Gulf Keystone declines as Iraqi Kurdistan oil-payment deadline looms

LONDON,— Gulf Keystone Petroleum Ltd. fell the most in four months as a deadline approaches for Iraq’s Kurdistan authorities to make good on a pledge to pay regional oil producers. Gulf Keystone, Genel Energy Plc and DNO ASA are awaiting a November payment from the Kurdistan Regional Government for the roughly 300,000 barrels a day they jointly produce. Failure to pay will undermine the companies’ finances and their ability to expand output. The KRG disbursed a total of $150 million to international companies in September and October after vowing to re-establish regular monthly payments in August. That followed an eight-month hiatus after disagreements with Iraq’s central government in Baghdad over how the region should be remunerated for its oil output. The collapse in crude prices and the cost of fighting Islamic State is making it harder for the KRG to balance its books. If the KRG “doesn’t make the regular payments, it won’t see oil production increase and therefore export revenues won’t increase,” Richard Mallinson, a London-based geopolitical analyst at Energy Aspects Ltd., said by phone. “There’s a Catch 22.”

Payment Expectations
Gulf Keystone remains in talks with the KRG and expects the next payment to be in line with those received in September and October, according to a spokesman for the company. Genel declined to comment. DNO will issue a statement when it receives a transfer, said Managing Director Bjoern Dale.

The KRG’s prime minister and oil minister are due to speak at an investor conference in London on Tuesday.
Gulf Keystone dropped as much as 15 percent and was down 6.9 percent to 20.25 pence as of 12:32 p.m. in

London trading. The stock has declined 70 percent this year. Genel fell 2.6 percent, while DNO gained 2.1 percent in Oslo.

The three companies are owed around $1.7 billion from past crude exports, based on their last regulatory filings. Unless this is paid, an increase in crude production isn’t possible, according to top executives at DNO, Genel and Gulf Keystone.

Court Ruling

Dana Gas PJSC said on Sunday that a court in London has ordered the KRG to pay it and two other energy companies $1.98 billion in a dispute over development rights for two oil and natural gas fields in Iraq’s self-governing Kurdish region.

While the KRG has been supportive of Gulf Keystone, the Dana Gas ruling has caused some concerns in the market, James Midgley, an analyst at Mirabaud Securities LLP, said by phone. “It’s just more stretch on the balance sheet of the KRG, which was already stretched,” he said.

Kurdistan is a major driver behind Iraq’s record crude production this year, with the region exporting 595,528 barrels a day in October, according to the Kurdish Ministry of Natural Resources. That’s 22 percent of total Iraqi exports and almost double the level it was shipping in November last year.

Lower oil prices and the conflict with Islamic State have been compounded by the collapse in the revenue-sharing agreement between Baghdad and Erbil, leading the KRG to pursue crude sales independently.

Debt Concern

Liquidity and indebtedness remains a concern for investors in oil producers in Kurdistan. Yields on Gulf Keystone’s $325 million of convertible bonds maturing in October 2017 have widened to 83.5 percent from less than 30 percent in January, according to Bloomberg data.

“They’re quite highly leveraged,” Sam Wahab, an analyst at Cantor Fitzgerald Europe said. The company has to make two bond repayments of $575 million in 2017. Regular monthly payments, similar to the $12 million Gulf Keystone received in September and October, won’t be enough for the company to renegotiate the debt on the same terms, Wahab said.

Genel has a bond repayment of $730 million two years later, while DNO’s $400 million bond repayment comes in 2020. Yields on those bonds are almost 20 percent.

The need to strengthen balance sheets has prompted speculation over consolidation among producers in Kurdistan, especially after $9.4 billion was wiped off the three companies’ market value since early 2014.

Genel is said to be in early merger talks with with New Age African Global Energy Ltd., a closely held explorer backed by commodities trading house Vitol SA. Gulf Keystone is still interested in finding a partner for its flagship Shaikan field or even a buyer for the whole company, Chief Executive Officer Jon Ferrier said last month.

Any buyer would have to weigh the risks associated with going into Kurdistan, according to Shola Labinjo, a London-based analyst at Tudor, Pickering, Holt & Co.

“There are a number of other opportunities that are available to larger companies in this market with lower risk, so you don’t have the issue about security, or ISIS nor do you have payment problems,” Labinjo said.