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I previously rated Gulf Keystone as a strong sell on the news of a debt for equity swap being announced in July. To be honest I have considered these shares a stonking sell all the way down from 100p, unfortunately I have nothing in writing to prove it, you’ll just have to trust me! Anyway on to my musings, there have been a string of further announcements in the past few weeks from Gulf Keystone and I thought it quickly worth reviewing what they mean for shareholders and whether this means my verdict has changed.
The most notable RNS was the open offer launch on 31st August, which saw the shares go ‘ex open offer’. In lamens terms, this means that any shares bought after 30th August are no longer entitled to subscribe for shares under the open offer terms, i.e. the right to subscribe for 20 shares at 0.86p for every 9 shares owned.
There was also a revised Competent Person Report (CPR), a shareholder resolution regarding the proposed increase to authorised share capital and details of the scheme of arrangement for noteholders. The CPR was unchanged from the last reserves report issued in June 2016, aside from the hydrocarbons produced since and the RNSs regarding the shareholder resolution and noteholders scheme were also nothing more than formalities.
So what is the timeline from here? Is this Restructuring on track?
Gulf Keystone cleared the first hurdle on 5th August through the passing of shareholder resolution to increase its authorised share capital, this being to accommodate the new shares to be issued to get this restructuring away. No drama on the day despite various petitions being passed around on the bulletin boards, there was even word of emails being sent to Theresa May, I’m guessing she was tied up with Section 50. In the end only 26% of the total shareholder base turned out to vote, so it looks like insufficient traction and/or appetite from the largely retail shareholder base to block the move. Clearly any attempts from shareholders to block this would be ‘cutting off your nose to spite your face’, but it has happened before with other companies…
The next step is the open offer which closes on 15th September. Gulf Keystone desperately needs this cash to start a workover program to maintain production levels. Gulf Keystone’s largest shareholder, Capital has already agreed to subscribe for up to $20m of the $25m target, so this seems well within reach.
The final piece in the puzzle is the Debt Holders scheme of arrangement which should be finalised on 22nd September. This process requires 75% of the bondholders to agree to the terms of the restructuring. Nothing more than a formality, Gulf Keystone already have the support of the majority of its bondholders.
In summary the the restructuring is on track and it will almost certainly go through.
Are the shares still a sell then?
In my article on Gulf Keystone last month which was written before the shares went ex open offer the share price was then 5.12p, i.e. an effective price was 2.15p, assuming you fully subscribed to the offer. I went on to outline why I believed at that point you were still better off getting out now, and my logical target was around 1p for this company. I won’t repeat myself, have a quick read of the article for my arguments. SPOILER – I can’t see any other outcome other than a DNO takeover, or at a push a rival oil company, but I really can’t see a bidding war justifying 2.15p.
Nothing has changed since I wrote the above article and the market has started to agree with me. The share price has obviously collapsed since the shares went ‘ex open offer’, the price at point of writing is 2.39p. Amazingly though this is still actually a higher than effective price of 2.15p, which was when I published my original article. Fundamentally the shares are still 40-50% over what I believe will be the final offer price for Gulf Keystone.
If I owned the shares I would be selling my existing holdings. I would though be sure to still subscribe in full to the open offer at 0.86p, these open offer shares are in the money based on where I believe this will end up, i.e. an acceptance of DNO’s bid.
SELL, Target 1.2p (Generous)