Genel Energy plc (GENL) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Genel Energy plc investor presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Paul Weir, CEO. Good afternoon, sir.

Good afternoon, everybody. My name is Paul Weir, and I'm the CEO of Genel Energy. I'm joined as usual by our CFO, Luke Clements. Welcome to our half year results presentation. There are two subjects that have a significant bearing on the business so far this year. The first, the headline is our proposed acquisition of Capricorn Energy announced at the start of July, a transaction that delivers on the growth strategy that we've been talking about for some time. The second is the temporary suspension of production at Tawke that began at the end of February and lasted through until the end of June, a full 4 months of the 6-month period being reported. That production suspension was, of course, the result of facilities in the region that's spilled over and close to our operational footprint. I'd like to offer some quick guidance upfront to manage expectations about what we can say on today's presentation. We're in an offer period. So on the Capricorn transaction, our update will be consistent with what's in the published announcement and the scheme document. And we'd ask you to look there for the detail. And as in our March update, we won't be able to provide a regional security update or offer any sort of an insight beyond that, which is publicly available. Notwithstanding all of that, today, we will take you through the performance of the business in the period, where things stand currently and the catalysts ahead. I'll work through the slides fairly briskly. It should take about 15 minutes, and then we will be happy to take your questions within the parameters that I just mentioned. On to the first slide deck. We start with an overview of the business, and this slide is now our standard slide with the key metrics for the period. You can see clearly the negative impact on performance of suspended production for 4 out of the 6 months, a daily average production rate of 6,600 barrels a day, precisely 1/3 of the 20,000 barrels a day we were expecting in the WP&B and with EBITDAX, the top line impacted accordingly. Despite that setback, you can also see that we retain a strong low leverage balance sheet with cash at the end of the period of $199 million and a net cash position of $108 million. The building blocks at the foot of the slide are the ones we set out in March, and they are unchanged. A world-class asset in Tawke, significant cash ready for deployment and material organic upside. On to the next slide, please. This slide, again, I hope a familiar slide by now sets out our strategy in the way that we think about it every day. Maintaining a strong balance sheet. Those of you who follow us closely will already be aware that following the Capricorn announcement, we have tapped our bond for an additional $35 million that we now have available for deployment. Maximizing cash generation from the assets we have, the Tawke metrics, again, should be familiar to regular followers, and we are pleased with being able to resume investment drilling there. And of course, adding new sources of cash flow in a disciplined and value-accretive way. We remain focused on all three boxes and in particular, that bottom banner where we build a business that supports recommencement of a regular dividend. I won't dwell on the detail because the big news for this period is on the next slide, the proposed acquisition of Capricorn, which, of course, is an ideal component for that third investment box on the right-hand side of this slide. Let's take a look at the acquisition in a little bit more detail then. On July 2, we announced a recommended all-cash offer for Capricorn Energy. At announcement, we held irrevocable undertakings from approximately 39% of Capricorn's issued share capital. The shareholder vote on the scheme is expected on the 18th of August. The full terms are in the scheme document and on our website. And as I've already mentioned, I'd point you there rather than rely on a summary here today. So why Capricorn? Well, Egypt has been one of our focus countries for some time, and we have tracked and evaluated a number of opportunities there, particularly since thanks to the efforts of the relevant ministries, there's been an improved focus on regular payments to oil and gas investors and creating an environment that encourages further investment. This transaction will give us an immediate and material position in a mature but important hydrocarbon [ province ] with very significant potential for further organic and inorganic growth. This acquisition provides scale for Genel, doubling production and significantly increasing our 2P reserves base. Genel sees this as the start of a long-term relationship with Egypt, not a financial trade or a short-term investment. Our engagement with EGPC and with the ministry is well underway, and the dialogue has been very constructive. We've highlighted the fact that as a well-established upstream E&P company, we have a long-term vision with a 15-year planning horizon with great technical and operational bench strength that will allow us to find the real value within existing mature assets and as we grow within new as yet unrealized opportunities. That approach requires a long-term investment strategy. We've pointed out that such an approach is good for our shareholders, but it's also good for Egypt, too. These points seem to have landed well and jive with Egypt's own objectives of attracting more international investment, arresting and eventually reversing decline, developing Egyptian talent and local content and operating to international standards of safety and environmental care. The pro forma figures on the right-hand side of this slide give you an idea of the impact on the business. It broadly doubles. 2P reserves increased to 117 million barrels of oil equivalent. Working interest production increases to an average of around 38,000 barrels of oil equivalent per day, all while retaining balance sheet strength. In practice, that means two geographically diversified production hubs rather than one asset in one geography, a stronger reserves base, near-term cash generation and exposure to the international oil price alongside the organic upside that we already hold in Kurdistan, Oman and in Somaliland. The combination business on the other side of this deal is summarized in the right-hand box, a larger independent MENA-focused E&P business, significant near-term resilient and diversified cash generation, strong balance sheet, significant resource upside across all regions. All in all, a very positive outlook. So I'll come back now to the extent business and first to Tawke. The world-class characteristics of Tawke are well known and the first 2 months of this year demonstrated them again. Gross production was running at around 80,000 barrels a day up to the end of February, essentially where we exited December with two newly drilled Tawke wells on stream. Following the start of the regional conflict on the 28th of February as a precautionary measure, the operator sensibly suspended production. That was absolutely the right call, and we remained close and supportive to DNO throughout that period. Development operations resumed on the 9th of April and then production operations restarted on the 28th of June. Since then, two more wells have been spudded at Peshkabir as the investment program was used after a near 3-year gap. The contractor group is keen to maintain that investment level, but obviously, we will need to regulate the number and nature of activities to suit the prevailing security situation. So the half year averages on this slide, 26,400 barrels a day gross, 6,600 barrels net to us reflect 4 months without production in a 6-month reporting period. Realized pricing on domestic sales averaged $31 a barrel up to the point of production suspension. Since the restart, it's been running at around $37 a barrel. Notwithstanding the fact that most production activities within Kurdistan were disrupted to some extent by the regional conflict, we've kept a close eye on the arrangements surrounding international export arrangements from Kurdistan and remain hopeful that circumstances there will allow us at Tawke to resume international exports, too. The security situation remains uncertain, and we continue to monitor it closely with DNO and other stakeholders. Obviously, we're pleased to hear that the U.S. decided at the weekend to haul facilities in anticipation of peace negotiations with around resuming this week. We will continue to follow that situation very closely, of course. Right. On briefly now to cash. Rather than walk through this slide line by line, I'll pick out the key takeaways. There are three, I think. Firstly, the effect of the suspension on the income statement was effectively 4 months of lost proceeds. Despite that, operating cash flow is still breakeven. Spend was carefully controlled and optimized during that disruption, although some important capital investments continued, mainly on Tawke, but also on Block 54 and Toosan-1. This really shows the resilience of the asset and our business. Secondly, free cash outflow for the half was $25 million with closing cash at the end of the period of $199 million and net cash of $108 million. And thirdly, after the period end, in July, we tapped our existing bond for a further $35 million nominal, issued as an implied interest cost of around 9.7%. That takes the total debt to $127 million against a facility with a capacity for up to $200 million. So some significant headroom there. Cash at the end of July was $240 million, $41 million higher than it was midyear at period end. Okay. Next, I'll briefly cover our preparatory activities on Block 54 and Oman. On Block 54, the focus this year is straightforward, simply do the work that ensures that our first well is drilled in the best location. That means integrating the data collected during the Batha West-1 well reentry at the turn of the year, some basin modeling, reprocessing of the existing 3D seismic and acquiring and reprocessing new 3D seismic. All of that's ongoing in line with our plan. Finalization of the actual well planning will follow as we work towards drilling in 2027. We are targeting reservoirs proven in the adjacent Block 53, the Mukhaizna field and in Block 4 as well as on the legacy Block 54 well blocks. As a reminder, the remaining work program for this first exploration period, the work commitment, which runs to May 2028 is 300 square kilometers of 3D and two exploration wells. Block 54 Oman is the kind of organic opportunity that we really like. It's a modest capital investment. We have a clear work program. We are undertaking data-led decision-making, and there will be meaningful upside if the subsurface case continues to strengthen. We continue to work closely with the operator, OQEP on all of that. And on Somaliland, the opportunity remains a material discovered resource addition from within our existing portfolio, and we continue to make steady progress towards drilling Toosan-1 in 2027. Toosan-1 targets the best estimate prospective resource of 650 million barrels across multiple stacked reservoir objectives, and we've got 6 further high-grade prospects right behind it. As first mover, our commercial terms are attractive enough that even a modest discovery would likely be commercial and anything we find benefits from proximity to the Port of Berbera, which is a stone’s throw away in African terms. In terms of readiness, the majority of the civil engineering is complete and around 80% of the long lead items are already in inventory and the well delivery stage gate process is ongoing. We remain measured about this. There's still a need for the stars to align operationally, commercially and geopolitically. The message today is that we maintain optionality over this opportunity through continued progress alongside continued investment in the well-being of our host communities to strengthen our very important social license to operate. So let me wrap up by returning to the three strategic pillars, our resources today and the catalysts that lie ahead. Number one, maintaining a strong platform. We finished July with $240 million of cash, low debt relative to the asset base and resilient cash generation from Tawke now that production has restarted. Secondly, maximizing cash generation, continued cost discipline, resumption of the drilling program at Tawke and working towards export pricing, which also one could more than double the free cash flow from the license, reinforcing its quality as an asset. And thirdly, diversifying production and free cash flow. A number of exciting workflows against this pillar, completing the Capricorn acquisition and getting to work in Egypt is, of course, the big one, finalizing and executing the plan to drill two wells in Block 54 and progressing to [ San Juan ]. In the near term, of course, the most important goal, as I said, is completion of the Capricorn transaction and the step change in production and cash generation that follows. Those pillars are straightforward. They are mutually reinforcing, and they remain the right framework for Genel value delivery. And we, the management team and the entire team remain clear and determined on our direction of travel. That was a very brief run through the slides. Thanks for your time this afternoon. Luke and I will now be happy to take your questions.

[Operator Instructions]

On exports, you've talked about exports. What does it take for Genel to start exporting?

We've said from the get-go that -- the thing that we need to see before we resume exporting is that we and indeed all exporters from Kurdistan are being paid in a manner that's consistent with the PSC. We want to export. We'd love to export. We'd love to begin exports just as quickly as we possibly can. But we've always felt that it was important that we and other producers get paid in accordance with our contracts. Now the many stages that comprise the arrangement that's been put in place so far. Those stages have been realized sequentially over time. And while things haven't happened quite as quickly as anyone thought when they began that process, everything that needs to happen has been happening, right? People have been getting paid their initial fees in line with the budget law. The independent -- the appointed independent assessor has undertaken his technical work and submitted a report to the federal government. And although we can't speak about it with great confidence because we're not part of the arrangement, what we hear is that, that report has been submitted and has been accepted by the authorities. And the next stage, as far as we understand the process to work is for those who are exporting to be given a top-up payment. And that basically means that oil exporters are being paid in a manner that's consistent with PSCs and such a development would allow us to reconsider our position in relation to exports.

Thanks, Paul. And then two questions on Somaliland. At the full year results, you said Toosan-1 is progressing through a series of internal gates stage gates. Could you elaborate on which stage of that process the project has now reached and what key criteria remain before management approves the next stage?

We look upon the Toosan-1 exercise as a project, and we've adopted what the industry would recognize as a fairly standard stage gate process, which comprises 5 stage gates appraisal, [indiscernible] define, execute and commission. The next stage gate for Toosan is the select to define gate, and we anticipate and that's only a matter of weeks away. And that would allow us to complete the procurement of the long lead items that we need and to embark on a tendering exercise for the goods and services that we need to drill the well. The subsequent stage gate, which is currently scheduled for very early next year is the big stage gate, which is the defined to execute stage gate, which is effectively a commitment -- a final commitment to spend big money in pursuit of drilling this well. Understanding well cost with a much lower tolerance than the tolerance that we enjoy today is really the next major consideration to allow us to proceed.