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Gulf Keystone (LSE:GKP) understands the art of writing a half year operational and financial report. You can’t play with the numbers, but you can be creative with the way you present them. Sometimes it works. Sometimes it doesn’t. Whether it eased the pain according to the company’s expectations or not is hard to tell. It all depends on how far they anticipated their share price would drop once investors realized that GKP was reporting a year-on-year loss that was three times larger than the previous year. At 1:00 p.m. today the share price had dropped 17.75 pence, or 6.34%, from 232.75 to 215.00.
The Creative Art of Reporting
It’s really quite simple. If it’s good news, put it right out in front. Regulatory reports don’t have headlines; else the good news would be in the report title. GKP’s 2010 half year report is a good example. Although the company had a $3.1 million loss that half year, that was good news compared to the $5.6 million loss for the same period in 2009. It was the first line of the report. Cash at the end of the period had increased $147 million over 2009. It was the third line of the report.
In the half-year report released this morning, the $31.4 million loss (compared to $10.3 million in 2011) was not mentioned until 18 lines into the report. That line was followed by the loss per share of $.0368 compared to $.0137 in 2011. In the 2010 report, when the loss per share remained the same as the previous year, it was reported on the second line.
Ultimately the format of the report really only delays the bad news. Once the media picks it up, the bad news becomes a headline. It’s just a matter of timing.
No Matter Where You Bury It, It’s Still Bad News
If I bury a dead cat in my back yard (Sorry, cat lovers, it’s all I could think of), it’s still a dead cat. It may take you longer to find it (not that you would want to), but when you do, it will still be a dead cat.
So here’s the dead cat that Gulf Keystone buried: A $31.4 million loss. To be fair, it was attributable in a large sense to a doubling of G&A expenses and increased capital investment in the company’s expanding operations in Kurdistan. If GKP can reduce the G&A expenses, the second half may generate much better results. In fact, if the company can get a grip on the operational expenses it should be in great shape.
Although the average price per barrel dropped from $44.23 in 2011 to $42.06 this year, increased efficiency in production was reflected in a decline in the cost per barrel from $29.59 to $28.09. Obviously that was not adequate to offset the drop in the price per barrel, but it sure helped.
GKP’s production share absolutely exploded, increasing from 37,203 barrels to 367,881 barrels. Unfortunately, selling costs rose proportionately, wiping out any financial gain from the massive increase in production volume. Production costs have got to be controlled. It makes no sense to produce a product that costs more to produce than it is worth.
Now That We Have Found the Dead Cat
GKP has scheduled a meeting with equity analysts to review the report and develop potential strategies moving forward. CEO, Todd Kozel, said, “Gulf Keystone is now in transition from the exploration and appraisal phase to the large-scale staged development and production of the Shaikan field, which will be both challenging and exciting.” This shift in focus alone should give the company its best chance to get out of the red and begin to generate a return on investment. That would also give GKP the opportunity to put those really good results back at the beginning of their reports.
