LONDON (Alliance News) - Gulf Keystone Petroleum Ltd said it is doing everything it can to strengthen its balance sheet to ensure the business can keep going after conceding the company is facing "material uncertainties" and may be unable to meet its debt obligations this year.
Gulf Keystone shares were trading down 18% to 9.85 pence per share on Thursday afternoon, having set a new 52-week low of 9.28p at the open. The stock trading as high as 46.00p in the same period.
Gulf Keystone is owed money by the Kurdistan regional government for the oil it has exported out of the country and has been working to establish a consistent payment method to ensure the company has some visibility on cashflow.
Although the regional government has committed to clearing arrears to foreign oil producers in 2016 and has made consistent monthly payments for ongoing exports since September last year, Gulf Keystone said it is aware there is "significant uncertainty" over whether the cash receipts for exports in early 2016 will be sufficient to cover the company's two coupon payments due this year on its debt.
"The financial situation facing Gulf Keystone is clear: payment arrears for past costs and revenue arrears coupled with reduced near-term income because of low oil prices have resulted in a weak balance sheet to service the existing debt obligations of the guaranteed notes and convertible bonds in terms of coupon payments due in April and October 2016, as well as bond maturities in 2017," said the company.
Gulf Keystone is due to pay a USD26.4 million coupon payment on April 18, but said that even if it is in a position to cover that payment, then the next coupon payment due in October would require the company to raise additional funding.
If the company is unable to meet those obligations, then the holders of the loan notes would have the right to call for an immediate repayment of the outstanding loans in full.
Looking further into the abyss, Gulf Keystone also has substantial debt repayments to make in 2017, one to the tune of USD250.0 million in April and a further USD325.0 million in October, and Gulf Keystone said it is contemplating refinancing its debt and conducting a further fundraising.
"The directors have concluded that the current low oil price environment, the political situation in Iraq, the fact that the agreement with the [Kurdistan] Ministry of Natural Resources is subject to an amendment agreement to the Shaikan production sharing contract, and the early stages of the mitigating actions outlined above create a material uncertainty that casts significant doubt upon the group's ability to continue as a going concern," said the company.
Still, Gulf Keystone said the opportunity to refinance its debt and raise further funds gives it "a reasonable expectation" that it will be able to keep going for the "foreseeable future".
"Continuing the wide-ranging strategic review which began in February 2015, we are actively considering our options to strengthen our balance sheet and secure new funding, including balance sheet restructuring, capital raise, and acceleration of Ministry of Natural Resources arrears payments," the company added.
The company has a debt service reserve account of USD32.5 million, which it said it could potentially use to pay the coupon payments due in April, but that reserve account must stay at that level, meaning Gulf Keystone would only have a matter of days to replenish any cash taken from it.
Excluding that reserve account, Gulf Keystone only has USD18.1 million in cash - far short of its payments this year, making it "essential" that the business finds further funds from elsewhere.
Gulf Keystone looks likely to return to the market if it cannot refinance its debt, or potentially both, admitting that there is a "low likelihood of an asset transaction in the near future".
On Thursday, the company said it believes it is currently owed around USD93.0 million from the Kurdistan regional government - but also said it owes the government USD49.0 million, suggesting it is only waiting to receive around USD44.0 million.
In addition, Gulf Keystone said it has a contingent liability of USD27.0 million in relation to the sale of test production in the period prior to the approval of the Shaikan field development plan.
The issues at the company ultimately come back to where it operates. Ignoring the political uncertainty within Iraq, the company has no guarantee from the Kurdistan regional government that it will be paid for ongoing exports and is having to take the government's word that the arrears owed to the company will be cleared.
The regional government is having to stretch its resources as it continues to fight to protect its borders from terrorist organisations, accommodate 2.0 million refugees and displaced individuals, and deal with falling commodity prices, which are hampering one of its key industries.
Gulf Keystone will remain in limbo until that issue is resolved, and, unsurprisingly, the company has suspended any new capital investment in the near term - which could end up having a knock-on effect as its producing Shaikan field is mature and facing natural production declines.
Gulf Keystone said the field is likely to face natural declines in the latter half of 2016, but said it has drawn up an interim plan to maintain production at Shaikan at its full capacity of 40,000 barrels of oil per day and to potentially increase that to 55,000 barrels of oil per day - but said this is reliant on payments from the government amongst other things.
That would come at a cost of USD71.0 million to USD88.0 million, including a 30% contingency payment.
Gulf Keystone's bleak outlook was contained in its 2015 results, published Thursday, which showed it remained in the red as its pretax loss amounted to USD135.0 million compared to the USD248.2 million loss in 2014.
The main driver of the narrower loss was a big reduction in impairments to only USD3.6 million in 2015 compared to the USD144.1 million booked a year earlier, alongside a fall in administrative costs to USD31.0 million from USD39.0 million.
However, that was partly offset by depreciation costs amounting to USD74.1 million compared to USD38.4 million in 2014.
On a mildly brighter note, Gulf Keystone said revenue soared in 2015 to USD86.2 million from USD38.6 million. Excluding depreciation costs, Gulf Keystone's operations generated a USD23.4 million gross profit in the year compared to a USD4.8 million loss in 2014.
Including depreciation, the gross loss in 2015 amounted to USD50.7 million compared to the USD43.3 million loss last year.
Coupon payments also made a big impact in 2015, amounting to USD52.1 million in 2015 compared to USD19.8 million last year.
The rise in revenue was driven by more than a 70% lift in production and the start of exports out of Iraq, which yield a better price than domestic sales, and therefore deliver better margins.
With gross operating costs of only USD5.00 per barrel in 2015, excluding royalties and other costs, the company was able to improve its margin by achieving an average price of USD22 per barrel for exports compared to the USD18 a barrel it gets from the domestic market.
Gross operating costs will drop to USD4.50 per barrel this year, and production is expected to rise further. Operating costs in 2014 were around USD7.00 per barrel.
Gross production in the year averaged 30,500 barrels of oil per day, a rise of 71% from 2014, and Gulf Keystone said that will rise to the region of 31,000 to 35,000 barrels a day in 2016, subject to offtake and export infrastructure availability.
Although production in 2015 soared, it was at the bottom end of the company's guidance range of 30,000 to 34,000 barrels per day.
"The reasons behind my initial attraction to Gulf Keystone remain my motivation today. We have a superb subsurface asset, which continues to perform well, and a motivated workforce dedicated to realising Shaikan's full potential. We started 2015 with installed capacity to produce 40,000 barrels per day and achieved our guidance with a 30,500 barrels a day average rate, as well as record levels of over 45,000 barrels a day achieved during the year," said Chief Executive Jon Ferrier.
By Joshua Warner; joshuawarner@alliancenews.com; @JoshAlliance
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Gulf Keystone Petroleum (GKP)