In true bearish style I increased the size of my only short position in Gulf Keystone (LSE: GKP) in the portfolio:
Just added to my short position in GKP, if it breaks 34 I'll be happy
— David Thomas (@djthomas) March 20, 2015
The mains reasons that lead me to add to this position is that my exposure is within risk limits for The Value Investor Report but also because even though GKP managed to resume oil production in line with it’s pre-payment of $20 million net, there is no indication from GKP that they are doing anything meaningful to cut costs which are astronomical:
As I’ve already mentioned cost of sales, general admin expenses as well as finance costs are so huge that revenue would have to increase by well over 100% just to break even on costs.
My view is that it will be extremely difficult for GKP to do this when you consider the region in which they operate:
Company continues to target 40,000 bopd of Shaikan production by year end through the tie-in of three additional producing wells (Shaikan-7, -8 and -10), although certain consequences of the recent security situation, including the current short term limited availability of some international contractors, may cause this to move to Q1 2015
Postponing 40,000 bpod to Q1 2015 has already happened and gives shareholders a sense of the type of hostile environment in which GKP operates and we’ve yet to hear anything concrete from GKP that this target has been achieved.
Shareholders have also gleaned from their latest RNS that ‘the company anticipates that a further payment of a similar nature will be received, which is expected to stabilise a payment cycle for current and future Shaikan production’.
Well for current shareholders I certainly hope so but an anticipation of future payments is rather wishy washy language and shareholders need something more concrete to feel confident about future revenues.
But it’s all a smokescreen when you factor in management’s desire to sell this business whilst asking the bondholders (who are receiving 13%) not to exercise their options – at least for time being – whilst GKP tries to find a buyer.
The whole story is a short and the weakness of Gulf Keystone’s balance sheet only adds to my rather pessimistic view of GKP’s future prospects.
Will the market prove me wrong in the long run?