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Gulf Keystone Petroleum: Macquarie warns of over-exuberance and false dawns

Published: 21:08 26 Sep 2013 AEST

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Specialist resources broker Macquarie says it will ‘wait and see’ whether Gulf Keystone Petroleum (LON:GKP) will re-start oil production soon.

In a note, Macquarie points out that Shaikan’s production came on stream six months late and stopped again soon after.

At the request of the Kurdistan authorities GKP suspended production earlier this month while improvements were made to the domestic sales process (the vast majority of Shaikan’s production is sold locally), Macquarie explains.

The broker is not, however, completely assured by GKP’s expectations that operations will soon resume.

“GKP expects production to come back on shortly; however, given the false dawns in the initial start-up, we believe that this will be a wait-and-see event,” analyst David Farrell said.

Farrell, who has a ’neutral’ rating and a 173p target for GKP, says funding is now the main issue and he expects a fund raise of around US$200mln before the end of the year.

“GKP talks about applying a ‘cash neutral approach to growing operations,’ much like DNO and Genel.  For a company that has raised US$774mln of equity since 2004, we find this a welcome sign of capital discipline,” the analyst said.

“This neutrality, though, is based upon production from 40,000 b/d + in 2014 and therefore means that the company will push ahead with a US$200mln debt raise by the end of 2013.”

Farrell goes on to highlight that this puts GKP in something of a ‘Catch 22’, as raising such an amount will require the company to demonstrate consistent production and cash flow, something which the analyst says is far from assured.

“We believe that there is some over-exuberance in the share price relating to the possibility of M&A, something that we discount, given that even at US$115/bbl long term our fair value is about 10% lower than the current share price. Funding is likely to drag on the stock near term.”

Macquarie instead prefers more established Kurdistan based producers Genel Energy (LON:GENL) and DNO International (STO:DNO).

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