Genel Energy plc (GENL) Earnings Call Transcript & Summary

Good morning, and welcome to the Genel Energy plc business update. Throughout this recorded presentation, investors will be in listen-only mode. [Operator Instructions]. The company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I would like to submit the following poll. And I would now like to hand over to CEO, Paul Weir. Good morning to you.

Good morning. Thanks. Good morning, everyone, and welcome to the Genel Energy March 2025 Business Update. My name is Paul Weir, I'm the CEO, and as has become usual, I'm joined here today by our CFO, Mr. Luke Clements. We've got a short [ pack ] coming through this morning, following which we will take questions. It's only 6 weeks since Luke presented the January trading update, where he provided an initial look back on 2024, and presented a reminder of our areas of strategic focus. Although 6 weeks is a very short time in a business sense, there have been some business developments for Genel now since then. And I'm delighted to be able to share some of these positive updates with you today. Our news headline, of course, is our entry into Oman with Block 54. Oman is a new country entry for us. It's a country we identified some time ago as a preferred geography for Genel. It's a great place to do business. It's prolific. It has a very reliable regulatory regime and has terrific in-country capability. We've been trying to establish a [ toehold ] in Oman for some time, and we're delighted to have finally made it. We see the Block 54 opportunity as the start of a journey in Oman, and we are delighted to be working with state-owned OQ, who will be our operating partner there. We've been made to feel very welcome and activity there is about to begin in earnest. Our aim is to invest more capital, grow our footprint and in time, establish a material cash-generating business there. It won't happen overnight, but we now have a base upon which to grow. We have a terrific partner to work alongside, and we certainly have the skills and determination to make it happen. It's also very pleasing to get some reward for the significant efforts, not always seen or acknowledged, that the team have been making in relation to the new business set up and indeed continues to make as we carry on the search for producing assets that demonstrate potential for value accretion. As we've mentioned in other presentations, our origination and evaluation of growth opportunities is excellent. And we have a list of further opportunities that we will focus on over the coming year. There will be a slide later in the pack to remind you of the characteristics and size of acquisition that we are targeting. So this first slide is a reminder that we're building from a strong base and that we will focus on 3 strategic pillars. On the left is the strong and resilient platform I've mentioned. And this platform, the Tawke platform, continues to deliver consistent performance in 2025, with a production rate today about the same as it was in December '24, and net cash flow now at about the same level as it was at '24 year end. To the right are the few pillars that underpin our plan. First, maintaining a strong balance sheet. We will continue to protect the balance sheet by careful business optimization, disciplined capital allocation and ensuring that we maintain appropriate cash and debt balances. The next pillar is maximizing cash generation, primarily by working towards the resumption of Kurdistan exports, an area where we continue to work with our peers and our regulators in an effort to operationalize the framework for funding that has now been passed into law by the Iraqi Federal Government. Negotiations are ongoing to establish proper formal arrangements to ensure Genel and the other IOCs are paid properly for their production. We'll touch more on that a bit later. On Tawke, Genel and our operating partner, DNO are working together on ideas on how we can get even more out of that asset by increasing activity at the Tawke [ impression refuels ]. And the third color is adding new production assets. So we now have an asset in Oman, Block 54 and we have already begun to work with our partner, OQ to determine the best manner in which to unlock the contingent resource already discovered on the block. And at the same time, we'll be targeting additional prospective resources. That work will begin [indiscernible] has been granted, a process that we anticipate will take no more than a couple of months. Meanwhile, in Somaliland, our other exciting potential organic growth vehicle. We continue to work with all stakeholders towards the conditions that will allow us to allocate capital to the drilling of the Toosan-1 well, and in the meantime, continue to demonstrate our commitment through our very important and successful CSR initiatives within our host communities. And of course, the acquisition of new assets for our portfolio. The farm into Block 54 is an important first step and a journey for us, but it does not provide us with the immediate reserve additions and diversification of cash generation that we aim for. So while the Block 54 deal takes us into an exciting new job, with great potential, we remain focused on delivering the acquisition of accretive cash generative production. Success across these areas will allow us to reestablish a regular dividend program that we are so keen to know about. On to the next slide, please. So a quick reminder on our strong balance sheet, our base. We have a net cash position of around $130 million and $66 million of bond debt that matures in October this year. Yesterday, we announced that we aim to issue a new 5-year bonds to give us the ability to fund our capital allocation priorities, specifically the purchase of new production assets. In addition, we are still owed a significant receivable balance by the KRG, with a net balance owed just under $60 million. Separate to that, the KRG is claiming a little more than $36 million in legal costs from the Genel subsidiary GEMBBL, Genel Energy Maran Bina Bawi Limited, in relation to the arbitration that brought against us and won, although we should mention that tribunal has yet to make an actual award of costs. So overall, our balance sheet and working capital positions are strong, and we will keep them strong. On to the next slide, please. This slide is a reminder of the well-known story of the Tawke PSC and its world-class characteristics performance. Tawke continues to perform consistently and reliably, it's operated well and its performance so far this year is consistent with last year, with gross production averaging 80,000 barrels a day and it's costing cash flow generation in line with expectations. Tawke always features prominently in our business presentations. It's very low operating costs, around $4 a barrel. It's cost/oil capacity and reliable production performance mean that this asset is as resilient as it gets. And its ability to flow of cash even at discounted domestic sales prices is very impressive. Next slide, please. This slide is a reminder of the impact of international market export pricing on what this asset delivers. The Federal Iraqi Courts have now recognized the Kurdistan PSCs as constitution on ballot. Upon the resumption of exports and realization of international market pricing, the Tawke contractors has entitlement free cash flow generation doubles without any change in production. So return to exports with proper payment would build a new asset from Genel, doubling the cash generation of the Tawke PSC, even after any resulting capital activity ramp up. Exports income and consistent payments support the decision to resume drilling on the asset. There's been no drilling since 2023, so any new drilling would certainly have an impact. Given the maturity of the Tawke PSC with all past costs recovered, 80% of any spend is funded from field revenue. So for example, an example here, if there was a gross increase in spend of $100 million, our share of that gross $100 million spend is just $5 million. And we would, of course, expect to see improved long-term production performance following that investment. Fundamentally approval of an amendment to the federal budget law in January provides a mechanism for the federal government to compensate the Kurdistan regional government for oil produced in PLI. Negotiations continue today to operationalize that agreement and to establish an agreed process that sees Genel and the other IOCs being paid properly for their production. So when exports resume, a doubling of free cash flow generation likely holds true whatever the capital expenditure ramp up, such as the efficiency of this license. And in terms of negotiations and export recommencing, while the Iraqi Court decision earlier in the year on the validity of the PSCs was an important step, and then the budget law amendment was the next step to putting in place a financial framework to fund the payment of KRI production, there has been considerable activity and positive momentum from all sides towards the restart of export since that time and particularly most recently. There have been many more regular meetings in recent weeks and meeting this re-contract, and by that, to continue those negotiations. Key now is securing the same agreements as oil and gas companies operating in federal or I can -- pretty much everywhere else in the world enjoy namely a documented agreement on both and how we will be paid for our product. We continue to work with peers in these important parts, and we hope to see progress in the coming weeks. Next slide, please. I've mentioned several times during this presentation that it remains a strategic objective to diversify production. There are essentially 2 routes to doing that, and we are working both. Firstly, by buying new assets where we can make an immediate impact, the inorganic route or secondly, by derisking our existing resources, the organic route, which takes a little bit more time. This slide, as a reminder, effort should already be understood in relation to our desire to purchase new assets and sets out the characteristics of the assets that we are looking for and importantly, already identified. We aim to acquire new assets in new places. There's a natural and, I think, understandable inclination towards MENA, but good deals can be found in a great many places, and we continue to scan as a wider horizon as possible. These assets, wherever they are, need to generate cash or be close to generating cash and they need to be located in reliable and predictable jurisdictions. We are working intensely for assets that have upside potential and where we can realize value that is as yet untapped. And we'll consider a wide range of options in terms of deal size from modest right-sized deals to more significant deals, providing the opportunity has the characteristics that we need. The Block 54 deal provides an indication of the kind of countries where we want to establish new and expanding footprints with our balance sheet position and access to capital, providing us with the funding to do so. In relation to our existing resources, our organic portfolio, this next slide provides a very brief summary of where we stand on these. Next slide, please. It's early days on Block 54, we are excited to be in country, and I was delighted to be in Muscat last week to sign the agreements. We found both the regulator and our partner to be extremely welcoming and we'll work hard to impress them and to forge deep long-lasting partnerships with the various important government stakeholders. In Somaliland, we remain excited by the opportunity and committed to drilling in this underexplored basin, once the conditions are right. Whilst the potential scale of the resources is high impact, the commercial terms afforded to us as the first movers in the basin, mean that even a modest discovery is likely to be commercial and can be monetized in short order through a pilot production project. On to the final slide here. For a recap with our triangular graphic representation of our strategy. We have a resilient base as a foundation and the 3 building blocks of our strategy. We remain committed to maintaining our resilient platform and strong balance sheet, and we will continue to get the very best performance out of our assets and our people. And we will continue to work towards a transformational export restart. And we will continue to also work towards capital-efficient diversification of our cash generation, which we intend to progress both organically, as I've mentioned, and the area of real focus through the purchase of new assets. Okay. I'm going to pass over to Luke now who's been gathering your questions while I speak, and we'll work our way to the last. Thanks a lot.

Thanks, Paul. We had some pre-submitted questions. So I'm going to start with those. So thank you for those and we're still taking questions if you want to submit further questions as we go through. So the first one, you've talked about M&A a lot through the presentation, Paul, what changes is Genel incorporating in 2025 to finalize a deal. Genel's track record in deal selection finalization does not instill confidence.

Well, we have already provided quite a bit of color on the parts, more than most, I think, on how many deal opportunities we're generating since late 2022, we've been looking seriously at opportunities on a rate of about 1.25, and there have been a number of reasons why those deals haven't come to fruition. We've simply been outbid in some and if others choose to overpay for assets, then that's their business, there have been others that we've been picked at the course, and there have been others still where we've chosen not to proceed having got our head under the bonnet and realized that property now wasn't exactly what we thought it was. So I understand the comment that our record in terms of selection and finalization doesn't instill confidence. But for someone on the outside looking in, I can understand that they may feel that way. But we've been working very, very hard. We've been working very, very hard to find a deal, and we are committed to continuing to work to find a deal. I don't think we're going to change anything. Finding the right deal for us is always going to take time, and you've heard me say it from similar to this before, the M&A requires that we kiss a lot of frogs. We will continue with our program as it stands.

Thanks, Paul. I'd just add we've been very clear this is strategic diversification. What we want to do is establish just as exactly as Paul talked about in Oman is we want to establish and grow our footprint and spend more capital wherever we put our next step. So it's a very important decision for us. The bar is high. It's got to be the right country. It's got to be the right asset. It's got to be the right price. This isn't a simple small bolt-on. This is a big strategic diversification into countries where we want to spend more money. So it does take time, but we are still confident we're going to deliver on that. Next, question, what is the size of bond issue that Genel is targeting? Should I take...

Yes, you take that one.

So bonding in October, we've got $66 million of bonds. We want to derisk any funding challenges we may have, which is really about the macro environment, which feels pretty uncertain at the moment. So we are going to take a modest -- we're looking for a modest amount, we've said about $100 million, but let's see. If you think about $100 million and you think about the sizing of that relative to our business, it's kind of RBL type metrics using the domestic sales price around $34, $35 a barrel. So it's quite a low level of debt for the asset either on a domestic sales basis. And there's a couple of reasons for that. One is we don't want to overburden the business with interest costs when we haven't yet got a precise place to use that capital. And secondly, we anticipate that any diversification we do will be credit positive. It will be a production asset in a decent jurisdiction with a good deal. So if further capital is needed, for M&A, we think we would probably be a better credit quality as a diversified business than we are as a pure Kurdistan player. But time will tell on that. Next question. What is the timeline of final determination of arbitration costs? Is it possible to bring a litigation funder for an appeal on the decision?

I'll take that one. So there are no more submissions either from us as they responded or from the KRG as claimer in relation to this particular case. So basically, we're simply waiting for the arbitration panel to the site. And that could happen any time, it could happen today or tomorrow. It might be a week or 2, we're really not sure. In terms of appeal, and I think we may have mentioned at this when we provided our January update, the bar for appeal in arbitration is very, very high, and we tribute quite early on and appeal and a very good chance of success. So we've elected not to appeal the decision. And in any case, the deadline for appeal has now passed. So we will not be appealing the decision.

Next question. Given Genel Energy is not operating any assets, why are our G&A cost is so high? Am I correct that Genel G&A is more than double that of GKB for last year? You want me to answer that one, Paul?

Yes, please. Please go ahead.

I'm not sure exactly which number you're referring to, but it's probably the G&A number in the income statement. That number includes about $10 million of costs relating to arbitration and noncash costs as well. So if you're looking to do a like-for-like comparison, you need to take $10 million off that number, which nearly has it. But needless to say, we continue to look at our G&A costs. We continue to optimize the business, that reported number for '24 has some nonrepeating items in it. Okay, next question, Paul. Can you provide an update on your exploration efforts in Somaliland? Are you currently considering any additional exploration sites in Somaliland? Or is the focus solely on Toosan-1?

So obviously, before we make the final decision to spend a well, there's a number of stars that need to align in Somaliland. I mean we've done a great deal of proprietary work and we're well placed. We've spoken publicly several times about our success around the civil engineering proprietary work, which concluded in late '23, early '24, and we've also completed a purchase of all the long-lead items that are necessary for the wells. So I don't think there can be any doubt in anyone's mind that it's a matter of when rather than if. But there are a number of operational and logistical and commercial factors that need to be taken into account. And we're actively working just now with all stakeholders, our partners and our host government to figure out the optimal time to begin drilling that well. I think in terms of guidance, it's fair to say that it's not going to happen before the second half of 2026. As far as our options for what we're going to drill in Somaliland, well, obviously, we have a ranking system. And there are a number of potential opportunities there. But as a result of our ranking exercise, we've determined the Toosan-1 ranks as the best opportunity. So we are certainly going to drill that first, and we'll wait to see the outcome of that well before we decide what, if anything happens next.

Thank you, Paul. Next question, and I think you probably answered this in your presentation, but let me ask it. Given the strategic focus on diversifying cash flow sources, is there any interest in acquiring producing assets outside of the Middle East?

Well, yes, there is. I mean -- there is. I'll repeat what I said in the presentation. I think people -- I think most people would understand that we have a natural inclination toward the Middle East, North Africa region given the fact that we've established here, and it's an area that we know well, not just from a technical point of view, but from a macro point of view and from a political point of view. But there is a dearth of good opportunities. There are not many good opportunities out there and even fewer that meet our criteria. So for that reason, we're obliged to look at other geographies as well. And we have looked at every continent in terms of potential opportunities, and we'll continue to do so.

Yes. And I'd add, we've obviously demonstrated Oman is a country that we like, Oman is very competitive and opportunities that don't go along that often. So you can't rely on even though we very much delighted to be in that country, you can't rely on that country to deliver the opportunities at the right price for what you're trying to do with the business. Next question, Paul. What happens if the pipeline doesn't open?

Well, we would be terribly disappointed if the pipeline doesn't open, but should that prove to be the case, we've already taken steps to reshape the business and to make the business profitable in the coming certain circumstances that we face. So we sold oil at $35 a barrel last year, and we generated free cash on that basis. So without wanting to tempt fate, we could carry on in today's situation pretty much indefinitely. And of course, we still have our cash pile and hopefully, we will have bond debt very soon, and we could still go ahead and make acquisitions and go the business. But I don't think that's a likely scenario. I mean let me reinforce another point that I made in the -- luckily there's another point that I made in the presentation. The number of meetings that are taking place has increased in intensity in recent weeks. And we have very, very senior people sitting around negotiating table from Kurdistan Regional Government and from the Federal Government of Iraq. We know that our American IOC peers have done a very good job of lobbying the American government and the American government is also applying pressure to try and resolve this issue. I'm not going to predict precisely when it's going to happen. But I think the people are involved now and the intensity of the meetings that are taking place and the nature of the conversations, all point to resolution of the ITP issue within weeks or a couple of months. So I don't think we're going to be facing prolonged local sales. It's possible, and we can survive reasonably well if it happens, but I don't think that's the future that we're facing.

And then I got a question on a similar subject, do you expect the cost assessment by an external consultant to return a dollar per barrel figure representing both your cost and profit oil as per existing PSC terms?

Yes, we do. And the methods that will be employed by the cost consultant -- the negotiations that are taking place at around that precise point at the moment. So you will know from publicly available data that the initial payment that's being proposed for the other companies is $16 a barrel or a large portion of $16 a barrel, with a true-up subsequent to some sort of a review or an audit by an independent technical consultant. And it's the scope of that body, and it's the methods that they will employ that are coming to be negotiated.

And the key input into that is our PSCs. And the key point on the PSCs as they've been recognized for the first time in 20 years as legally valued by Baghdad. So there's no debate on how you do the math. You just need someone to verify it. It's our view.

That's our position.

Some questions on Tawke, what are the main operational challenges in maintaining production efficiency at Tawke? How much more barrels you think can be added by drilling on Tawke in the near term?

Well, the key operational challenges or the operational challenges that you would expect on any large onshore complex field, our operating partner, DNO has been very diligent in conducting a series of well intervention activities to try and keep production at its current levels. So they have been intervening in wells to conduct various engineering exercises, including the repair and replacement of BSPs, for example, amongst other things. As far as the benefits of drilling are concerned. We're obviously keen to begin investing in the field again. But we're obliged to wait until the conditions are right for that to happen. But once we do start drilling, I think the real benefits are going to be that it's going to allow us to continue to keep production at current levels for longer. I don't think that we could reasonably expect a sudden and significant increase in production rates, but rather it's about the long-term health of the field, that would allow us to actually extract the 2P reserve base in its entirety. And that's what we are planning for.

Okay. Now I've got a few questions on Oman. First 1 I'll take. Why will Genel provide [ operatorship and carry ] of OQEP's 60% interest during the initial phase in the Block 54 RNS? That very simply is the cost of getting in. So nothing like this is free, particularly not attractive assets in a mine. So that's simply the cost of entry. Next one...

There's more pointing out perhaps as well, these are modest costs. I mean it's important a lot has taken place, but it's not very expensive once it's taken place.

Next point -- and I'm not sure how much you want to sell on this fall. Can you provide more detail on the time line of work at Oman's Block 54? When will seismic well testing and drilling start? And what is the current contingent reserve estimate for Block 54?

I can't say anything at this stage on the contingent reserve estimate. As far as what's starting is concerned, we are waiting on oil set, and we've been advised by our friends in Oman that, that will take a couple of months. So we're probably looking at some time in May before working begin in earnest. And our initial program is to actually go back and revisit wells that have been drilled there, if we have oil has already been found and to examine those and to look at the productivity of those wells, and that will begin this year. There is work to be done on seismic as well and these seismic programs have to be planned before they're implemented. The arrangement that we have in place is an arrangement that lasts for 3 years, and we have a work program that will extend across those entire 3 years. Obviously, if we are in a position to commercialize the hydrocarbons that we discovered or rediscover, then we would obviously move into a commercial operation on before that pre-license period expired. But as things stand today, we've got 3 years of work ahead of us.

Okay. And next one, congratulations on the deal in Oman. It's important to have the right instead of being pressured to make a deal. Paul mentioned the MENA region, if the pipeline export starts, will Genel continue to look for deals?

Yes, is the short answer. And I don't want to sound glib, but the resumption of international exports. If anything only encourages us more to go and look for deals. We will not take our foot off the gas as far as searching for geographical diversification, for diversification of our income streams or for value-accretive opportunities. That will remain the cornerstone of our strategy going forward.

Thank you, Paul. We're through all the questions. So I can hand back to the [indiscernible]. Thank you.

Fantastic, Paul, Luke, thank you for addressing those questions from investors today. And of course, the company can review all questions submitted today and will publish the responses on Investor Meet company platform. But before we direct to investors to provide you with their feedback, which is particularly important to the company, Paul, can I please ask you for a few closing comments?

Sure. Thank you. Look, I hope this short presentation and the conversation that we've had give you a flavor of the direction that Genel is heading. The last 2 years since closure of the ITP would be tough for us and for everyone else sends up in KRI. Thankfully, we've had a world-class asset to help us through these less than perfect times. In that time, we've worked very hard to reshape the business and shared assets that don't add value. But the sharp end of our strategy has been about diversification and growth and working to mitigate the risk of a single asset dependency. We've got a compact and very highly skilled and highly motivated team directing its efforts towards that goal. The immediate success is never a likely outcome. Our strategy requires patience and determination and discipline. [ I know of you ] that a long overdue increase in momentum around the resumption of exports and they were very exciting for you into Oman marks the very earliest steps on a new journey and a new direction for Genel. And I hope you will all coming to feel the same way. Thanks very much for your time today, everyone, and I look forward to talking to you all again in due course.

Paul, Luke, thank you once again for updating investors today. Could I please ask investors not to close the session as you will now be automatically redirected to provide your feedback in order that the Board can better understand your views and expectations. This will only take a few moments to complete and 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.