Kurdistan Pipeline Restart Will Secure Future Oil Market Access

Key Takeaways

• Kurdish pipeline export restart and improved government payments could enhance revenue and cash flow stability.
  
• Cost discipline and strategic shareholder distributions may positively impact earnings and EPS growth.
  
• Political instability, export disruptions, and production decline may affect revenue stability, requiring careful management of financial risks and investment priorities.

Catalysts

Engages in the exploration, development, and production of oil and gas in the Kurdistan Region of Iraq.

• A potential restart of exports through the Kurdistan pipeline could lead to a return to international prices for their oil, improving revenue significantly.
  
• Payment mechanisms and receivables repayment from the Kurdistan Regional Government and the federal government of Iraq could provide financial stability and improve cash flow.
  
• Low-cost field interventions and investment in water handling facilities could enhance production efficiency, potentially increasing net margins.
  
• Ongoing cost discipline and lower capital expenditure could continue to support free cash flow generation, contributing positively to earnings.
  
• Shareholder distribution framework, including dividends and opportunistic buybacks, is poised to positively impact earnings per share (EPS).

Gulf Keystone Petroleum Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gulf Keystone Petroleum's revenue will grow by 25.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.7% today to 31.8% in 3 years time.
• Analysts expect earnings to reach $95.0 million (and earnings per share of $0.43) by about May 2028, up from $7.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $106 million in earnings, and the most bearish expecting $84 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.4x on those 2028 earnings, down from 62.2x today. This future PE is lower than the current PE for the GB Oil and Gas industry at 9.1x.
• Analysts expect the number of shares outstanding to decline by 2.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.06%, as per the Simply Wall St company report.

Gulf Keystone Petroleum Future Earnings Per Share Growth

Risks

• The suspension of pipeline exports in 2023 and ongoing discussions with the government regarding the restart of exports could lead to further disruptions, impacting revenue stability and future cash flow.
  
• Political issues and regional holiday disruptions impacting trucking sales highlight potential variability in local sales, which could influence production reliability and earnings.
  
• Production decline rates of 6% to 10% per year and planned facility shutdowns for upgrades and maintenance might impact short-term production levels, thus affecting revenue and free cash flow.
  
• A potential dependence on exports to improve cash flow, alongside uncertainty around payment mechanisms and receivable recovery, introduces financial risk related to revenue and liquidity.
  
• The need for investment in the field, including potential water handling capabilities, without established export agreements may strain financial resources, impacting capital expenditure and net margins.

Valuation

• The analysts have a consensus price target of £1.887 for Gulf Keystone Petroleum based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £2.49, and the most bearish reporting a price target of just £1.43.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $299.2 million, earnings will come to $95.0 million, and it would be trading on a PE ratio of 6.4x, assuming you use a discount rate of 6.1%.
• Given the current share price of £1.54, the analyst price target of £1.89 is 18.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.