Gulf Keystone Petroleum Limited (GKP) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Gulf Keystone Petroleum Limited Full Year Results Investor Presentation. 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 it receives during the meeting itself. However, the company can review all questions submitted today, and we'll publish those responses where it's appropriate to do so on the Investor Meet Company platform. Before we begin, I would just like to submit the following poll. And I would now like to hand you over to CEO, Jon Harris. Jon, good afternoon, sir.

Thank you very much for that introduction. Hello, and thank you for joining this presentation, following the announcement of our 2023 full year results this morning. I'm Jon Harris, I'm the CEO. I'm joined today by Ian Weatherdon, CFO, will be taking you through our financial performance in a bit. We're pleased to be able to speak directly to our retail investors who account for an important part of our share register. We are continually looking for opportunities to engage and receive feedback from all of our investors, and we are pleased that you have joined us today. After the presentation, we'll be happy to take your questions. Slide 2, please. Okay, slide 2 is a disclaimer. This is our regular legal disclaimer, and we'll leave you to review it yourselves. I'd like to remind you that the presentation is also available on the website, of course, you'll see it presented during this webinar. Slide 3, please. 2023 operational and financial highlights. 2023 was a challenging year with our operational financial performance materially impacted by the suspension of Kurdistan exports following the closure of the Iraq Turkey Pipeline on the 25th of March as well as continued delays to payments from our Kurdistan Regional Government. Having entered the year with significant production and development momentum, we were forced to take decisive action to reduce capital expenditures and costs, safely transition our operations to trucking and local sales in the second half of the year. In doing so, we have been able to protect the business and successfully adapt to our new environment while maintaining a rigorous focus on safety. Since the startup of local sales in July 2023, we've been able to more than cover our reduced monthly cost run rate of around $6 million and significantly reduce accounts payable. Excess cash generation is now being used to improve our liquidity position with our cash balance at $86 million as of yesterday, while we continue to review opportunities to further reduce costs. While local sales demand has been difficult to predict, and we continue to sell at steep discounts to Brent, volumes have rebounded since mid-January, and we are seeing strong demand in the near term with our low breakeven at current prices, providing downside protection. While there remains no time line for the restart of exports or repayment of our standing receivables, we continue to actively engage with government stakeholders and see significant value to be unlocked for our shareholders, Kurdistan and Iraq from securing a solution. Turning now to Slide 5, resilient in local sales environment. To start, I'd like to highlight our track record of successfully managing through challenging circumstances to ensure that we remain well positioned to realize the deep underlying value of the Shaikan Field when circumstances improve. With the increase in local sales demand since mid-January 2024, we have been able to ramp up production and move to 24/7 truck loading operations at both production facilities. Based on March, gross average sales to date of around 43,000 barrels of oil per day, we are currently loading around 215 trucks a day. We are pleased that the reservoir and our operations have responded well to the increase in demand. Subject to local sales demand and considering our limited capital program, which is focused on safety critical and upgrades and production maintenance expenditures only, we see the growth -- the current gross production potential of the field of between 43,000 to 45,000 barrels of oil per day. As ever, we continue to manage natural field declines, estimated and annualized 6% to 10% and the productivity of wells to avoid traces of water. We see robust local sales demand in the near term and are focused on maintaining our current strong performance. Looking further ahead, the local market remains difficult to predict with volumes and prices driven by local supply and demand dynamics. Nevertheless, we have downside protection to current volumes with our current gross production breakeven of around 22,000 barrels per day at current realized prices of around $25 a barrel. Next slide, please. 2023, a year of significant operational transition. Despite the volatility, we've been able to protect our business and balance sheet and successfully adapt to our new temporary environment. We ended the year with significant momentum with the Jurassic reservoir expansion project, driving production to record highs of over 55,000 barrels a day on several days in March '23 and good progress being made towards sanctions that fulfill development plan. Following the unexpected closure of the Iraq-Turkey pipeline, we lost access to our export route. We shut in the Shaikan field completely on the 13th of April and moved swiftly to wind down all expansion activity in order to aggressively reduce our spending and preserve liquidity. Following a period of negotiations and due diligence on local buyers, we were able to restart production and commence local sales on the 19th of July. All sales to date have been provided trucking apart from the brief period of utilizing our pipeline in reverse flow to a refinery in Erbil. Volumes increased steadily from July to October 2023 as we agreed terms with new buyers. Lower demand and volumes followed in November and December 2023 as our other producers in the region ramped up supply, local refineries became constrained and winter weather impacted trucking logistics and [Indiscernible] for certain refined products. Despite the fluctuation, we more than covered our monthly expenditures in the second half of the year. In 2024, we have seen a rebound in volume since mid-January with gross average sales year-to-date of around 33,000 barrels of oil per day. The increase reflect higher market demand for certain refined products such as heavy fuel and the easing of seasonal logistic challenges as the weather in Kurdistan has improved. The current realized price is around $25 a barrel, which has reduced since the second half of last year, in line with local market pricing. Slide 7, please. estimated gross 2P reserves. As I mentioned, we have been pleased with how the fields have responded to recent local sales demand, and we've seen no degradation to the reservoir from the extended shut in. However, we do not expect to consider a return to fill development until exports have restarted, and we have confidence in KRG current production payments, the payment of our arrears and the fiscal and commercial environment. Consequently, we have prepared an internal estimate of gross 2P reserves at the end of 2023, incorporating a delay to development. I acknowledge it is hard to predict when exposed to [Indiscernible]. For modeling purposes, we have assumed that they restart the in Q4 of 2024, but the pipeline may open earlier or there could be further delays. Once exports resume, we will start planning and preparation activities for a potential return to investment once our sales payments normalize. We are currently assuming that we will resume facilities expansion activities in 2025 based on an assumed restart of pipeline exports in Q4 of 2024, which include water handling that we see as a priority to ensure long-term well productivity. Also, we assume a return to drilling -- development drilling in the first half of 2026, as it will take time to procure a rig and acquire long-lead items. The estimated development delay drives an 8% reduction in gross 2p reserves to 458 million barrels as of the 31st of December 2023 as recoverable volumes are pushed beyond the end of the license period in 2043. I'm sure that there are further optimizations that could be considered to recover our reserve position, but this will be subject to technical and commercial work once the pipeline is open. Despite the adjustment, the Shaikan Field remains a large, underdeveloped asset, as demonstrated by our reserves production ratio of 28 years, using production of 44,200 barrels oil per day, which was 2022's production number, our last year of full export sales. The reserves to production ratio of 28 years underlines the significant upside development potential of the Shaikan Field, and compares favorably to our peers in Kurdistan at almost double our closest peer. Slide 8, significant potential upside. Before I hand over to Ian, I'd like to highlight the significant value that we believe could be unlocked for our shareholders and broader stakeholder base from an exports restart solution and a return to higher netbacks and regular payments. We have outlined on this slide what an improvement in our operating environment could mean for our cash flow generation capability, capital allocation and sustainability strategy. If you look at box one, a return to exports with clarity on parts and future payments could be transformative for our cash flow generation. Selling in international oil prices again would more than double the current realized prices we are achieving from local sales. For the unrecovered cost from previous investments of around $224 million gross would provide significant support for cash flows. The repayment of the $151 million of outstanding receivables where KRG would add further upside. Box 2, cash flows would be used to ensure that we maintain a strong balance sheet and will be invested wisely. We will only consider material investment in the field with an export restart, KRG payment normalization and a stable and transparent fiscal and economic environment. Once confident in the investment environment, we would expect a return to field development. Box 3, we continue to believe that distribution of excess cash by way of either dividends or share buybacks is important to reward shareholders in line with our program track record prior to the Iraq-Turkey pipeline closure. As the operating environment and the company's liquidity position improved, we will keep under review our capability to reinstate distributions. In addition to our strategic commitment to shareholder distributions, our highly discounted current equity valuation provides significant upside to investors. And finally, Box 4, a return to investment would enable us to reinvigorate progress towards becoming a more sustainable business. Due to the current liquidity situation, we have paused all work on decarbonization opportunities, including our progress towards sanctioning a gas management plan and the target to more than half Scope 1 emissions intensity. There's greater clarity on the investment environment, we plan to review and reinstate this target. In the meantime, we are in the early stages of exploring alternative options to the gas management plan with a focus on optimizing scope, implementation timing and costs. Beyond emissions, there's a significant potential economic value to be unlocked for both Kurdistan and Iraq through the restart of exports and the reestablishment of a constructive investment environment for international oil companies and investors. Billions of dollars of revenue could begin flowing again into the economy, while the significant further investment needed to maintain and grow Kurdistan's oil production would benefit local suppliers and communities. We continue to work as a company and industry to push for a solution. With that, I will now hand you over to Ian for the financial review.

Great. Thank you very much, Jon. Before I jump in, I'd just like to reemphasize what Jon has said, really appreciate this forum to have a more direct line with our retail investors. You have and always have had an important part in terms of liquidity and trading in this company, and I'm certain that, that will continue in the future. Now turning to the financial performance highlights. As everybody is aware, in 2022, we delivered record profitability and cash flow generation, which enabled us to reward shareholders with dividends of $215 million. Also, importantly, we repaid our $100 million bond, and that was ahead of our maturity and that left us debt-free. We believe that it is important to maintain a conservative financial position that provides us with flexibility to manage through the challenges that we typically face in this environment, which is high risk, high return. As a result, we entered 2023 in a position of financial strength with cash of $120 million and no debt. This strength was vital to enable us to withstand the impact of the suspension of exports and continued delays to KRG payments, which impacted our financial performance materially. Soon after the export pipeline was shut in, we took steps to aggressively reduce our costs with a significant step-down in activity and staffing levels. This is evident from the reduction in net CapEx that you see on the bottom left, where you see it going in the second half down to $11 million. Following the succession, the successful transition to local sales in July 2023, we've been able to more than cover our reduced monthly cost, enabling us to pay down accounts payable. And we exited 2023 with $82 million. And as you can see in the top left chart, this is roughly in line with the net cash level over the past few years. Next slide, please. Adjusted EBITDA decreased from just under $360 million in 2022 to $50 million in 2023. While we enjoyed record production levels in the first quarter, gross 2023 average production halved relative to 2022 to just under 22,000 barrels a day with no revenue from the 25th of March to the beginning of local sales on the 19th of July. Production in the second half of the year was sold to local buyers at an average realized price of about $30 a barrel, reducing average realized prices for the year to around $41 a barrel versus the average in 2022 of $74 a barrel. Realized prices for local sales, which are currently at around $25 a barrel are driven by supply and demand dynamics in the local market. While local sales have been sufficient for us to cover our costs and generate excess cash flow, they still remain at deep discounts to data Brent. We have consistently emphasized the importance of being a low-cost operator, and we have one of the lowest cost structures in the industry. Low cost enable us to maximize cash flow and provide downside protection. With the closure of the pipeline, we completed a detailed analysis of our cost structure and further reduced OpEx and G&A. Finally, we incurred one-off costs of around $10 million related to the wind down of expansion activity and monetization of inventory. About half of this amount was noncash. On to the next slide. The impact of lower adjusted EBITDA and increase in delays to KRG payments drove a significant reduction in free cash flow from $267 million in 2022 to a cash outflow of $13 million in 2023. The closure of the pipeline towards the end of March resulted in only 2 KRG payment receipts in the year, with the last payment being received in March 2023 for September 2022 sales. Accounts receivable totaling $151 million net to Gulf Keystone for October 2022 to March 2023 oil sales remain outstanding. The resumption of pipeline exports and consistent budget transfers from Iraq to Kurdistan are likely required before we see a return to more normalized payments and the KRG providing international oil companies, a plan to address the outstanding arrears. While local sales were at reduced prices, they were an important part of our cash flow and enabled us to more than cover our costs in the second half of the year, allowing us to pay down accounts payable. Local sales and cash receipts during the period were about $44 million. To manage credit risk, buyers are required to prepay for all local crude purchases. Our net entitlement is currently 36% of gross sales. Capitalizing on the momentum from 2022, we had planned to spend $160 million to $175 million on drilling and facilities expansion activities in 2023. With delays in reopening of the pipeline, we moved quickly to reduce expenditures, resulting in a significant reduction in net CapEx to $58 million. Following the payment of a $25 million interim dividend in March, we canceled the payment of the 2022 final dividend to preserve liquidity. Local sales, cost reduction and managing accounts payable have supported our liquidity position. Our cash balance as of yesterday was $86 million. As Jon previously mentioned, we continue to believe distributions, either by way of dividends or buybacks are important to reward shareholders. As the operating environment and the company's liquidity position improve, we will keep under review our ability to reinstate distributions -- now looking at our cost structure. Gulf Keystone has consistently maintained strict control of its costs and has a track record of producing one of the lowest operating costs and G&A per barrel among Kurdistan and international peers. While costs have been increasing in the first quarter of the year reflect an increased operational activity and investment in the Shaikan field, following the suspension of exports, we moved quickly to reduce our expenditures to preserve liquidity. Operating costs were down 14% relative to 2022 to $36 million, reflecting the shut-in of production as well as cost-saving initiatives. The increase in gross OpEx per barrel to $5.60 is primarily a function of the 50% reduction in annual production to just under 22,000 barrels of oil per day. As production levels increase, we expect unit operating cost to decrease. Other G&A expenses in the year were 14% lower relative to 2022 at around $10 million. The reduction was principally driven by cost savings and no bonus payments to staff. These were partially offset by nonrecurring corporate costs of $2 million in the first half of the year. Now moving on and looking at our cost and our balance sheet. Aggressive cost -- aggressive cuts to net CapEx, OpEx and G&A reduced average monthly cost to below $6 million in the second half of the year. We expect to maintain the monthly expenditure run rate at or below $6 million in 2024, while we continue to review further cost reduction opportunities. It is important to note the run rate includes costs associated with maintaining full production capability to capitalize on increased local sales as is currently the case or a reopening of the pipeline. As Jon mentioned, we have a lean work program in 2024, equating to an estimated $20 million of net CapEx. Expenditures are planned for safety-critical upgrades and production maintenance. The transition to local sales has enabled us to cover our monthly costs and use excess cash generation to strengthen our balance sheet. Accounts payable, which includes trade payables and accrued expenditures were down by almost 50% in the second half of the year to $26 million. With the rebound in local sales volumes in 2024, we have now paid all remaining overdue invoices. And today, we stand at an accounts payable balance that is about 1/2 the 2023 year-end balance. At the same time, we have increased our cash balance to $86 million. Looking ahead, we are focused on driving local sales and maintaining tight control of our cost structure with the objective of further strengthening our liquidity position. To illustrate the potential, current gross average sales of around 43,000 barrels of oil per day generates around $6 million of monthly free cash flow at a realized price of $25 a barrel. With that, I'd like to now turn it back to you, Jon, to wrap up.

Okay, Slide 16, outlook. Thanks, Ian. To summarize, following a challenging year, we have successfully protected our business and adapt to the current local sales environment in which we are resilient and cash flow generative with significant upside exposure. Looking ahead to the remainder of 2024, we are focused on 3 priorities. First, we are working to maintain our recent strong local sales performance in a safe and sustainable manner. While the market remains difficult to predict, we see robust demand in the near term and are planning to maintain the production potential of the field of between 43,000 to 45,000 barrels of oil per day with minimal investment. Second, we are minimizing costs and improving liquidity. We expect our monthly cost run rate to remain at or below $6 million in 2024, and we continue to look for ways to minimize costs while retaining the operational capability we need to respond to local sales demand and the restart of exports. Following the significant reduction in accounts payable, we are now using excess cash to further strengthen our liquidity position. And finally, while there remains no defined time line, we are continuing to engage with government stakeholders to push for an export start solution. We believe that this could transform the cash flow generation capability and value proposition of our business, underpinned by our unwavering commitment to capital discipline. We continue to believe distributions to shareholders are important as the operating environment and company's liquidity position improve, we will keep under review our capability to reinstate distributions. With that, I'll now hand back to the operator for questions.

Perfect. Jon, Ian, that's great. Thank you very much indeed for your presentation this afternoon. Ladies and gentlemen, [Operator Instructions] Please do continue to submit your questions just by using the Q&A tab that situated on the right-hand corner of your screen. But just while the company take a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your investor dashboard. Ian, Jon, we did receive a number of pre-submitted questions ahead of today's event. And as you can see there in the Q&A tab, we've received a number of questions throughout your presentation this afternoon as well. So firstly, thank you to all of those on the call for taking the time to submit their questions. And Jon, Ian, if I may, at this point, hand over to you just to read out those questions and give your responses where it's appropriate to do so. And then I'll pick up from you at the end.

Great. Thank you very much. Right, first question, [Dear executive team], is there any scope to reintroduce dividends whilst only selling oil locally or are dividends wholly dependent on resuming exports through Turkey? Do you like to take that?

No, I'd be happy to do that. A very, very important question. Really maybe just stepping back and thinking first off about our strategy, our strategy has always been focused on profitable production growth, balanced with returns to shareholders, while maintaining a conservative financial profile in order to provide us with flexibility. Of course, as we move through different stages in Kurdistan, we have to adapt to that. We've seen the adaptation to local sales. And the near-term focus has been on strengthening our balance sheet. You've seen the big step down with the support of our suppliers and actually reducing accounts payable to now a more operating level seeing cash start to turn the corner. So we're starting to look at opportunities to further strengthen that financial strength. Now that said, we still see, as we navigate through this, the importance to maintain some degree of financial cushion in order to make sure that we maintain focus on the price, which is, as Jon had mentioned, over 450 million barrels of 2P reserves. That's a massive resource that can pay dividends to shareholders over an extended period of time. Now that said, where we sit here today, looking at our prior demonstrated commitment to distributions, we started with share buybacks, and we've been paying dividends since 2000s -- share buybacks and the dividends in 2019. Sector-leading dividends in 2022 before we had to slow things down. If things were to carry on a trajectory where we are able to at the current level, maximize local sales, we'll continue to maintain a very low cost structure, you will, over time, see the cash balance increase. We do have ongoing discussions at the board around looking at our liquidity, our cash flow, our cost structure and the like. So I do see, notwithstanding the fact that our preference would be to return to exports and growth and really drive the true underlying value of the asset, there could be an opportunity as we travel through towards the end of the year of potential dividends to shareholders, it is critical. We recognize that our shareholders have been very supportive of us, and we need to reward our shareholders for that support along the way.

Great. Second question, if it's so advantageous to all stakeholders to restart exports through the trans Turkey-Iraq pipeline, why is it taking so long to complete the negotiations? Who is profiting from the disparity between the $25 oil price we get and the circa $85 Brent price today, this is an impediment to exports restarting. The first part of the question about why is it taking so long to complete the negotiations. I think firstly, if this was just a purely economic or commercial decision, then it would be quickly resolved. But there's clearly a lot of politics involved between Baghdad and Erbil, and some of the political machinations are continuing, and you'll see that some of that is reported in the press and some of it isn't reported in the press. And those have to run that course in order to ultimately resolve the budget, which is what it's going to take to free up payments to the KRG, and to get oil flying again. Who is profiting from the disparity between the $25 oil price and the $85 Brent price? Well, currently, there's a level of pricing for products, not oil. So obviously, we sell crude oil and process, and we don't possess the ability to process that at the moment or to refine it. And therefore, we are a price taker in the local market for crude oil and not for product. Obviously, it costs money to refine crude oil into products and then there's a price to get that product to market. But unfortunately, we are a price taker. And actually, the local market is somewhat of a [Indiscernible], and it's restricted -- we're restricted to a few buyers. And that's why there is -- price disparity. Is there an impediment to export restarting? Is this an impediment? I don't think so. Ultimately, I think the government of Iraq is very focused on if it's got to pay a fair budget share to the Kurdistan region. It will certainly be seeking to get the revenue from the oil potential to pay for some or in fact probably all of their budget allocation. Okay, next question. The recent Iraq-Turkey pipeline issues over the past year have once again highlighted our need for geographical diversification. What are the company doing in this regard? And what is the medium term plans for diversification? Well, I guess I think you will understand that at the moment, we're currently focused on improving our liquidity position, having being in what I would consider a difficult position last year. And we're also, of course, pushing for exports to realize the upside that, that would bring as we've talked about. Of course, we will consider value-accretive opportunities outside of that. But that's, I think, once we've got -- once we've reestablished exports and we've got a healthy cash flow, and we've reestablished our share much. Next question. May I ask if you have received further assurances from KRG concerning payment of arrears. So what we've heard is that the KRG are committed to honoring our existing contracts, and that includes the payment of the arrears. I think that's what in a simplest way I can answer that. So I'm not going to further expand on it. The pipeline is currently closed. What is stopping GKP in tracking their oil as an export product and not sell as a local at a huge discount. Ultimately, the export of crude oil is controlled, and we would clearly get -- we would attract the eye of the Iraqi government if we were to export as crude oil. And the trucking of products, obviously, we don't have the products -- it's not a refined product, it's crude oil that we sell. The trucking of product is controlled, and it's licensed by the KRG. So we have to enter that market and get a license. But first of all, we have to get access to being able to refine our crude oil in addition to that. Okay, what's the latest on the pipeline discussions, KRG Turkey, Iraq. Okay, I think what you've seen in the market is that the KRG and Erbil continue to discuss this. It's not just a simple question around opening the pipeline, it's also a conversation around our budgets and budget payments and regular budget payments. It's also a conversation about carving out, potentially carving out payments of civil service in KRG to be funded by the central government, which some people in government in Erbil support and some don't. So that's causing some difficulties. But also, there's been some, sorry -- the FGI, the federal government of Iraq and the Supreme Court in Iraq has also met our interfering with the election process within Kurdistan which is also causing some issues and some conversations about landing the outstanding pipeline conversations. With regard to Turkey, I would say Turkey have made it very clear that they are pipelines open over the business and available. And I think we'll see that further reinforced -- you would have read recently around the security systems that Turkey wants with from Iraq. And with regard to support against the PKK, the Turkish-Kurd movement. And I think they've got those assurances recently, and I think there will be, I think Erdogan, the President of Turkey is traveling to Baghdad probably little later in April, beginning of May. And the conversations are -- or the agenda is further discussion on security support, plus water conversations that I think Iraq is very keen to land and secure further water, further water concessions. And lastly, but by no means least, the oil export through the pipeline, I think, will absolutely be on the agenda. So I think the things are progressing. And plus also President, Al Sudani, will be of Iraq is tapping to the U.S. following the Eid holiday after Ramadan in last part of -- other part of April. And we're expecting there -- we're obviously loving as part of epicure. We're loving the U.S. government to push Sudani to resolve the outstanding issues and get the pipeline open and oil flowing again.

Jon, if I may just jump back in the room. Thank you very much indeed for being so generous for your time then addressing all of those questions that came in from investors. And of course, we will be asking you back all of the questions we missed today as well as any further ones that do come through back immediately after the presentation has ended, just for you to review and add any additional responses, of course, where it's appropriate to do so, and we'll publish all those responses out on the platform. But Jon, perhaps before really just looking to redirect those on the call provided you with their feedback, which I know is particularly important to yourself and the company. If I could please just ask you for a few closing comments to wrap up with, that would be great.

Yes. Thank you very much. So I think just in terms of closing comments, what I would like to do is highlight resurgent rebounding local sales. We've seen it rise from kind of quite a low stake in January to year-to-date, 33,300 barrels of oil per day, and oil has seen a real surge in March, going up to -- we've averaged just over 43,000 barrels a day in March -- beginning of March to date. So hopeful that we see continued strong demand locally. With that, we currently have -- we're strengthening with the excess cash we are generating. We're strengthening our balance sheet. So we see it now at $86 million in cash at the moment. and all our accounts payable are now current, which was obviously a big issue for us at the middle of last year when we couldn't see through to even local sales. So we think we've managed that situation quite well to get our accounts payable down to almost -- well, down to being current, which is a great achievement. So now being cash generative in the current environment with upside potential from the exports restarting and payments normalizing, we see our share as a potential fantastic value currently. Thank you very much.

Perfect. Jon, that's great. Thank you once again for updating investors this afternoon. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in all of the management team can really better understand your views and expectations. This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of Gulf Keystone Petroleum Limited, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon. See you all.