The message boards are buzzing about Gulf Keystone Petroleum (LSE: GKP) and understandably so, with the share price up almost 20%, to 17.5p, at time of writing. This follows another action-packed day yesterday, when the price leapt more than 18%. Investors are celebrating the long-awaited news that GKP may soon start to see hundreds of millions of dollars it is owed in back payments by the Kurdish Regional Government (KRG).
Gulf In Class
This should spell good news for another Kurdistan-focused explorer Genel Energy (LSE: GENL), which is also owed hundreds of millions, but investors haven’t bothered to throw a party on its account. Its share price is up less than 2% this morning.
On Monday, the KRG announced new payment terms for both oil explorers, which included an element for paying off some of the arrears that have been built. This news is more than welcome, although should not be overstated. The KRG will shift away from the flat monthly payments that started in September, which has seen a total of $60m a month flow into Gulf Keystone’s coffers since then, and $100m into Genel. Instead, it will make payments that reflect the revenue derived from each producing field on a netback basis, using Brent crude as a benchmark.
Outstanding News
The KRG said it would also make a further payment, equivalent to 5% of the respective monthly netback revenue derived from each field, towards the recovery of outstanding entitlements. This ties payments to the oil price and, with Brent currently trading at less than $35, Barclays has pointed out that this might mean lower monthly payment levels, although this would be offset by payments to reduce arrears.
Payments are to be made within 10 working days of the end of each month, which could see the first money coming through under the new structure as soon as 10 February.
Gulf Keystone is still waiting on arrears totalling $298.4m. Genel’s receivable balance is around $400m. Better still, it suggests that the KRG is keen to meet its obligations, no small order given the fight against Daesh, where it is struggling to pay the wages of front-line fighters. Obviously, it will take time to clear those arrears, and investors should brace themselves for payment shocks or setbacks along the way.
Geopolitical Geologies
Gulf Keystone, which has a 75% working interest in the Shaikan field, and Genel, which has a stake in the Tawke field operated by DNO and is the operator of Taq Taq, are a play on one of the most politically volatile regions of the world, but at least oil extraction costs are low. Turkish aggression is a growing concern, given excitable talk of direct military intervention or a showdown with Putin’s Russia. On the plus side, the Kurds have the backing of the US, and are making good use of their powerful friend.
Kurdistan presents a world of risk but it is good to see GKP investors being rewarded for their loyalty. I am still curious as to why Genel hasn’t enjoyed the same lift, especially with Barclays saying the news is a positive for all of the companies operating in the region. Perhaps investors simply weren’t as worried, given its healthy cash position, with cash balances of $455 million at end 2015. Time will tell.
