Gulf Keystone Exploration: A Highly Asymmetrical Call Option With No Expiration Date!

The publicly listed company Gulf Keystone Exploration is the largest and cheapest oil producer in Kurdistan. 

Last year in March, the pipeline between Kurdistan and Turkey was temporarily closed due to "different political views"! As a consequence, Kurdish oil producers can only sell into the domestic market - which has a significant impact on the realized oil price (=> more supply than demand)!

What's the current situation?

The pipeline is still offline, but according to the latest media reports it should come back online in the coming months (big catalyst). 

Currently, a reopening of the export pipeline is only partially priced in, as (a) there have already been two false starts and (b) there is still a lot of uncertainty (what happens to the payments the Kurdish state still owes the Kurdish oil companies?)!

Why is Gulf Keystone the most asymmetric bet/has the highest expected value?  

Gulf Keystone owns the largest oil deposit in the country (=> long life, very low costs and significant growth potential), has a first class balance sheet and a very shareholder friendly management team!

In 2022, before the pipeline closure, Gulf Keystone Exploration generated USD 450 million in revenue and USD 350 million in EBITDA!

As already mentioned, Gulf Keystone can currently only sell into the domestic Kurdish market, as the export pipeline is still closed. As a result, the price per barrel of oil is significantly lower...

At a realized oil price (Sales price in March 2024) of USD 25 per barrel and 43,000 boe/d, the company generates USD 6 million in FCF per month or USD 72 million per year. 

At the current local oil price of around USD 35 per barrel, the company generates around USD 120 million in FCF per year! 

To put the current FCF into perspective: the company is currently debt-free, has USD 80 million in cash and currently has a market cap of USD 320 million!

When the export pipeline comes back online, which is only a matter of time (when not if), the company will generate USD 250-400 million in EBITDA again (and that's without any further organic growth initiatives)!

All in all, you can currently buy a debt-free company with a P/E ratio of 3 and wait for it to return to a P/E ratio of 1 when the pipeline is open again!

It's almost like buying a call option with no expiration date!