Why I believe Gulf Keystone is 50% overvalued at 5p a share

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.

The recent restructuring announcement is close to giving Gulf Keystone a potential fresh start without being saddled by a debt mountain. Once the darling of the AIM market with shares trading at around 400p at their peak, today though they sit at 5p. Is this though still too high? Also what does the recent DNO offer imply?

This share is heavily dominated by private investors and the complexity of debt for equity swaps and the effect on the investment is not straight forward. The full terms can be found at gkp restructure.

I’ve included some calculations below, allow me to talk through them.

GKP DE Calcs

Part a) simply show the expected number of shares to each party post the restructuring. This information is calculated based on the GKP restructuring RNS.

Part b) shows the enterprise value based on current share price.  I have calculated an effective price to retain the same enterprise value as 2.05p. So assuming no change in the Macro environment or any company specific news we can expect the price to fall to 2.05p all other things being equal on the date of the restructuring.

Part c) goes on to calculate the effective cost of 1 share assuming you buy at today’s price in the open market and fully exercise your open offer rights. This gives you an underlying cost of one share of 2.15p, this is below the expected enterprise value 2.05p so theoretically by buying today you are taking a punt on improved oil price etc.

Part d) this is the most interesting calculation. The noteholders can keep selling their shares all the way down to 0.86p and still be in the money, i.e. fully recover the debt that has been converted to equity. If the noteholders can sell a tranche of shares above 0.86p, they may well settle for selling tranches below 0.86p.

How low will this share go?

The above is purely theoretical but does set the context. Bondholders are unlikely to want to hold equity investments for very long, you can imagine they are already working behind the scenes to look for buyers. These shares won’t hit the open market, they will be negotiated with a series of equity investing institutions or perhaps more likely a rival oil company, as mentioned above I see DNO have already made an approach.

Here is the important part, all that has to be offered is to the noteholders is an offer > 0.86p and the buyer can obtain 65% of the company. Under UK Takeover law they need 75% of shareholder support to force through a takeover, so only another 10% is needed….enter the convertible bonds owners with 20% of the company. Their breakeven point is 5.75p a share, however these bonds have been trading as low as $13, i.e. a 13% return on initial investment, this represents 0.74p a share. If they were offered 1p and it could well be enough to get these guys to sell too…The DNO offer on 29th July offered just that, in fact a little over 1p.

The verdict

Those buying in the secondary market today are risking a potential 50% loss. The only thing which would justify this risk is if a rival bidder came in. This to me is highly unlikely, Kurdistan is not a place where I can see new entrants to the market, which leaves Genel as the only other possible bidder. This company if anything is probably looking to decrease its exposure to Kurdistan, even if it had  $300m+ to spend on assets (it doesn’t) then I imagine this will not be spent on increasing its Kurdish exposure.

My belief therefore is the DNO offer will be accepted after the restructure. This sadly means the dreams of riches from the Gulf Keystone private investor base will be extinguished forever. RIP.

SELL – Target 1.5p

Disclaimer – I have no positions in this stock and to my knowledge nor do any close family, friends nor associates. This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.

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