Gulf Keystone suitors expected to wait for political clarity over Iraq

11 Jul 14 – Potential suitors for Gulf Keystone [LON:GKP] will likely wait for clarity on Iraq’s political situation before making any move for the oil producer, sector bankers and analysts said. This could allow the Kurdistan-focussed oil group time to position itself for a higher offer than it would expect to receive now, they said.

US majors Exxon Mobil [NYSE:XOM] and Chevron [NYSE:CVX] along with Chinese state-backed Sinopec [SHA:600688] and CNPC have all shown interest in Gulf Keystone, it was said. Korea’s KNOC was also mentioned, but was said to have retreated. Genel Energy [LON:GENL], headed by ex-BP CEO Tony Haywood, and which has a presence in Kurdistan, is likely to have considered the move as well, a sector banker said.

A spokesperson for Genel declined to comment. The London-listed group may be less deterred than others by the political instability in the region, given its familiarity with Kurdistan, noted one analyst. Last year, Hayward said that the company was considering acquisitions. At the end of 2013 Genel had net cash of USD 700m.

Political unrest in Iraq may have come at the wrong time for those picking GKP as a near-term takeover target, it was said. But, Gulf Keystone’s long-term position could be seen as stronger now due to the higher likelihood of Iraq being broken up and the semi-autonomous Kurdistan region – where GKP’s assets are based – becoming independent, it was said.

Takeover speculation pushed Gulf Keystone shares up last month after founder Todd Kozel said he would step down as CEO. The company also announced the departure of its finance director, Ewen Ainsworth, and three non-executives.

Kozel has been involved in a long-running battle with key shareholders over his remuneration and management of the company. While stepping down as CEO, he will seek re-election as an executive director at next week’s AGM in Paris. Kozel has a close relationship with Ashti Hawrami, the oil minister for the Kurdistan Regional Government.

Board changes and efforts to ramp up production at GKP’s Shaikan field in Kurdistan, Northern Iraq, mean the company is in a transition phase, a person close to the company said. GKP shares are cheap relative to its production potential, leaving it vulnerable to takeover interest, a sector banker and analysts said.

“The main question is the price,” the first banker said. “I think the company thinks it’s too cheap at the moment; it would be looking for a price of between GBp 125 to 150 per share,” he said. GKP was trading Friday at GBp 90.50 per share, giving it a market capitalization of GBP 787m.

The situation in Iraq could allow Gulf Keystone to improve its case for a higher takeover premium by giving it time to reach production targets, bankers and analysts said. GKP’s operations have not been affected by the situation, the person said.

The Kurdish Regional Government could also have its hand strengthened by the situation, the first banker said. The Kurds are at loggerheads with central government officials in Baghdad over the exports of oil from the region.

The Kurds have sought to export oil directly through Turkey in attempts to signal to Baghdad the region should control its own oil revenues, according to reports. But potential buyers of the crude have been warned they could face legal action because the exports have not been approved by Baghdad.

The more powerful Kurdistan gets, the better it is to sell Kurdish oil, it was said. “One could say that this is Kurdistan’s opportunity to go its own way, and not have to deal with Baghdad. But that wouldn’t be easy,” the second banker said. “This is a new situation that we have not seen. There is not a strong political presence, such as the US or Saddam Hussein to control the situation,” he said.

Gulf Keystone should use this time to ramp up production at Shaikan to its target of 40,000 barrels per day by the end of 2014, analysts said. “Until there’s clarity on what’s going to happen in Iraq, I feel it would take a brave man to step up to the plate and go for Gulf Keystone now,” an analyst said.

GKP’s AGM on 17 July is set to be a bellwether for investor sentiment following the Kozel situation, a second person close to the matter said.

Spokespeople for GKP, Exxon, Chevron, CNPC and Sinopec declined to comment.

by Alex Tarrant, Julie-Anna Needham and Katie Laura McQue

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