Gulf Keystone increases credit loss provisions

It would be unfair to suggest that Gulf Keystone Petroleum (GKP) is engaged in a holding operation, but the Kurdistan-focused oil group is still contending with suspended exports, along with delayed payments from the regional government (KRG). Since the Shaikan oilfield was declared a commercial discovery in 2012, there can have been few moments when the operation hasn’t been impacted by geopolitical issues, not altogether surprising given the locale.

The ramp-up at the SH-17 well and commencement of production elsewhere drove Q1 2023 output to an average of 49,165 barrels of oil per day (bopd), including five days that drew 55,000 barrels. That was prior to the Iraq-Turkey pipeline closure on 25 March, so the driller duly set the production cap lower than the available output and switched to local sales. Gross average production consequently halved to 21,891 bopd, although chief executive Jon Harris noted that “local sales volumes have rebounded since the beginning of 2024”, hitting an average rate of c43,000 bopd during March.

The disruption meant the company swung to a reported loss against a profit of $266mn (£209mn) in the prior year, due in part to increased credit loss provisions linked to the $151mn in overdue receivables from the KRG. Cash flows followed a similar pattern, although actions have been taken to significantly reduce operating expenses. Gulf Keystone’s net entitlement from local sales has more than covered its costs since commencement, giving breakeven at gross sales of c22,200 bopd.

A return to development of the Shaikan Field won’t happen until exports have recommenced and there is clarity on the KRG payments. We therefore revert to a neutral stance with the shares trading at a 61 per cent discount to net assets (ex-cash). Hold.

Last IC view: Buy, 138p, 27 Apr 2023