Genel Energy plc (GENL) Earnings Call Transcript & Summary

Good morning, and welcome to the Genel Energy plc investor presentation. [Operator Instructions] The company may not be in a position to answer every question it received in the meeting itself. However, the company will review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll. And I'd now like to hand you over to Paul Weir, CEO. Good morning to you, sir.

Good morning. Thank you, and good morning, everyone, and thanks for joining us. My name is Paul Weir, and I'm the CEO of Genel Energy, and I'm here with my friend and colleague, Luke Clements, our CFO. We are going to run through a short presentation and then answer any questions that you may have. Thanks to everyone who's already submitted questions. Should anyone have any others as we walk through these slides, then please submit them in the box which, as you've just heard, is on the right-hand side of your screen. Now for those of you who don't know us, we are Genel Energy. We have a robust production business in the Kurdistan region of Iraq and exploration licenses in Somaliland and Morocco. Our production has been consistently over 30,000 barrels of oil a day, the last few years largely driven by the Tawke PSC. Tawkey is a high-quality license with 2 producing fields, Tawkey and Peshkabir. We have a 25% interest, and our partner is DNO who hold the remaining equity and operate. They do a terrific job. It's a highly cash-generative asset, and it supports our material and predictable dividend. Our production is bolstered by Taq Taq, where we're a JV partner, and Sarta, where we operate. Appraisal is ongoing at Sarta. We have produced while we've appraised, but production from Sarta hasn't quite been what we want it to be. Despite that, once we finished appraisal, we'll take stock and optimize a field development plan to be implemented in 2023 and beyond to deliver a cash generative-producing field. Again, for those who don't know, following years attempting to take the Bina Bawi and Miran gas fields to production and having made a very significant investment, we had little choice but to enter inter-arbitration proceedings with the Kurdistan regional government. That process is underway, and the trial is scheduled for 2024. We then have exploration licenses in Somaliland and Morocco. We have very recently, within the last few days in fact, launched a farm-out process on the Morocco license. The Lagzira block is a large offshore license with a proven petroleum system. New place have been identified. We have identified 18 prospects, in fact, and 1 billion barrel resource potential. Somaliland is more progressed. It's a very exciting opportunity, and I'll talk more about that in a minute. On this next slide, you will note that Somaliland, along with arbitration, is one of the potentially very high impact but less immediate events that form part of our own investment case. While worthy of mention, I don't want to focus on these issues. Instead, today, we have a very strong business that supports a material and committed dividend. Our dividend program has returned over $175 million to shareholders since 2019, and our focus is on continuing this delivery for many years to come. Following a year of exceptional cash generation, we have the financial strength to add new assets to the portfolio and deliver that aim. We want your company to become known for its focus on creating value for shareholders, investing prudently and then returning material and growing amounts of money to its shareholders. For Genel, the right acquisition could reset market expectations overnight. At present, our cash is not seen to have all its value. And to convert that into something that demonstrates real returns could improve that situation significantly for shareholders. This is our focus. In terms of business priorities, we know exactly what we want to do to get there. We want to put our cash to work to bolster our organic portfolio production and add the right assets with the right profile with cash generation that will allow investors to see a clear route to long-term progressive returns. We have a fully aligned Board and management team with a dedicated and focused team actively screening and working business development opportunities. It's a challenging market, but we have very good people looking at these opportunities. And of course, we also expect to have $0.5 billion of liquidity by the end of the year. Now that certainly doesn't mean that we will lose our business focus on mitigating downside risk, absolutely not. Any M&A transactions under consideration will be looked at very firmly and carefully through the lens of supporting the dividend. The first question we ask ourselves is, how does this opportunity help us provide our shareholders, you, with returns? As to our organic portfolio, well, it's about utilizing our cash to maximize high-margin production and develop opportunities for material value creation. Which brings us back to Somaliland. This is a tremendous opportunity, a highly prospective block with multiple prospects and over 5 billion barrels of prospective resource identified already. We have agreed our first well location which is targeting stacked mesozoic reservoir objectives with individual prospective resource estimates ranging between 100 million and 200 million barrels each. But this is frontier exploration in a fairly remote location, and there are a lot of activities to get through before we actually start drilling. Drilling is scheduled for the end of 2023 or early 2024. You can see here listed some of the key activities lifted from our schedule that we'll be working through over the next 12 months or so. Things are progressing nicely. We have a terrific team in place, and we can't wait to get going. So with that, I'm going to pass over to Luke now who's going to talk about how we fund our plans.

Thank you, Paul. Our balance sheet is in good shape to support investment. As mentioned, our cash position is expected to be over $500 million by the end of the year, and our debt doesn't mature until Q4 2025. The reported net cash of $181 million at the end of Q3 does not include the proceeds due in September from July -- June sales which were received after month end. If you add those late receipts on there, net cash gets to $240 million. You'll see that our debt at $274 million is down a bit from the half year, the $6 million decrease is because we made a small opportunistic move to buy back some bonds that became available at a good price. But buying back bonds isn't the focus for our use of cash. Our cash is available to invest to enhance this business by having assets. Our balance of $0.5 billion represents all potential upside. If we can invest some or all of our available cash, maybe together with some debt, in a double-digit IRR project, which means a project delivering returns above our cost of debt, there will be a significant impact on the returns and value outlook of this business. As we look to invest that cash, those 4 bullet points are the frame we use to think about capital allocations in new assets. Maintain our strong balance sheet, preserve the resilience of our cash flows, maximize returns and support long-term funding of the dividend program. The dividend program is our key frame. So let me provide a reminder of what that program has been in the past and reconfirm what it is today. We set up the dividend program in 2019 to be material, meaning big enough to be interesting to investors when compared to similar investment opportunities they may have. Sustainable, meaning the quantum is supported by the business for the foreseeable future. It is repeatable and it doesn't reduce. And progressive, meaning that, over time, the dividend amount increases following the shape of the business. So far, we've delivered on that plan and paid around $175 million in dividends over 4 years. But the look forward is more important than the look back. So we repeat the same outline of the dividend program. It is material, currently representing a yield of over 10%. We are committed to it, and we repeat our commitment to progressing it when supported by the underlying business profitability as was the case in both 2021 and 2022. The dividend amount that we pay now is rock solid for the medium term, with our focus and energy now in building a portfolio that supports extension of this program well into the long term. And I'll repeat myself, the dividend program provides the key frame for our business. This also applies to assessment of potential new assets. This slide sets out what we want these new asset characteristics to look like. On a high level, we want new assets to support our established business model, resilient, cash generative, supportive of our ESG goals with mitigated downside risk. We are definitely not assuming current oil and gas prices last forever. Paying the right amount within the right structure for any new assets will be key to any investment decision we take. Geographically, our preference is for the Middle East and Africa. We will potentially look further afield for the right opportunity. Our focus is on investment returns above all else. We currently have a long list and a short list of opportunities. We're progressing these through our review process. And I'm hopeful that, over time, we'll be taking one or two of these to the Board for approval. If we can get the portfolio moving in the right direction, and I believe we will, we will then look to getting the right capital structure around it and see what impact that progress has on our outlook and consequently our dividend story and how it makes progresses. A decent size and, importantly, good M&A deal will have a significant impact on this business. Our cash balance is very large compared to our market value. It's not what we want, but this brings real opportunity to transform this company. I'll turn you to Paul.

Thank you very much, Luke. ESG is something that we've long been focused on. We're very proud of our ESG performance, and I'd urge everyone listening to view our sustainability report. You can actually access that on our website. This year, we're celebrating 20 years in Kurdistan. And in all that time, we've won very significant social commitments. For our latest initiative, which serves to recognize our 20-year track record, our most senior team members are traveling to Erbil, next week in fact, to make university scholarship awards to 20 students from all over Kurdistan, who come from disadvantaged backgrounds and who otherwise would not have been able to afford the higher education. We want to ensure that we make a real difference to society, both through the revenues that we generate, the employment that we bring and the social improvement that our investment funds. There are, of course, other aspects to our ESG effort, as you would imagine. We're also committed to minimizing our greenhouse gas emissions. A good example is the recent solar electrification of our Sarta-1D well pad. That project alone has already led to a reduction of 26.5 tonnes of CO2 emissions, and we're now looking at how we replicate that on a wider basis across other operations. To wrap up then, from a business outlook point of view, this is where we are. We've had material cash generation this year. We have a rock-solid dividend, and we have the chance to do something with our cash to really drive long-term and progressive returns. So that concludes our presentation. I'm going to hand back to Andrew Benbow now, our Head of Comms to run the Q&A session. Please submit your questions. Andrew?

Thank you very much, Paul, and I hope you can hear me okay. First of all, we'll run through the questions that were presubmitted. But I'll say thank you very much to those people who've also submitted during the presentation. So the first question is asking if we'll be making a special dividend in light of our very healthy financial position.

This is an issue we've obviously considered very carefully for some time. I'll pass it over to Luke to explain our rationale around special dividend.

Thanks, Paul. I've spent quite a lot of time talking about our dividend program and how we think about it. We developed it to be material, sustainable, progressive because we think that's the way you get best value for a dividend in the share price. It gives the best market price and then what to expect from the dividend program. That is absolutely our preferred route to return capital to shareholders. So when you look at that, that's the way we want to return the money. If you look at our cash balance today, I think we are pretty clear in the presentation where our priority is for the use of that cash. Override ends this year, deferred receivable ends this year. So although we've been highly cash generative this year, that cash flow generation reduces next year. And our absolute focus, and it's come across at the half year and it should come across in this presentation, is on buying new assets. And we want to preserve our capital for buying new assets. And the more we can spend on buying new assets and reshaping the returns delivery of this business, absolutely the best.

Is there any scenario in which you pay a special dividend?

So I think in -- thinking about our program, I guess, a special dividend would be kind of windfall. If you get something windfall then you might think about special. So if I look at the next 12, 24 months, if we do well, if we do a good deal, how do we -- how does that impact our dividend? Well, if the capital structure is right and the business outlook looks right, I think we'd have strong preference to increase the ordinary which we've been committed to sustaining at a higher level than -- rather than a one-off special. So we're pretty focused on the ordinary dividend, I hope that came across in the presentation. It frames our thinking, it frames our capital allocation, it frames our choice of assets and it frames the development plan we use to bring assets onto production.

Thank you very much, Luke. And if we continue the theme of use of cash, given the interest receivable on our cash reserves versus the interest payable on the bonds, will a buyback of bonds be looked at?

That's another one for you, Luke.

Good question, good question. Sitting on debt, paying 9.25% coupon is -- and a big cash balance is kind of suboptimal. It's less suboptimal than it was because our -- interest rates have gone up recently, so our cash is earning more money than it was. So if you look at the net burn annualized at the moment, it's about $17 million rather than the full price interest cost. So it's a bit better than it was. But it's still not optimal. Now you all have seen we bought back a few bonds recently, about $6 million of them at a pretty good price. Do I want to do a lot more of that? I don't want to do a lot more of that because I want our money to go on new assets, and that's our absolute priority. But as we go along, might we trim a little bit? We might trim a little bit if the price is right. But it's -- in terms of capital allocation, we're not launching a debt reduction program, and we're not focusing on that use of capital.

There has also been another question submitted today, which I think it's worth answering now because I suspect the answer may be along the same theme. But with our shares trading on low metrics at the moment, why are we not buying them in rather than looking for acquisitions?

Yes, interesting question. I guess -- so over -- in my time, again, we've thought about this quite a lot. And I think the evidence we've looked at is if you buy small amounts of your stock when it's at a low price, it doesn't -- it might have a short-term impact on stock price and give you a bit of a jump. But it doesn't really help the long-term share price. And what you're really doing is giving a nice exit price for people who want to leave. In my mind, where does share buybacks really work. I think it's if you do a really material share buyback program. So you are reducing the kind of size of the company, so the returns get magnified. So if you buy kind of 25% or 30% of your stock that you're transforming the return relative to the value of your business. And in that way, I see how it helps the investment case for your business. But for us to go and spend a bit of money just for reducing the share price short term, I don't see the value in that.

Right. Changing tack now, had a couple of questions around arbitration and gas. First one is due to the changing environment around gas, have there been any further discussions with the Kurdistan regional government already prospects or renegotiation? And then, while we're staying on that theme, there's also someone who've been asking how long this process is expected to take and whether or not we can comment on the potential rewards or materiality?

I'll take that one. The gas assets that we did hold in Kurdistan are now firmly in the hands of the KRG. So it's really a question for the KRG as to what happens to them now. We're obviously focused on the arbitration process. It's a private process and there's not a great deal that I can say about that other than the fact that, as I mentioned in the presentation, the trial has been scheduled for early '24. As to how long it's actually going to take for the arbitration panel to deliberate and issue a judgment, it's very difficult for us to say. We simply don't know. In terms of quantum again, it's -- we're not in a position today where we can say what we're going to claim for and how much we anticipate getting. Far too early for that kind of conversation. What we are focused on in Kurdistan at the moment, of course, is our remaining production business. It's a vibrant business. It's a profitable business and, by a consent of both parties, is a business that's entirely unaffected by the arbitration proceedings. So that's where our focus is just now, and we are quite happy to let that discreet arbitration process unfold somewhere else.

Thank you very much, Paul. And now, changing tack again onto Somaliland, which we had numerous questions submitted. The main crux of the questions, I think, is why is the SL10B13 block your focus? And what plans do we have for the Odewayne block?

Well, the SL10B13 block is our focus because following some prolonged and very rigorous scientific study, we consider that block to be the one that holds by far the greatest geological potential. And we've got a drill-ready prospect identified. We've got a surface location identified. And again, as I said during the presentation, we are now working through a series of consecutive activities that allow us to spud that well towards the end of next year or perhaps very early the following year. So we've elected to simply go for the most exciting opportunity on the land that we hold. The seismic on Odewayne wasn't nearly as compelling or nearly as exciting.

I think that some of our shareholders may well have seen a video circulating of oil or allegedly oil coming to the surface on the Odewayne block from a water well. Has that changed our thinking in any way?

It hasn't, to be honest. And we've seen that video, of course, and we've taken interest in it. But seeps to surface are evident all over Somaliland, and it's not an indication that there is anything of material value underneath those seeps. It doesn't change our view in terms of prospectivity, and it doesn't change our view in terms of what we plan to do in the coming year or two.

And one question I've had on the [ right ] as well, just to clarify, someone's asked if we'll spud Somaliland without a farm-in partner. So I think it's worth just reminding of the farm-in deal that we announced.

Yes. But we have actually already farmed, [ though ]. We have a 51% interest in that [ part ].

Just to add to that. I think it's an important demonstration of how we think about capital risk. We've started on that Somaliland prospect for a long time, been excited about it for a long time, and we've wanted to explore it for a long time. We didn't want to do it with 100% equity. So we've said we've waited. The commercial and asset team have done a great job to bring in a partner. And now we are delighted to have a very, very good partner who are sharing the journey with us. So it's just kind of an example of our business model in action and our patience.

Thank you very much. And moving on to M&A now. There's been -- as you can imagine, this is the key focus of the presentation of the business. There've been a lot of questions about M&A. So I'll try and distill a couple of them. In a high oil price environment, why is now the right time to make an acquisition? Do you think you can make one on reasonable terms? And why not sweat our own assets first when you can get huge cash flow per share from doing that?

Luke, you take the first part, and I'll take the second part.

So we are very cognizant of where oil price is today. I'm going to say some obvious things. It's higher than it was a year ago, and it's much higher than it was 2 years ago. There are different views on where it goes. It may be high next year, may be low next year. I think the key is how we approach the deal and how we approach the valuation and the structure of it. The dialogue we have had with some of the assets that we've had a look of with the potential vendors has shown some vendors are going to just demand a high oil price for that -- to encourage them to exit. And they don't want to negotiate their own structure. But we've been pleasantly surprised that probably more vendors are actually kind of a bit more realistic about the way we think about oil price and recognize the need to structure it and think about a lower price that can probably forward that for the initial valuation and then you structure some kind of deal. Now who knows where we might end up finally on it, but I think that's -- I think it's encouraging that vendors recognize that. It's encouraging. We've had good dialogue on it. I don't think the current oil price means that doing a deal now is a bad deal. I think you've just got to be very careful about how you structure it. We're pretty careful people. We'll think about the downside, not just on price, but on the technical and the development risk as well. And then we'll see where we get to. But ultimately, we'll have a multi-scenario valuation and downside scenario and catastrophic case scenario and models and work out if we're having to put our capital at risk on that basis. So yes, listen, it's not an easy environment to do M&A, but we've got enough encouragement to think we can do it.

[ And the ] outlook we had.

Yes.

And further on, on the geography, where we're looking on the type of assets. Someone has asked, why not invest in the North Sea? And then, whether or not we'd be looking for renewables or if we're focused on hydrocarbons.

On the North Sea, if you look at the history and experience of this business, I'll never say never. But it's hard to think exactly what value or extra benefit we bring to that kind of asset. And also, it's hard to see how that fits our criteria. We're looking for resilient, low cost, low breakeven, supporting a dividend that will sustain kind of whatever the weather then North Sea is not the right profile for that, all else equal. So what probably means, we're most likely to look onshore or dip our toes in a bit of shallow water, but it's unlikely to be North Sea or deep. It's probably onshore, low cost, developing world kind of how we framed it. Preference may not mean enough, but we'll go where the value is.

Yes. It's worth bearing in mind that the North Sea and places like the North Sea offshore highly regulated environments are high-margin criteria for consideration. I'd just like to come back to the issue of splitting our own assets, using our money to sweat our own assets. It's worth pointing out that we've had extraordinarily high activity levels at Tawkey and Peshkabir this year and are getting towards the end of a period of very, very high activity, particularly on the drilling front and on the facilities project front. And it looks like next year is shaping up to be another year of very high activity on those licenses. I made mention in the presentation that we are getting towards the end of the initial appraisal phase for Sarta, but we've already begun work on development options for 2023 and beyond at Sarta. And we are resuming drilling at Taq Taq towards the end of this year after a 2-year hiatus. So I think we can point to a number of things to illustrate that activity levels remain high within our organic portfolio.

I think a follow-on question from that before we come back to M&A is, what should production expectations be for Sarta in 2023?

It's a little difficult for us to say. Like I said, we know that it's going to be disappointing in relation to some of the guidance that we've provided in the past. But we really need to wait and see for what Sarta-6 well delivers. That well is about to begin testing and we anticipate results by the end of the year. We will have a much better picture about what Sarta is going to deliver next year and beyond once we see the results of Sarta-6.

And where do you currently sit on Qara Dagh? What's the likelihood of us giving up that license?

It's possible that we'll give up the Qara Dagh license. The current license period is due to expire very, very early next year. We are talking to the KRG about it. We've been talking to them about it for some time. From a purely technical and operational point of view, it remains an exciting prospect. But we're going to need more time. And our technical people and our business development people are actively engaged with KRG on that now.

And one of the final questions I think on M&A is what size of deal are you looking at? And is it fair to assume that you won't be raising new equity as part of any deal given where the valuation of the shares currently is?

Luke?

So we've got a cash balance of about $0.5 billion. And let's assume we can get that, it kind of depends on the asset and the opportunity. But we'd like to put as much of that cash to work to possible, whether it's in 1, 2 or 3 of 3 deals. The dream is [ being in ] one or two really good ones. Let's see how we go. So hundreds rather than tens is the simple focus and more material and the better the deal, the better for the returns of the business, obviously. With the share price where it is, and as you'll know, it depends on the other side of the deal, right? Just because the share price is low doesn't mean you can't use equity if you find the right price from the other side of the deal. But it gets harder. Look, it's fair to say, it gets harder. And our shareholders will need to be -- will want to know that we're using equity well, if we're using [ at precision ]. And so the bar is no doubt higher when your share price is low relative to value expectation, fundamental value expectation.

And is there any specific return rate that you look for when you judge M&A? Do you have anything in mind?

No, because it really depends on the opportunity. I mean if you get scale and a high-quality asset in the right post code, then obviously, your return requirement is going to be lower than if you see more risk in the project. So I don't want to give an indication. But I think from a company point of view, if you look at our coupon on our debt is 9.25%. So that tells you the cost of debt. Cost of equity is going to be higher than that. Our debt currently, if you want to go and buy it, gives about a 12% return. So it tells you that equity return needs to be higher than that. So if that helps think about what the business should be trying to achieve, then that's probably a useful frame.

Thank you, Luke. And while you're on a roll, how should we see CapEx for next year and beyond?

So this was a year of -- this was a busy year on growth capital. So we've been busy on the Sarta appraisal. Sarta-1 being in the -- early in the year, Sarta-5, Sarta-6. We've done Sarta-3 recompletion and other work. So we've been quite busy on growth capital this year with Sarta appraisal finishing around the end of the year, early next year. We've got some thinking to do about how we take that asset forward. So in terms of our capital investment on Sarta, it will be expected to be lower. As for Tawkey and Taq Taq, Paul kind of talked about it. We're going to be busy on those again. Remember, the payback on those is 3 months. You pay the money and you get 75% of it back through the PSC terms within 3 months. So the capital investment on those assets is a different profile for the investment on Sarta where it doesn't come back as quick because of where you are in the life of the asset and you've got loaded back costs, which are very valuable when they come through, but I mean you don't get quick cost recovery. Hopefully, that kind of answers your question. So down a bit on Sarta [indiscernible] growth capital.

Thank you. And then the final question is, what's our relationship like at the moment with our major shareholders?

I'll take that one. Our relationship is good, I think it's fair to say, with our major shareholders. Those of you who have studied Genel's history will know that there have been periods of tension, and things have been rather fraught. But I think I can honestly say, we have a new and reinvigorated management team and we have a smaller Board. And I think the dynamic certainly around the boardroom and with the wider major shareholder community is very good. We work hard and are improving our communicating with these people. And -- but the feedback from them has been very supportive of what we're trying to do.

So with that, Paul, thank you, everyone, very much for taking the time and submitting questions. It's much appreciated. Should anyone have any other questions at any point, please don't hesitate to get in touch with us. We do answer each and every question that we receive. We're very happy to answer every question that we receive, and we always prefer people to get in touch with the company directly than to speculate on anything. I hope you'll find us very open and approachable. And with that, I'll just hand back over to Paul for rounding up.

Thank you very much, Andrew, and thanks again to everybody for joining us this morning. I've got very little to add in the way of closing remarks. I hope you can all sense the excitement that the Genel team enjoys around the prospects and the journey ahead. And we look forward to talking to you more as the journey unfolds. Thank you very much.

Paul, Luke, Andrew, thank you very much for updating investors today. Could I please ask investors not to close the session? As you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few minutes to complete but, I'm sure, will be greatly valued by the company. On behalf of the management team of Genel Energy plc, we'd like to thank you for attending today's presentation, and good morning to you all.