announced a delay in payments for its convertible bond, after being granted a two-week grace period for a coupon due on Monday (18 April). That detail wiped more than a third off the shares in early trading on April 14.
Getting to the point
The statement began in a rather convoluted style. “[GKP] today publishes further details on potential interim investment scenarios to build a common foundation for stakeholder discussions on the company’s need for near-term fundraising, upcoming debt obligations and possible restructuring of the balance sheet”.
That’s a long-winded way of preparing shareholders for further dilution. Or possibly worse.
The company outlined two possible investment options. The first involves a gross capital expenditure programme of $71m to maintain Shaikan production at 40,000 barrels of oil a day (bpd), or $88m to install another facility and expand production to 55,000bpd.
Neither scenario will actually cost Gulf Keystone this much: the company is committed to 64 per cent of total costs for Shaikan and so the net cost will either be $46m or $56m, if it can somehow raise the money.
Shrewd move
In a way, this is sensible: Gulf Keystone desperately needs to protect, or increase its cash flows. However, neither scenario includes general and administrative expenditure, a number of costs associated with the “installation of air-assisted flares,” or “several small projects to improve Shaikan production facilities”.
The costs also exclude production bonuses of $10m and $20m, due to Kurdistan’s oil ministry and Shaikan joint venture partner MOL Hungarian Oil and Gas, respectively. That last detail will probably smart, given that the Kurdistan Regional Government (KRG) still owes the company more than $150m in delayed payments from 2015.
Those delayed payments, together with the fall in oil prices and a host of other issues, has led to a terrible cash crunch for the company. Last month, with cash balances sitting at just $18.1m (£12.5m) net of restricted cash, GKP's auditor explained there was "significant doubt upon the group's ability to continue as a going concern".
There was further bad news on Wednesday, when the company disclosed that funds managed by Prudential had sold their remaining 5 per cent stake at the beginning of the week.
