Gulf Keystone payout surges on oil price

If conditions stay as they are, a new shareholder in Gulf Keystone Petroleum (GKP) would have their initial investment covered by dividends in three years. Counting up its various payouts this year, the yield has hit one-third. 

The Kurdistan-based oil producer has put itself in this position by being a few years into production at its Shaikan asset as oil prices surged this year.

Production for the first half of the year was 45,000 barrels of oil per day (bopd), up slightly on the year before. With a gross operating cost in the realm of $3 (£2.54) per barrel (bbl) – and a realised average price of $84/bbl – there was little question Gulf Keystone would see significant cash generation this year.

The free cash margin duly climbed from 51 per cent to 67 per cent over the period. 

Spending will increase in the coming months, taking this back down, but at the same time, Gulf Keystone has paid off a $100mn bond post-period and was sitting on a cash balance of $112mn as of 31 August. 

Investors have long been wary of its operating environment in Kurdistan, and payments from the regional government have often been slow in arriving. This seems to have eased in the bull market, and missing payments from 2019 and 2020 have now arrived. 

The newest drama is the Iraq government reportedly telling services companies to stop working in Kurdistan if they want to hold on to Iraqi contracts. This even prompted a statement from the US consul general in Kurdish capital Erbil this week, who said he agreed with the Kurdish Regional Government that “existing oil contracts must be respected”. 

Gulf Keystone chief executive Jon Harris said the company’s operations had not seen any impact from Iraq’s demand. 

There will be plenty of work for Gulf Keystone’s contractors and sub-contractors in the coming months – the company has forecast full-year capital expenditure at $110mn-$120mn, more than double last year’s figure. This is largely a result of the new Shaikan 16 well and spending on water handling, which will boost production. 

Peel Hunt analyst Werner Riding flagged the regional tensions but said the dividend yield provided “more than adequate compensation for the risk of operating in Kurdistan”. He has forecast 2022 as a peak for the company, with cash profits hitting $400mn this year (up from $223mn in 2021) before dropping back slightly to $393mn in 2023. 

While being aware that very high yields do have downsides, we stick with our positive call. Buy. 

Last IC View: Buy, 254p, 30 Mar 2022