GKP falls after disappointing Shaikan update

Gulf Keystone Petroleum has fallen 12.5% to 126p today following a disappointing update on its Shaikan site in Iraq.

The third party audit of the Kurdistan reserves, prepared by ERC Equipoise, showed total reserves of 9.38 billion barrels of oil equivalent at the site, just 68% of the earlier estimates of 13.7billion barrels.

Gulf Keystone also took the opportunity to announce production of 10,000 barrels a day from the first Shaikan production facility, and a second facility expected to begin production in the second quarter.

The company is ramping up commercial production from the existing Shaikan facilities with the aim of achieving a 40,000 bopd target from PF-1 and PF-2 in 2014.

GKP plans to do this through potential re-configuration of the Shaikan-8, initially drilled as a gas injection well and by tying in the deep exploration well Shaikan-7, which is currently being drilled, to become the fifth producing well at PF-1.

Productivity of the Shaikan-1 and Shaikan-3 wells is expected to be enhanced through the replacement of the existing 3 ½ inch tubing by 4 ½ inch tubing and plans to drill an additional production well in the proximity of Shaikan-10, which will also be connected to PF-2, and install four flowlines between the Shaikan-10 location and PF-2.

An amine plant is also being connected to PF-1, which will allow sweetening of some of the associated gas stream, which will be used as fuel for the PF-1 operations instead of diesel, which could represent savings of approximately $400,000 (£239,746) per month to the project.

This next stage envisages a further 60,000 bopd of additional production capacity to reach the medium-term target of 100,000 bopd set for Phase 1 of the approved Shaikan Field Development Plan. This stage will require construction of additional production facilities with gas injection and water handling capabilities, as well as the drilling of a substantial number of development and production wells.

The company, which plans to move from AIM to a full listing on 24 March, also said it is making progress in its discussions on the near term debt financing options.

Despite the sharp market reaction, both Sam Wahab at Cantor Fitzgerald and Jamal Orazbayeva, analysts at Westhouse, said the third party report represents a conservative estimate based solely on reserves which are being targeted with 26 wells representing less than 25% of the 109 wells currently envisaged for the Shaikan development.

Wahab reiterated his 'buy' recommendation but reduced the target price to 183p.

Investor view

On the Interactive Investor discussion board, 'RenardArgente' said: "We are asked to believe that those that issued previous incorrect guidance and knew full well about the water intrusion on Sh-6 many months ago and said next to nothing about it are now to be believed.

"Ewen Ainsworth is asked about funding and he waffles on (yet again) about what 100K bpd is worth ($1billion) without commenting on the obstacles; financial, political and operational, that stand in the way. It's maddening to see this amateur-night stuff not getting the mauling it deserves. The audience are colluding with this mealy-mouthed drivel and they are 'finance professionals'?"