In this article we will be analysing the Net Asset Value (NAV) of Gulf Keystone Petroleum (GKP ), and will calculate a target price based on that analysis.

Note: Click on the title of each section to view it.

Highlights

Short Term Target (1 to 3 months): 250p

Medium Term Target (6 months plus): 500p

Based on:

  • Estimated NAV of £3.9 billion
  • Estimated NAV per share of 517p
  • Risked NAV per share of 269p

The biggest obstacle in Gulf Keystone’s way is the contractual disagreement between the Kurdistan Regional Government and the Iraqi Central Government, but if that is sorted by the end of June, GKP should be well on their way to our medium term target of 500p.

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About GKP

Gulf Keystone is an independent company whose focus is on exploration in the Kurdistan region of northern Iraq.

In November 2007 Gulf Keystone secured interests in two production sharing contracts in the Kurdistan Region of Northern Iraq, Shaikan and Akri-Bijeel.  In 2009, the Company diversified the asset base in Kurdistan with the addition of two new Production Sharing Contracts, Sheikh Adi and Ber Bahr.  This region has the potential to be a world class hydrocarbon province and Gulf Keystone believes it is well positioned to seek out further growth opportunities.

Gulf Keystone is quoted on the Alternative Investment Market (AIM) of the London Stock Exchange. Ticker symbol GKP.

Strategy

•    Bring the company into production
•    Explore, appraise and develop current blocks to realise reserve potential
•    Regional diversification into high impact exploration / appraisal opportunities

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Asset Summary

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Assumptions

In the calculations, several assumptions were made, mainly because specific data was not available.

1) The recovery factor is 35%. Recovery factors are generally between 20% and 50%, and GKP have not indicated a specific estimate for the recovery factor of each well. The recovery factor could be as low as 15% or as high as 70% (as Hertiage (HOIL) optimistically estimated was possible in Kurdistan); but there is no way to know for sure, and any NAV calculation would be significantly affected by an incorrect recovery factor. The recovery factor is the percentage of oil that can be recovered from each well; so 35% would mean that 35 barrels of oil would be recovered from a 100 barrel find.

2) That the profit per barrel of oil would be 8% of the current price of oil; $90. 8% is a conservative estimate, and 10% to 15% could be expected, but Shaikan’s crude is heavy and requires a discount. The price of oil has also been predicted to rise significantly throughout 2011 and beyond, and any increase in the price of oil would increase GKP’s NAV.

3) The chance of success is 50%; about average for a Kurdistan drill.

4) The diluted working interest was used, rather than the working interest. The diluted working interest is more relevant as it takes into account the Kurdish governments back-in rights; which would most likely be utilised if the drills were successful.

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Calculating the NAV

To calculate the net asset value, take GKP’s Shaikan block for instance, we have taken the estimated oil in place (OIP), the mean estimate for Shaikan being 4.2 billion barrels, and multiplied that by the recovery factor (35%), then by the diluted working interest (51%), taken off the Kurdistan Regional Government’s 40% tax on profits, and finally multiplied by the estimated profit per barrel ($7.20). For Shaikan, this process places its value at $3.24 billion. Converting this into British Pounds, Shaikan’s value to GKP is £2.01 billion.

Shaikan’s value can also be calculated per share. Taking its value of £2.01 billion, we can then divide by the number of shares GKP has in issue; 754.2 million. This values Shaikan at 266p a share; considerably higher than its current share price of around 170p currently, based on this one asset alone.

The risked Net Asset Value can also be calculated, by dividing the NAV with the chance of success. The chance of success has been estimated at 50%, taking into account the chance of finding oil based on the seismic surveys, as well as the chance that political problems in Iraq may interfere. The risked NAV of Shaikan is therefore 50% of £2.01 billion; £1 billion or £1.33 a share.

GKP can also be valued on a per barrel of oil basis; dividing the market cap by number of barrels of oil in place. For GKP this would then be £1.26147 billion (market cap) divided by an estimated 9.3 billion barrels of oil; 13.5p or 21.5 cents a barrel. This calculation could be considered a huge simplification of a company’s value, as it does not take into account any costs.

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GKP's Net Asset Value

GKP has £161.7 million in cash according to their last financial report. To calculate the NAV of Gulf Keystone Petroleum as a whole, this must cash must be factored in. The risked NAV is 50% of the value of the assets, plus the full amount of cash.

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Evaluation

Gulf Keystone has the potential for huge gains in 2011 but is currently being held back by the contractual dispute between the Kurdish Government and the Iraqi Government. The net asset valuation of 517p a share represents an upside of 213% on the current share price of around 165p, and highlights GKP’s huge potential. The estimates of oil in place used in the NAV estimate are only the mean estimates, and the best estimates could add 300p or more to the NAV.

Hertiage’s recent share price collapse does emphasise the dangers of Kurdish drilling, as they found gas where they thought was oil, though Gulf Keystone’s has already confirmed the presence of significant oil at the Shaikan drill. GKP are also rumoured to be looking at joining the FTSE 250, which could provide renewed interest from investors. They are also rumoured to be thinking about further fund raising, most liking through a share placing; a positive sign as shortly after their last share placing the share price shot up 50%. Historical performance does of course not guarantee future success but the future does look bright for Gulf Keystone Petroleum.

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Risks

The two biggest risks we feel threaten GKP’s share price are:

  • The Iraqi Central Government (ICG) deciding that the contracts the Kurdistan Regional Government had signed with international oil firms, such as GKP, are invalid. A discussion on this is due before July 2011. There have been signs recently that the ICG made decide to uphold these contracts, as they will allow Kurdish oil exports to resume in February.
  • The recent legal claims of rights of up to 30% of GKP’s blocks from Excalibur. Little is known about the validity of this claim, but if the New York courts rule against GKP, it could be hugely damaging.