Gulf Keystone Petroleum

Energy Research 8 November 2010

ACCUMULATE Bigger fish to fry

Bloomberg GKP LN This morning Hungarian operator MOL (80% undiluted WI) announced an update on the Bijeel-1
Price (p) 191.5 well in the Akri-Bijeel block in Iraqi Kurdistan. The block is held jointly with Gulf Keystone
Target Price (p) 200.0
Upside (%) 4% Petroleum which has a 20% undiluted working interest. Having previously reported testing of the
12mth high/low (p) 202.8 / 64.0 upper Jurassic at 3,200 bopd (18° API) and 0.9 mmscf/d of gas back in March, the consortium
Shares out (mill) 754.2
Fully diluted (mill) 794.1
has now reported a successful test of a deeper Jurassic interval (3,804-3,967 metres) at a
Mkt Cap (US$m) 2,332.7 restricted rate of 2,700 bopd (12-13° API). In addition, the two intervals were jointly tested at
Enterprise Value (US$m) 2,069.6 3,743 bopd (13° API) and 0.6 mmscf/d of gas. MOL said that the test results – which conclude
operations at Bijeel-1 – prove the validity of its geological model, providing a solid base for
250p
GKP LN future appraisal drilling and exploration of the wider licence over the remaining two years of the
FTSE AIM O&G (re-based)
200p initial exploration phase.
Figure 1: Fish seller (L) and Weatherford 842 Rig (R), Akri-Bijeel block
150p

100p

50p

0p
Jan-09

Jul-09

Jan-10

Jul-10

Source: Bloomberg

Oil & Gas Analysts

Richard Savage
+44 (0) 20 7866 0098
richard.savage@mirabaud.co.uk

Tim Hurst-Brown
Source: Mirabaud Securities.
+44 (0) 20 7866 0092
tim.hurst.brown@mirabaud.co.uk
The news of a further successful test result from Bijeel-1 is, of course, positive for Gulf Keystone.
Alex Martinos However, this well, which took around a year to drill and test, was targeting a relatively small
+44 (0) 20 7866 0212 structure. Moreover, the find lies within Akri Bijeel, where Gulf Keystone has the lowest equity
alex.martinos@mirabaud.co.uk
exposure (12.8% fully diluted) out of its four Kurdistan blocks. For the moment, our NAV for the
Oil & Gas Sales Bijeel discovery remains unchanged at 2p/shr (on the basis of a 75% CoS; 150 mmbbls gross
Pav Sanghera recoverable), pending the outcome of further appraisal work.
+44 (0) 20 7878 3380
pav.sanghera@mirabaud.co.uk In our view, the real action lies elsewhere. Firstly, there are two much larger prospective
structures located in the block: Bekhme to the East and Bakrman (renamed Aqra in the latest
Harry Baker
+44 (0) 20 7878 3401
presentation) to the West. These feature abundant surface oil seeps (see Figure 2, below).
harry.baker@mirabaud.co.uk Initially MOL chose to drill the smaller Bijeel structure because it feared the oil seeps equated to
seal risk – success at Shaikan suggests otherwise. In its own announcement today, Gulf Keystone
Resources Sales Trading
said it believed the Bijeel discovery could possibly be the southern flank of the Bekhme structure
Lucas McHugh – the company hopes that MOL will spud a well on Bekhme in Q1 2011. At present we value
+44 (0) 20 7866 0085
lucas.mchugh@mirabaud.co.uk Bekhme at 14p/shr (unrisked), based on 1 bn bbls gross recoverable resources.

MIRABAUD Securities LLP 33, Grosvenor Place London SW1X 7HY, UK T +44 (0)20 7321 2508 F +44 (0)20 7930 4066
www.mirabaudsecurities.co.uk
 Figure 2: Oil seeps, Akri Bijeel Block

Source: Mirabaud Securities.

Accelerating activity
In the meantime, the belated completion of testing at Bijeel-1 allows for the
mobilisation of the Weatherford 842 rig to the location prepared for the delayed
Shaikan-2 well. This deep appraisal well has been designed to test the flank of the
Shaikan discovery, with the aim of proving the lateral extent of the good quality
reservoir seen at Shaikan-1, as well as exploring deeper horizons that proved beyond
the reach of the discovery well, due to the unexpected high gas pressures
encountered in the Triassic formation.
Elsewhere, activity continues apace – something we were able to witness on a site
visit last week. Drilling operations are proceeding at the Shaikan-3 shallow appraisal
well, while the Sheikh Adi-1 exploration well has now reached a depth of over 900
metres with oil shows visible, although progress has not been helped by the total loss
of drilling fluids into the highly fractured cretaceous interval. The company has made
progress in its quest for a fourth rig and hopes to spud the Shaikan-4 well in Q1 2011.
This will be the second deep appraisal well to be drilled on the discovery, located at a
prepared site at the Western end of the licence towards the Sheikh Adi block.
Figure 3: Seismic acquisition, Shaikan Block

Source: Mirabaud Securities.

MIRABAUD Securities LLP 33, Grosvenor Place London SW1X 7HY, UK T +44 (0)20 7321 2508 F +44 (0)20 7930 4066
www.mirabaudsecurities.co.uk 2
 3D seismic acquisition operations are now nearing completion on the Shaikan block,
and ongoing over the Sheikh Adi licence. The Shaikan-1 early production facilities are
complete, with pipelines, separator, storage and offloading equipment all
operational. At present, having sent samples for assessment at local refineries, the
company is in the process of negotiating a sales contract. With this in place, extended
production testing will resume, with management estimating that rates of 8,000-
10,000 bopd can be achieved.
Figure 4: Production facilities, Shaikan block

Source: Mirabaud Securities.

Gulf Keystone’s shares have enjoyed a good run, and with a market cap of c.£1.45bn,
the stock is, in our view, now approaching fair value. However, there are plenty more
valuation drivers to energise the share price over the coming 6-9 months. In addition
to the accelerating pace of activity on the ground, likely to bring further drilling
results, we also anticipate a domestic crude sales agreement and initial results from
the 3D seismic shoot. In the background, there is the added possibility of positive
political developments in Iraq, while there has also been an influx of big
independents (notably Marathon Oil and most recently Murphy Oil) into the Kurdistan
region. These factors together are likely to maintain share price momentum; however,
with one eye on valuation, we are lowering our recommendation from BUY to
ACCUMULATE on an unchanged 200p/shr target price.

MIRABAUD Securities LLP 33, Grosvenor Place London SW1X 7HY, UK T +44 (0)20 7321 2508 F +44 (0)20 7930 4066
www.mirabaudsecurities.co.uk 3
RECOMMENDATIONS HISTORY

Market index FTSE AIM O&G

Date Market Share Target Opinion
Index Price Price
level (p) (p)
Gulf Keystone Petroleum
26 Apr. 2010 3703.0 82.00 140 BUY
28 May 2010 3598.2 77.25 140 BUY
8 Oct. 2010 4625.9 148.75 200 BUY
8 Nov. 2010 4793.6 191.50 200 ACCUMULATE

RATINGS, CERTIFICATION AND DISCLOSURE

RATINGS SYSTEM

BUY: The stock is expected to generate absolute positive price performance of over 20% during the next 12 months.
ACCUMULATE: The stock is expected to generate absolute positive price performance of 10-20% during the next 12 months
NEUTRAL: The stock is expected to generate absolute price performance of between 10% positive and 10% negative
during the next 12 months.
REDUCE: The stock is expected to generate absolute negative price performance of 10-20% during the next 12 months
SELL: The stock is expected to generate absolute negative price performance of over 20% during the next 12
months.

RISK Qualifier: Speculative

Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria. Investments in the stock may
result in material loss.

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