Gulf Keystone Petroleum (LSE: GKP) climbed 14% to 72p in the first hour of trading this morning, after the Kurdistan oil producer reported that its partner, Hungarian firm MOL, had received approval for the Field Development Plan (FDP) for the Akri-Bijeel block in Kurdistan, in which Gulf Keystone has a 20% interest.
Gulf Keystone’s share price has now risen by 37% this week, thanks to this morning’s news and the firm’s announcement yesterday that it is in “constructive discussions” with the Kurdistan Ministry for Natural Resources — which I suggested could relate to faster payments for oil exports.
Why is this important?
Today’s news is positive and potentially significant for Gulf Keystone, which has been trying to sell its interest in Akri-Bijeel for some time. A deal would generate additional cash for the firm to invest in its primary asset, the giant Shaikan field.
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The approval of MOL’s FDP for Akri-Bijeel means that the Hungarian company can start development drilling immediately, and MOL clearly intends to fast-track the process, as it plans to use four drilling rigs and one work over rig for phase one of the FDP. This should establish a reserve base and production plan for Akri-Bijeel, which estimates suggest could contain up to 375m barrels of oil-in-place.
Deal in Q1 2015?
A deal on Akri-Bijeel is badly needed for Gulf Keystone, in my view, as the firm indicated in its half-year results that “significant capital expenditure” will be incurred on Akri-Bijeel, if Gulf’s interest in the block is not sold or otherwise reduced.
In a recent investor presentation, MOL said that it plans to begin commercial production from Akri-Bijeel by the second half of 2015.
Given that appraisal drilling is starting immediately, this suggests to me that if Gulf Keystone is able to find a buyer for its share of Akri-Bijeel, the deal is likely to complete during the first quarter of next year, once phase one drilling results are known, but before production starts.
Buy Gulf Keystone?
Things seem to be going well for Gulf Keystone at the moment, and the firm remains a likely medium-term bid target. However, Gulf is not as well funded as it might be, and is operating close to a war zone, so risks remain.
Overall, I maintain my personal Hold rating for Gulf Keystone, ahead of the firm’s next update in November.
However, Gulf Keystone has always been volatile, and the share could continue to rise or fall back sharply after this week’s gains.
