How Gulf Keystone Petroleum Limited (GKP) Measures up as a GARP Investment

LONDON — A popular way to dig out reasonably priced stocks with robust growth potential is through the “Growth at a Reasonable Price”, or GARP, strategy. This theory uses the price-to-earnings to growth (PEG) ratio to show how a share’s price weighs up in relation to its near-term growth prospects — a reading below 1 is generally considered decent value for money.

Today I am looking at Gulf Keystone Petroleum Limited (LON:GKP) to see how it measures up.

What are Gulf Keystone Petroleum’s earnings expected to do?

	2013	2014
EPS Growth	n/a	2,396%
P/E Ratio	457.3	18.3
PEG Ratio	n/a	0.1

Source: Digital Look

Gulf Keystone Petroleum Limited (LON:GKP) is expected to swing from losses per share of around 6 pence last year to modest earnings per share (EPS) growth, to 0.3 pence, in 2013. Still, EPS is forecast to rev up from next year onwards, according to City analysts, with EPS of 7.6 pence widely anticipated.

This year’s expected earnings rebound from 2012’s losses creates an invalid PEG rating, although next year’s stratospheric improvement leaves the metric trading fractionally off 0, a figure which represents massive value.

For the current year, the firm trades well above the price-to-earnings (P/E) ratio benchmark of 10 — any reading below this value represents decent value — although this is expected to improve significantly in 2014.

Does Gulf Keystone Petroleum provide decent value against its rivals?

	FTSE AIM 100	Oil and Gas Producers
Prospective P/E Ratio	29	30.8
Prospective PEG Ratio	2	0.5

Source: Digital Look

Gulf Keystone Petroleum Limited (LON:GKP)’s invalid forward PEG rating does not allow a comparison with its oil and gas rivals, and the broader FTSE AIM 100, to be made. On a prospective P/E basis, meanwhile, the company significantly lags both of these groups.

It could be argued that Gulf Keystone Petroleum Limited (LON:GKP)’s improvement from this year lays the foundations for its case as a delectable GARP investment, with improving production anticipated to drive earnings skywards. However, I would argue that remains a risky pick as the outcome of ongoing legal action could have huge ramifications for the stock.

Production surge expected but court case weighs
Gulf Keystone Petroleum Limited (LON:GKP) announced last week that losses after tax rocketed 31.1% during 2012, to $81.8 million. However, the firm saw group production rally more to 832,859 barrels of oil, up markedly from 200,137 barrels in the previous 12 months. This helped to push revenues 367% higher to $32.2 million.