Genel Energy plc (GENL) Earnings Call Transcript & Summary

Good morning, and welcome to the Genel Energy plc Trading and Operations Update. [Operator Instructions]. The company may not be in a position to answer every question received in the meeting itself. However, the company will review our questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to [indiscernible]. I'd now like to hand over to Andrew Benbow, Head of Communications. Good morning to you, sir.

Good morning, everyone, and thank you for joining us. As said, we are here partly to run through a short presentation, but also to answer any questions that you may have. So please do feel free to submit them on the right. If there's any that we can't get to today, then always do feel free to e-mail me at any time. We always respond to e-mails very quickly after getting them. I'm very happy to answer any of your questions. So with that said, I'd like to hand over to Luke Clements, our CFO. Go ahead, Luke.

Thank you, Andrew. As Andrew said, my name is Luke Clements, I'm the CFO of Genel Energy. I'll run through the short presentation, and then we will pick up any Q&A at the end. Next slide, please. For those you who don't know us, we are Genel Energy. We are an oil and gas business. We have a cash-generative production business in the Kurdistan region of Iraq. We have 4 producing fields, but primarily the Tawke license delivers that cash generation with its 2 fields, Tawke and Peshkabir. And we also have 2 exploration licenses, one in Somaliland and one in Morocco. We entered 2023 with a very significant cash balance of $500 million, net cash of $200 million with no debt maturity until October 2025. We've been pretty clear about our capital allocation in the past, kind of 6 months, focused around supporting our dividend program and extending it. And I'll talk about that a little bit on the next slide. Our focus for the year ahead is very simple. We are focused on our cash generative production from our resilient production business. We will continue to maintain our strong balance sheet, which we have done for many years now. We see it as an important part of our investment case. If we add assets, we will ensure they are resilient assets. We find our business resilience is also important and a key part of that dividend program. Key focus for '23 is putting some of that $500 million to work to add new assets to our production portfolio. And we will continue to progress towards drilling our Somaliland exploration well around the end of the year or early in 2024. So I talked a little bit around -- I mentioned our dividend program. This is really the focus of all our investment decisions, key to our dividend program, when we set it out in 2019, was it will be material, sustainable and progressive. Material means it's competitive with peers and the dividends that they're paying. Sustainable means it's repeatable when we keep paying it. We don't want our dividend to ever go down. And progressive means that over time, it increases following the business as the business grows. Since 2019, when we started the dividend program, we've paid out just under half our current market cap in dividends, and we've increased it by about 19%. You can see the chart on the right shows the shape of the annual dividends since we started. And currently, our dividend at about $50 million is about 11% yield on our current market cap. So the year just gone, what happened. Production was flat at 30,000 barrels a day, most of that, as I said, coming from the Tawke PSC, 0 lost time incidents, a lot of cash generation in 2022. Over $200 million of that came from old debts in various forms, deferred receivables and override payments, meaning we are -- our production business generated a lot of cash in 2022. And we invested about $50 million in appraisal at Sarta where we drilled 3 wells Sarta-1D, Sarta-5 and Sarta-6, and we gave the results of those quite recently. If you put all that together, you get to free cash flow of just over $230 million. As I said, we paid a dividend of $50 million, and our cash is just under $500 million at the end of the year. As we look ahead, our guidance for '23, production 27,000 to 29,000 barrels a day, down a bit from last year as a natural decline on the field is offset by drilling primarily at Tawke. Our focus this year is really optimizing costs and preserving that cash on the balance sheet for investment in new assets. So we've been very careful with our capital allocation to our existing portfolio. That means we're -- in our production business where the money comes back very quickly. So about 80% of what we invest in our production businesses recovered within 3 months under the PSC mechanism. So that's about $90 million and about $10 million on maintenance to our other assets, which includes Sarta -- with up to $25 million progressing towards drilling our exploration in Somaliland. In terms of the free cash flow, as I said, the override and deferred receivables, the old debts that came through over $200 million in 2022 won't repeat in '23. But we do start the year with about $64 million overdue. And we expect the normalization of payments and the Erbil, Baghdad political and financial relationship to mean that we catch those up in the year. And the other item on '23 is, we'll progress towards arbitration in February '24. In terms of what kind of assets are we looking to add to our portfolio. As I said, the lens we use is the dividend program, so material, sustainable, progressive. How does that turn into asset characteristics? It means ideally production or close to production. It means resilient assets with low cost, low breakeven. That probably means onshore or shallow water, low carbon emissions because we want these assets to be around for a long time, whatever happens with the regulatory environment, and either through deal structure or investment plan, we want to be able to mitigate the downside risks, which come with any oil and gas assets. Impact of these, we are pretty obvious, but improved returns, strength in the business, diversify risk and ultimately, priority #1, [ extended sight ] on payment of our dividend program. We can currently [indiscernible] in midterm, but we want to extend that longer. And then ultimately, as the business grows, we'd like to see that progressing the dividend to a higher dividend as well. So this is really our outlook. The boxes along the bottom of the 5 items that I've walked you through in the presentation, low cost, low carbon and resilient production supporting our dividend yield of over 11%, a cash balance of $500 million currently earning 3% or 4% in a black crop liquidity fund. We want to get that invested in decent project or projects and transform the returns of our business and extend our dividend program and also that cash will fund our investment in Somaliland. Back to you, Andrew.

And now we'll run through some of the many questions that we've had. As you can imagine, Luke, we've had many questions asking about M&A and whether or not we have any specific M&A targets lined up and how we should think of the focus and timing?

Yes. M&A takes time, particularly if you want to do a good deal rather than any deal. We have a dedicated team. We've been -- we don't just pick up the pen last year, we've worked with it for a while. We have a number of opportunities at different stages of maturity. As I said before, we have a long list and we have a shorter list. A shorter list of less than 10% are still quite early stage in the process, but we're starting to get a feel for what they look like and what kind of shape a deal might have for those. So we've got assets we like to look of. We've got assets that deliver the kind of return and cash profile that we're looking for. But M&A is hard and it's competitive. So we can't make any promises, but we will continue to put all our energy into following in the right deal to fit our business and our dividend program and get that cash to work. It's an obvious thing to say $500 million sitting on the balance sheet, earning 3%, 4%. If suboptimal, we need to get that working properly for us and supporting our dividend program and delivering investor returns.

And if you can't find anything to use the money where you look to buy back the bond perhaps?

So we bought back a bit of bond in September. We spent about $6 million in September when we bought it back at about $94 million, $95 million -- I don't want to buy too much more bond back now because bond market is quite tough. And if I want the money for M&A, I think it's hard to try and raise money in the bond market right now. So I'd rather have the bond levels a little bit too high for now than too low. That's not to say we might not nibble at the bond, they've opportunistically -- it's available at a price and I think I can issue at that. So it's not a priority for now. As we go through the year, if we haven't managed to do M&A and bonds are available at a sensible price, we might think about doing something. But right now, it's not a priority for me.

And a couple of questions coming as you'd expected about Kurdistan payments. So what is happening at the moment with Kurdistan payments and why the delay?

So we currently owned payments for August and September. So we have -- we're kind of 2 payments overdue. We have not had explained to us why these are late. I think it's important to remember -- and it's a bit different now. But last year, there was a lot of turbulence in terms of news flow between Baghdad and Erbil. Part of -- partway through last year, Baghdad stopped making cash transfers to Erbil. I'm not saying there's direct linkage to payments, but it just kind of indicates we're in an unusual situation between Erbil and Baghdad last year. Now that seems to be resolving since the formation of government in Baghdad towards the back end of last year and PM, Sudani, indicating they wanted a normalized relationship with KRG, that was a good indicator. We are just hearing last night that Barzani has talked about, Erbil and Baghdad seemingly finding some dealer space in middle ground or some of the issues that they've been talking about for the last month or so. We've heard that Baghdad is going to start making payments again to Kurdistan. So I think the last few months have been positive from a politics point of view, and it looks like normalization of the relationship after the 6, 7 months last year when this formation of government issue left a vacuum for people who don't want Kurdistan oil sector to sell its own oil to kind of ratchet up the pressure. So let's see what happens. But the next couple of months, I hope to see return to normal business as usual for Kurdistan. And I would expect that to also mean a return to the normal payment timing of 3 months in arrears. So let's see. I'm hopeful that we'll catch up in the next few months and get back to normal payments.

There's a couple of questions, which I'll just take quickly because one of which is asking about an updated CPR in Taq Taq and Tawke that will be done in line with our usual end of year reporting schedule. There's also been a couple of questions about the rock and farm-out and how that's progressing in the expected time line? I think to give a quick update on that. We're in the final stages of signing the petroleum agreement and the association contract with ONHYM. And once that's done, and we have that absolute clarity, which we know is coming, but we're waiting for that clarity, then we'll really step up options around Morocco. And look, we've got a lot of prospects and leads identified. There's a serious amount of recoverable resource potential. And we have a team on the case of trying to get that farming the aim of that, of course, is to try and do a deal similar to that, that we did in smaller land, which is where we effectively get somebody else to pay for the exploration that is to come. And that's the idea, and that's how it fits to our strategy. In terms of time line, again, it's a bit like M&A. It's very difficult to put a time line on things such as that, but conversation will step up. The team did a great job with Somaliland and look forward to them to do the same with Morocco.

I'll just add on that. It's early days, but we have got some quite big companies having a look around. So let's see.

The question we've had in as well, asking about the oil seep news in Somaliland. Is there anything you can comment on, Luke?

Yes, we saw the news flow on that. I've been hearing about all the seeps in Somaliland for a long time. We've heard about them for 10 years. You asked the technical guys, it's not necessarily the ultimate answer, but for the nontechnical indicates there might be oil there, right, which is why we are thinking of drilling a well in Somaliland. The license we are planning to drill the well on is a different location to where that -- where that water to well was drilled, which had some evidence of traces of oil. But our priority is that other license where we plan to drill will next year. So it's interesting. It's good news flow. It's not new news flow.

And what are your views in relation to new news flow on Somaliland stating that the license is not valid?

Yes. This is frontier exploration. Frontier exploration is hard, right? And every step a bit is new. There's no warehouses to store new kit, so you need to build warehouses, but there's no roads where we want to drill our wells, so you need to build a road to the site. And we saw this Somaliland comment, and we saw the Somaliland response. It doesn't materially change our view on the risk in Somaliland. We've looked at it, and we will continue with our program.

And back to Kurdistan. Can you comment on the change of the oil price adjustment, which seems to be in the pipeline?

Sorry, what's the question?

Can you please comment on -- we've see HKN and others talk about change in netbacks? Is that something you have any comment...

Okay. Yes. So as reported by HKN and Chevron, they've signed a lifting agreement with a new pricing mechanism. It's been reported that the Kurdistan, the [ lens ] realized price per barrel that the government gets for its sales has deteriorated a bit in the last kind of 12 months as competing euro crude, I think, has pulled down the price of the Kurdistan blend. And KRG is looking to work out how that impacts the pricing mechanism it has with contractors. We have not accepted any change in pricing mechanism and if we had done, we have updated the market. We will update the market if it changes.

In terms of -- back on to M&A, is there a particular size of deal that you're looking for?

I think we'd rather do a few larger ones than the lots of small ones, so hundreds rather than tens. Obviously, the more of our -- assuming we have the right minimum liquidity level left behind the more of our cash we put to work on a good project, it's obvious the more money we make and the better returns it delivers to shareholders. So do we have a specific number in mind? No, that we have $500 million on the balance sheet, and we'd like to use the right amount of that to add assets potentially with the right level of debt that doesn't overburden our balance sheet or damage the resilience of our cash flows. So look, we've lost a lot of cash generation between '22 and '23. '22 benefited by over $200 million from old debt, and we need to seek to replace that. And if you're seeking to replace quite a lot of cash generation with production or near-term production assets, that cost quite a lot of money. So I think it's almost obvious that we want to spend hundreds rather than tens on the right asset, but it's got to be the right asset and it's going to be the right price.

We've had more of a comment come in than the question, but it's worth but I'd like to just deal with it. Someone asking, saying, it's very difficult to get a broker report on Genel and many companies published broker reports on the website. It is frustrating. That's the MiFID II regulations. Unfortunately, there's nothing we can do about that. We simply can't share analyst research on our website. The only way that you can have analyst research on the website is if we pay for it. We're well covered. We have 7 equity analysts covering our story. They cover our story very well. It's a shame that regulations mean it's not so easy for retail shareholders to access that research. You'd have to contact brokership directly and pay for the research to get that. I can say that the overwhelming analyst view on Genel is positive that we have 2 hold recommendations and all the rest to buy on Genel even the hold recommendations are a significantly higher price than our current share prices. It is something we've looked at doing pay for research, but our view is that the credibility that you get nonpaid for research is -- outweighs that, although that is offset, of course, for the frustration. It can be quite difficult for some people to see. With that said, I think those are all the questions that we have had to come in today. If anyone feels that we haven't answered that question, then as I say, and as I always say, please do contact us directly. We always respond to all shareholders, large or small. And we always -- we always welcome any questions that do come in. So please keep those questions coming. And I will pass over to Luke for any final closing remarks.

Thanks, Andrew. So probably quite a simple year ahead from an existing portfolio point of view, but we intend to take a lot of energy to the M&A. And you won't see it because of the nature of the work and we won't be able to signal it. But this business has the opportunity to use that cash to take it in a really good direction to support the dividend program and be the right shape and characteristics of business to be fit for the ESG challenges that we face as a sector. So I think we want to watch. We've got to get our cash balance and working, but hopefully, we've been pretty clear about the business model frame within which we intend to invest that capital. And hopefully, that makes us interesting for new investors who are looking at us for the first time.

Luke, Andrew, thank you for updating investors today. Could I please ask investors not to close the session as you'll now be automatically redirected to find 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 we'll be greatly valued by the company. On behalf of the management team of Genel Energy plc, I would like to thank you for attending today's presentation, and good morning to you all.