RE: Big Order8 Dec 2016 11:19
Gulfsands Petroleum – establishing fair value in a post Syrian conflict environment
December 8, 2016 | Posted by admin
By Richard Jennings, CFA
We initially covered Syrian focused Gulfsands Petroleum (GPX.l) at the beginning of this year, highlighting the embedded value in the company’s Key Block 26 field in the North East of Syria. At a price then of just under 3p we believed the stock to be materially undervalued should the tragic and devastating civil war that has dogged Syria for nearly 8 years now, finally see an end. Not even we could have envisaged the geo-political backdrop however that allowed the Assad regime to regain the upper hand and, in recent days, almost recapture the key city of Aleppo and which will be in all probability the turning point in the war. The catalysts behind these events were the involvement of Russia in aerial bombardments of the rebels and (at the turn of the year – highly improbable) prospect of a Trump presidency.
Fast forward to December 2016 and it looks ever more likely that the war will come to an end in the final closing days of this year and that there will be renewed diplomatic efforts for a lasting peace and which will, in all probability, leave Assad in office. For GPX holders then the question is what will be fair value for the stock in the event of Block 26 pumping again?
We attempt to establish this here via two methods – comparisons on an EV/2P basis to its regional peers Genel Energy and Gulf Keystone Petroleum and in the second approach by taking the pre-war value and applying an appropriate discount.
By way of background, the company has represented that the Block 26 fields are ready for pumping at just weeks’ notice and remain in good condition, and so unlike many other small cap E&P plays, cash flows to the company will accrue very quickly in the event of their operation again. Through the involvement of financier Richard Griffiths and Russian oil veteran Michael Kroupeev via his Waterford company, the debt legacy of the old management has been nullified through their taking on of the convertible loan that GPX owed Awarak International and then financing an issue of Ord shares to repay this. Net effect of this was to give them effective control of the company and there have been further management changes this year with Alistair Beardsall – a long time lieutenant of Kroupeev departing midsummer and John Bell taking the reins. Following a further modest fund raising in August of £1.5m, together with Syrian tycoon Ayman Asfari (via his ME Investments vehicle) who purchased stock at 5p earlier in 2016, the trio now hold 82.76% of the company. The free float, adjusted for the institutions on the list is thus very small and which is evident in the sharp price movements seen in recent days and also back in March of this year.
On an EV/2P comparable basis, Genel’s core reserves are valued (at the current stock price) around $2/bbl and