Should You Buy Gulf Keystone Petroleum?

LONDON -- AIM-traded oil explorer Gulf Keystone Petroleum has seen its share price drift lower in recent months, the stock declining 18% during the past two months to around 186 pence recently.

The company has gradually divested its Algerian assets since 2009 in order to focus on the lucrative Kurdistan region of Iraq. And revenues could be set to explode in the medium to long term as its work in the Middle East ramps up.

However, the company comes attached with a heightened risk profile -- Gulf Keystone is battling Excalibur Ventures in the courts about ownership rights to its Iraqi assets, fears over which continue to weigh on the share price. I believe that investors should resist leaping in until the outcome of the legal spat becomes clearer.

Positive E&D news continues to flow
Gulf Keystone announced late last month that its Bakrman-1 exploration well had made another discovery at the Akri-Bijeel Block in Kurdistan, the second discovery there after the Bijell discovery made in 2010.

The well -- which targeted Jurassic and Triassic reservoir zones -- tested 2,616 barrels of light oil per day, as well as 5.86 million standard cubic feet per day of natural gas. Testing is continuing and is expected to conclude next month.

Less appealing were the results of testing work at the Bjell-3 appraisal well, which disappointed after the company failed to encounter a commercial inflow of hydrocarbons. Appraisal work is continuing with the Bjell-7 well, which was spudded in December.

Meanwhile, at the gigantic Shaikan oilfield, Shaikan-7 -- the first deep exploration well there -- and the Shaikan-10 development well are scheduled to spud in the current quarter. The field is believed to contain almost 14 billion barrels of the black stuff.

Courting potential trouble
The legal outcome following the trial with Excalibur Ventures, which wrapped up at the start of March, could take up to three months to be announced. Excalibur is claiming up to 30% of Gulf Keystone's huge oil assets in Kurdistan in a legal battle that has been in progress since mid-2011.

A ruling against Gulf Keystone is likely to smash future revenue forecasts and derail further takeover talk -- ExxonMobil was rumored to be circling in late 2011 before the legal challenge saw it withdraw its interest. Consequently I believe that the investment risks remain too high to justify a solid investment case at the present time.

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Gulf Keystone Petroleum comes attached with great growth potential, but there are also other great natural resources opportunities out there waiting to be realized. However, drilling for oil and mining for minerals is often a hit or miss business where the timing, and indeed quantities, of potential payloads are extremely unpredictable.

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