Speculation that Gulf Keystone Petroleum (LON:GKP), which has significant operations in Iraqi Kurdistan, will become a takeover target continues today, following a report from small-cap broker Daniel Stewart & Co.
Following an analyst field trip to the Kurdistan region of Northern Iraq, the broker's oil and gas expert Richard Nolan said the company had “astonishing reserve potential”.
Nolan highlighted that the size of the Shaikan discovery (4.2 billion barrel mean resource) has been a ‘well known theme’ and ongoing drilling could expand the resource further.
According to Nolan, the potential to add 500 million barrels from two shallow zones - which would otherwise represent a significant find all by itself - shows the “sheer scale” of the Shaikan discovery.
Crucially, further drilling may provide a substantial increase to the Shaikan resource, to between 18bn and 20bn barrels - should the company determine an oil/water contact point at 2,230m - a level suggested by pressure data.
Nolan estimates that the Shaikan-2 well will target the oil-water contact point in Q1 2011, and provide more clarity on this aspect of the analyst’s investment thesis.
“A similar analysis across all of the blocks could see resources of 60bnbbl or more and with a recovery rate of about 30%.”
He added: “Gulf Keystone could be sitting on a giant on an equal footing to the Kirkuk field which has been producing for more than seventy years and still flows at 400,000 - 500,000b/d ... Any company with Gulf Keystone’s size of potential reserves will surely appear on the acquisition radar of many NOC’s [National Oil Companies] and IOC’s [International Oil Companies]."
That said, Nolan described the Gulf Keystone’s investment case as ‘a race against time’, with the analyst highlighting a need to accelerate drilling.
Nolan emphasised that major IOCs and NOCs have had reserve replacement issues for several years. According to Nolan, Gulf Keystone can maximise value by proving up resources on its other blocks, before it becomes a bid target.
“At present Gulf Keystone has good information on Shaikan. They could make a compelling argument to any prospective buyer to pay for those assets ... It would be a more difficult discussion for the other blocks”.
[If] Gulf Keystone becomes a target, then they should be doing as much as possible to prove their resources, especially drilling.”
The analyst believes it is “highly probable” that a new rig will be secured on a short-term contract to accelerate drilling. “To make up for lost time and to increase value, getting the rig now makes a lot of sense else Gulf Keystone runs the risk of leaving a lot of value on the table.”