Why Gulf Keystone Petroleum Limited may now be a safe investment

Gulf Keystone Petroleum(LSE: GKP) was once a poster child for all that's wrong with the AIM market. The company's management was overpaid, the business was struggling to meet its goals, and a massive debt mountain left it dependent on cash calls and the kindness of investors to keep the lights on.

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However, after its dramatic restructuring last year, it looks as if the group now has what it takes to stage a comeback.

Better, stronger

Last year's restructuring was devastating for Gulf Keystone's investors and bondholders, but the deal had to be done. If bondholders had blocked a restructuring, it's likely the firm wouldn't be here today and all of its stakeholders would have lost out.

The deal reduced its debt burden from more than $600m to 'just' $100m and today the company is sitting on more than $100m in cash as well, making it one of the best-capitalised oil businesses around. At the same time the group is still producing and collecting payments for its oil production and now the crippling debt interest burden no longer exists, Gulf Keystone stands a chance of making sizeable profits.

Indeed, City analysts are currently expecting the company to explode into profitability during 2018. A pre-tax profit of £83m is expected for 2018, up from a loss of £35m for 2017 and £85m for 2016.

Time to buy?

For many investors the prospect of buying shares in Gulf Keystone may be too much, considering the company's history, but the business today is nothing like it was this time last year. The group's balance sheet is clearly cash rich and oil payments are now taking place on a fairly regular and predictable basis, although the company admits there's no certainty this will continue. Nonetheless, unlike before, today it has the cash on hand to weather a payment drought for several months without sparking bankruptcy chatter.

Based on current City growth estimates, shares in the firm are currently trading at a 2018 P/E of 4.9, which looks exceptionally cheap. But considering the company's past, I'm wary of these estimates. The City has been trying to guess when Gulf Keystone will break into the black ever since its creation and so far, all forecasts have turned out to be wrong.

With a cash-rich balance sheet, this time around things might be different though. If it can keep on its current path without any serious operational or political problems, the group could hit City forecasts. A positive cash balance will certainly help the company achieve this goal.

The bottom line

It's clear that Gulf Keystone is a different company today than it was this time last year, and for the first time since the company's inception, the outlook is bright for the group. So, if you're willing to trust its management again, now could be the time to buy.

Hard to trust?

It will take years for Gulf Keystone to rebuild its reputation and if you're not yet ready to trust the company, there are plenty of other opportunities out there.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.