How Gulf Keystone Petroleum Measures up as a GARP Investment

LONDON -- A popular way to dig out reasonably priced stocks with robust growth potential is through the "Growth at a Reasonable Price", or GARP, strategy. This theory uses the price-to-earnings to growth (PEG) ratio to show how a share's price weighs up in relation to its near-term growth prospects -- a reading below 1 is generally considered decent value for money.

Today I am looking at Gulf Keystone Petroleum Limited (LSE: GKP) to see how it measures up.

What are Gulf Keystone Petroleum's earnings expected to do?

Source: Digital Look

Gulf Keystone Petroleum is expected to swing from losses per share of around 6 pence last year to modest earnings per share (EPS) growth, to 0.3 pence, in 2013. Still, EPS is forecast to rev up from next year onwards, according to City analysts, with EPS of 7.6 pence widely anticipated.

This year's expected earnings rebound from 2012's losses creates an invalid PEG rating, although next year's stratospheric improvement leaves the metric trading fractionally off 0, a figure which represents massive value.

For the current year, the firm trades well above the price-to-earnings (P/E) ratio benchmark of 10 -- any reading below this value represents decent value -- although this is expected to improve significantly in 2014.

Does Gulf Keystone Petroleum provide decent value against its rivals?

Source: Digital Look

Gulf Keystone Petroleum's invalid forward PEG rating does not allow a comparison with its oil and gas rivals, and the broader FTSE AIM 100, to be made. On a prospective P/E basis, meanwhile, the company significantly lags both of these groups.

It could be argued that Gulf Keystone Petroleum's improvement from this year lays the foundations for its case as a delectable GARP investment, with improving production anticipated to drive earnings skywards. However, I would argue that remains a risky pick as the outcome of ongoing legal action could have huge ramifications for the stock.

Production surge expected but court case weighs
Gulf Keystone Petroleum announced last week that losses after tax rocketed 31.1% during 2012, to $81.8 million. However, the firm saw group production rally more to 832,859 barrels of oil, up markedly from 200,137 barrels in the previous 12 months. This helped to push revenues 367% higher to $32.2 million.

The company is expecting production to ramp up massively from this year onwards, and is looking to hit production of 40,000 barrels of oil per day by the end of the year as activity at its two Shaikan field production facilities ramp up. Gulf Keystone also announced last week that it had begun work on the first deep exploration well at the Shaikan field, an area which is estimated to contain some 14 billion barrels of oil.

However, huge question marks continue to hang over the company owing to its fierce court battle with Excalibur Ventures, a case that dates back to 2011. The latter has staked a claim for almost a third of Gulf Keystone's assets in Kurdistan, and a ruling is expected any day now after the court adjourned in March. The result of the case could clearly have huge ramifications on future earnings potential, and I believe that current risks remain too lofty to justify investment at present.

There's gold in them there wells
Like all natural resources plays, Gulf Keystone Petroleum comes attached with a heightened risk profile. Drilling for oil and minerals mining is often a "hit and miss" business where the timing, and indeed quantities, of potential payloads are extremely unpredictable.

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