(Bloomberg) - Gulf Keystone Petroleum Ltd. creditors will take control of the oil producer after low crude prices and erratic export payments left the company unable to service debts.
Bondholders will get an 85.5 percent stake under a deal that will see more than $500 million of debt converted into equity, according to a statement on Thursday. The company, which drills oil in northern Iraq, also plans to raise as much as $25 million from selling new shares, and it named a new chairman.
Crude’s plunge to below $50 a barrel and the Kurdistan regional government’s irregular payments for exports in recent years have pushed Gulf Keystone close to collapse. The company has $325 million of convertible bonds due October 2017 and $250 million of senior unsecured notes due April 2017, according to data compiled by Bloomberg.
“Without the restructuring and the improved liquidity delivered by the transaction, the company cannot avoid insolvency,” Chief Executive Officer Jon Ferrier said in the statement.
The London-based company’s largest shareholder, Capital Research & Management Co., has agreed to the deal, along with more than half of bond creditors, according to the statement.
Gulf Keystone’s shares plunged 35 percent to 3.1 pence at the close in London. The stock has tumbled 81 percent this year.
“Something needed to be done to reset the balance sheet,” James Midgley, energy research analyst at Mirabaud Securities LLP, said by phone. “There was no point in investing knowing there was going to be this hugely dilutive debt-for-equity,” deal, he said.
Keith Lough has taken over as non-executive chairman at Gulf Keystone, after being a non-executive director. He succeeds Andrew Simon, who has left the company.
The oil producer will seek approval from other bondholders to reduce total debt to $100 million from more than $600 million through U.K. courts, in a process known as a scheme of arrangement, according to the statement.
Under the plan, unsecured noteholders will get 65.5 percent of the company and retain $100 million of bonds, while convertible noteholders will own 20 percent. Existing shareholders will be diluted to a 5 percent stake and get the chance to purchase about 10 percent more through the capital increase, the company said. Any stock not bought by shareholders will be purchased by Capital Research, up to a limit of $20 million.
Houlihan Lokey Inc. advised a group of creditors in the negotiations, including GLG Partners, Sothic Capital Management and Taconic Capital Advisors, people familiar with the matter said in February.
“It’s a far more attractive equity story now that that level of debt is gone,” Midgley said.
Gulf Keystone had a market capitalization of as much as $5.8 billion in February 2012 when Brent oil prices traded near $120 a barrel compared with just under $40 million now. Its value dropped in tandem with crude prices but failed to recover once oil started rising again early this year.
“The real question is why the debt funded the company in the first place when the revenue outlook was still uncertain,” Richard Savage, head of energy research at Mirabaud, said by e-mail.
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Copyright 2016 Bloomberg News.
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