LONDON -- It's time to go shopping for shares again, but where to start? There are loads of great stocks to choose from, and I've got my wallet out. Could Gulf Keystone Petroleum (LSE:GKP) juice up my portfolio?
Shaikan all over
There is something alluring about oil exploration stocks. They hold out the promise of riches -- if all goes to plan. A certain breed of investor obsesses over them. Some strike black gold, while too many get their fingers burned. Independent oil and gas exploration and production company Gulf Keystone Petroleum is one such stock.
This 1.67 billion pound AIM-traded company has enthralled investors ever since announcing a "world-class" discovery in its Shaikan block in 2009. Could it turn out to be the gusher many investors hope for? And should I buy it?
If you're looking for a safe and solid stock to build your retirement on, then look elsewhere. Any company seeking its fortune in the Kurdistan Region of Iraq, one of the world's final-frontier-of-oil markets, is going to be risky. On top of standard oil-exploration risks, you have to be prepared for massive political risk. The Kurds, who sit on an estimated 45 billion barrels of oil, are looking to consolidate their autonomy by building closer links with Turkey and the West, but they risk riling the Iraqi government as a result. Baghdad is looking suspiciously at Kurdish oil reserves and the region's independence aspirations.
Major and minor issues
There are legal issues, too. Gulf Keystone is embroiled in a legal battle with former advisor Excalibur Ventures, which claims it was cheated out of a 30% interest in its oil assets. The court's verdict has been delayed and isn't expected for several months.
Victory would be sweet for investors and could speed moves to list Gulf Keystone in the FTSE 250 or even precipitate a takeover. Chevron, Exxon, and Total have all been rumored to be lining up bids at some point. Defeat, however, could deal the share price a painful blow.
And all that is quite aside from the central issue of whether Gulf Keystone will successfully tap into those lucrative oil reserves. Its mid-February update suggested progress, with oil found at its part-owned Bakrman-1 exploration well, the second discovery on the Akri-Bijeel Block, where Gulf Keystone holds a 20% stake. The company decided to abandon its Bijeel-3 well but said that Shaikan, in which it owns a 51% stake, should be up and running shortly.
Not like other stocks
You can't value a stock such as this in the standard way. I'm used to seeing companies with an operating margin of, say, 5% or 10%. Gulf Keystone's margin is -1,016%. There is no dividend and no PEG, while forecast earnings-per-share growth for 2014 is a mind-boggling 1,696%. That's a jolly nice return -- if you can get it.
Some investors have high hopes for this stock. On the message boards, wide-eyed punters are openly dreaming of Gulf's Keystone's share price hitting 18 pounds. As it currently trades at 1.87 pounds, that would make it a 10-bagger.
In the meantime, the company is leaking money -- at a rate of 90 million pounds in the last two years alone -- while chief executive Todd Kozel trousers tens of millions of dollars in share awards through the company's executive bonus scheme.
At least one man is making money off of this stock.
The potential upside, naturally, is massive. The Kurds are upgrading their infrastructure nicely. Gulf Keystone has a share of an estimated 19 million barrels of oil. As with any oil explorer, you have to brace yourself for volatility. This stock has a 52-week high of 2.70 pounds and a low of 1.40 pounds.
Analysts at Investec recently confirmed their "hold" rating with a target price of 2.31 pounds. So will the share price soar to 18 pounds or plunge to 18 pence? Frankly, nobody knows. Gulf Keystone is certainly sitting on some valuable assets, including one of the world's largest land-based oil reserves, but a lot could go wrong along the way.
But I would say this: Every experienced investor should keep a space in their portfolio for the occasional bold and crazy enterprise. So long as you only commit a small corner of your funds, Gulf Keystone may be worth a punt.
To find out how you can tap into the massive growth potential of oil explorers, you need to read The Motley Fool's free report: "How to Unearth Great Oil & Gas Shares." This free and exclusive oil and gas report tells you everything you need to know about evaluating oil and gas explorers. It won't cost you a penny, but is only available for a limited period only. To receive the report instantly in your inbox, click here now.