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 [Operator Instructions]. Before we begin, as usual, we would just like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to CEO, Jon Harris. Jon, good afternoon, sir.

Thank you for the introduction. Welcome to Gulf Keystone's 2024 Full Year Results. My name is Jon Harris, and I'm the CEO. Today, I'm joined by Gabriel Papineau-Legris, our CFO, who will be taking you through our financial performance. I'm also joined by Aaron Clark, our Head of Investor Relations, who will be moderating the Q&A at the end. Over the next few slides, we'll run through our operational and financial performance in 2024 and the outlook for the remainder of 2025. Following that, we will open up the line for questions. Please see next slide. This is our regular legal disclaimer, and I'll leave you to review at your leisure. I'd like to remind you that the presentation slides are available on our website. Next slide, please. We delivered a strong operational and financial performance in 2024, a year of recovery following the suspension of pipeline exports in 2023. We returned to consistently strong production levels with volumes almost doubling supported by a full year of local sales. We did this safely with the 0 lost time incidents in the year. We continue to extend this track record and have been operating almost 800 days without an LTI. We remained extremely disciplined on capital and costs with the lowest capital budget we have seen since 2017. Combined with higher production over that of 2023, this discipline underpinned free cash flow generation, enabling us to restart shareholder distributions totaling $45 million in the year. We are pleased to announce today the declaration of a $25 million interim dividend in line with our current shareholder distributions framework. 2024 distributions supported top quartile shareholder return of 24% in the year versus our Kurdish and international E&P peers. As we focus on maximizing shareholder value from local sales, we also continue to engage with government stakeholders regarding an export restart solution, which I will touch on shortly. Turning now to our production and local sales performance and outlook. In 2024, we returned to consistently strong levels of production with gross average production of 40,689 barrels of oil per day. After a slow start in Q1, during which the local market was developing to absorb increased supply from producers in the region, we saw strong underlying market demand from Q2 onwards. This enabled a number of months of high production at levels we had last seen prior to the shut-in of the Iraq Turkey pipeline or ITP. In fact, we had our best month of production ever in September of around 48,500 barrels of oil per day. Strong underlying demand from local market was tempered by temporary disruptions from a lack of trucks during regional holidays, in particular, the 2 Eid celebrations in April and June and politically motivated road closures related to the Kurdistan regional elections in October. Production was also reduced as planned during the shutdown of PF-1 in November as we installed safety upgrades and carried out maintenance. Realized prices around $27 a barrel in the year, as with production volumes, we saw lower prices in Q1, which then improved and stabilized in the second half of the year at around $27 to $28 a barrel. Looking ahead, we are pleased to see local demand -- local market demand in the near term remaining strong. Gross production has averaged around 46,400 barrels of oil per day so far this year, with realized prices averaging between $27 and $29 a barrel. In light of our year-to-date performance, we are pleased to reiterate our 2025 gross average production guidance of between 40,000 to 45,000 barrels of oil per day. The guidance remains subject to stable local sales demand and continues to reflect a number of assumptions, including the estimated decline of the field of around 6% to 10% per year, the expected impact on production from the planned PF-2 shutdown later in the year and the estimated reduction in truck availability during regional holidays. Should we see any unforeseen disruptions in the local market or the restart of exports, we expect to review guidance. Moving on to field activity. We continue to be extremely disciplined in field investment and costs in the current local sales environment. At the same time, we are focused on maintaining safe and reliable production capacity. In 2024, we spent $18 million of net CapEx, primarily on executing safety upgrades at PF-1, maintenance and some production optimization. The PF-1 safety upgrades involve the installation of new integrated control and safety system, while vessels associated with the Flare and Amine system were replaced to handle higher pressures, as you can see from the pictures on this slide. Looking ahead to this year, we are executing a very similar work program to 2024 at PF-2. We are planning to execute safety upgrades and maintenance accounting for around $20 million of net CapEx. The work is currently scheduled for the final quarter of this year, and we will require to shutdown of the facilities for around 3 weeks, similar to PF-1 in 2024. We're also expecting to spend around $5 million to $10 million of net CapEx on production optimization, an increase versus last year. The program consists of a number of low-cost, quick payback well interventions. In total, we therefore expect net CapEx this year of between $25 million and $30 million. In addition to the current program, we are exploring additional plant initiatives to enhance production, in particular, water handling at PF-2. It is too early to provide details today, but we are firming up options and expect to review them later in 2025 based on our liquidity position and the operating environment at the time. Next slide, please. We are continuing to engage with government stakeholders regarding a solution to restart Kurdistan exports. We and other IOCs have held a number of meetings with the Kurdistan regional government and the federal government of Iraq. We have been seeking more detail around agreements on payment surety, receivables repayment and the preservation of our contractual rights. Discussions are ongoing but remaining conclusive, and we stay hopeful of reaching a solution in the near future. We are ready to restart exports quickly, provided we have the right agreements in place. We continue to see a number of sources of potential value to Gulf Keystone from the restart. A potential return to international prices, repayment of our outstanding receivables and recognition by Federal Iraq of the legitimacy of the Kurdish oil and gas industry could all be transformative for our cash flow and the cost of capital. The Shaikan Field has significant untapped potential with gross 2P reserves of 443 million barrels at the end of 2024 and reserves life of around 30 years using 2024's production. The restart of exports would be a significant positive for Kurdistan and Iraq, both in unlocking additional revenue from a vital source of global oil supply, which is currently selling for significantly discounted prices, but also by signaling that Kurdistan and Iraq are open for business and are attractive destinations for international investment. With that, I will now hand over to Gabriel for the financial review.

Great. Thanks a lot, Jon. We delivered a much improved financial performance in 2024 relative to 2023 as we were able to meet increasing demand from the local sales market with more efficient operations. Increased EBITDA, combined with minimal investment in the Shaikan Field underpinned the return to free cash flow generation, in turn, funding $45 million of shareholder distribution and strengthening our balance sheet. Next slide, please. Adjusted EBITDA increased by 52% to $76 million in 2024. The improvement was primarily driven by the 86% increase in gross average production to over 40,600 barrels of oil per day. Higher volumes more than offset the decline in average realized price to $26.8 per barrel as we transition to a full year of discounted local sales and the increase in operating costs associated with a full year of production capacity after the temporary shut-in during the second quarter of 2023. Adjusted EBITDA also benefited from the 59% reduction in share option expense from $10.8 million to $4.4 million, reflecting the lower vesting of the LTIP award last year compared to 2023 and the absence of one-off costs incurred in first half 2023 related to the wind down of activity. Turning now to operating costs and G&A. We continue to exercise tight cost control while maintaining and enhancing the production capacity of the Shaikan Field. As production increased, gross OpEx per barrel decreased by 21% to $4.4 per barrel, reaffirming our position as a leading low-cost operator among our Kurdistan and international peers. Other G&A expense were slightly higher at $11.4 million versus $10.5 million in 2023, with the reinstatement of performance-based staff bonuses and the one-off retention awards, partly offset by the absence of nonrecurring corporate costs in the first half of 2023. Combining OpEx and other G&A expenses with our capital expenditures, our average run rate in 2024 was -- sorry, $6.8 million net per month below our guidance for the year of around $7 million per month. Looking ahead, we reiterate our guidance as we expect stable operating costs within the range of $50 million to $55 million net and a reduction of other G&A expense to less than $10 million. Next slide, please. The stronger adjusted EBITDA and the lower net CapEx enable us to generate $65 million of free cash flow relative to a $13 million outflow in the previous year. Net CapEx reduced by 69% to $58 million in 2023 to $18 million in 2024, reflecting our lean work program compared to the busy expansion work that were in progress prior to the ITP closure. Free cash flow generation has strengthened our balance sheet, increasing our cash balance from $82 million at the end of 2023 to $102 million at the end of 2024. Liquidity has further improved so far this year, supported by the strong local sales and the cost control with our cash balance as at yesterday of $115 million. Moving now to shareholder distributions. We have a strong commitment to shareholders' return, provided with we have sufficient cash available to fund the liquidity needs of the business and to manage our operating environment. That's evident from our track record over the years, as you can see from the chart that we've completed or declared over $500 million of dividends and share buybacks since 2019. Throughout, we have balanced shareholders' return with investment in profitable production growth while maintaining an appropriate balance sheet to navigate the operating environment in Kurdistan as well as the commodity cycle. Last year, we were pleased to restart shareholder distributions following the decision in 2023 to suspend our ordinary dividend policy as a result of the ITP closure. By the end of 2024, we have been able to pay total distribution to shareholders of $45 million, comprising of $35 million of dividends and the completion of a $10 million share buyback program launched in May. We are pleased today to announce the declaration of a $25 million interim dividend for payment in April. This is the first semiannual dividend to be paid under the shareholder distribution framework that we announced last October. Under the framework, the Board will review the company's capacity to declare a dividend at its full year and half year results. In addition, the Board will continue to consider share buybacks opportunistically throughout the year following the expiry today of the program launched in October 2024. When assessing our distribution capacity, the Board looks at a number of factors regarding the liquidity needs of the business and the operating environment. The primary reference point is typically the next year of CapEx and costs to fund essential investment in the Shaikan Field. The Board also looks at the outlook of the local sales and any potential liquidity needs of the business, including for the transition to the pipeline export for which the actual payment terms are still unknown. With that, I will now hand it back to Jon for wrap up.

Thanks, Gabriel. To summarize, we are really pleased with our performance in 2024 and have entered 2025 in a strong position. Looking ahead, we remain focused on 2 priorities. First, we are continuing to maximize shareholder value from local sales. We have reiterated today our annual production guidance of between 40,000 to 45,000 barrels of oil per day, subject to stable local market demand. With the delivery of our CapEx and cost guidance, that would enable generation of free cash flow, underpinning our continued commitment to shareholder distributions, evidenced by the announcement today of the $25 million interim dividend. Secondly, we are continuing to work towards unlocking significant potential upside with the restart of pipeline exports. We are continuing to engage with the KRG and Iraqi government following recent meetings, and we seek agreements regarding payment surety, receivables repayment and contractual terms. We are ready to quickly restart exports with the right agreements in place. With that, I'll now hand you back to Aaron to take your questions. Thank you.

Perfect. Jon, Gabriel, if I may just jump back in there, thank you very much indeed for your presentations this afternoon. [Operator Instructions] I'd just like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can all be accessed via your investor dashboard. Guys, as you can see there, we have received a number of questions, and thank you to all of those on the call for taking the time to submit their questions. But Aaron, so at this point, if I may hand over to you just to chair the Q&A with the team. And if I pick up from you at the end, that would be great. Thank you.

Thank you very much, Jake. Yes. So thanks, everyone, for all the questions. So what I'm going to do, I'm just going to approach it thematically. So I think given the interest, we should start really with the macro environment. And then we'll move into capital allocation and returns. So starting with the macro and obviously specifically the pipeline. Clearly, there's a lot of negotiations and engagement ongoing. So the details are outstanding at the moment, but I'm just going to ask Jon and Gabriel the questions anyway. So let's start off with, can management please explain how we'll get paid through SOMO and details of how the production sharing contracts will work once the pipeline is open. Maybe, Jon, I could ask you to answer that.

Yes, certainly. So I think with regards to payment, we're looking at 2 mechanisms. Really one is a kind of payment in kind, which is offered by SOMO to all other producers in Iraq. And that will be picking up crude at [indiscernible]. The second one is what's been publicized where funds would get paid to the KRG and the KRG would on pass those funds to IOCs initially at $16 a barrel, and that's for gross barrels. So it's not a net amount, that's the gross. So for every barrel delivered, $16 would be made available. And if you net that to us, it's an increase on what we're currently getting. But that's really just to get started, then there would be an appointment of an international consultant to come up with the actual costs as per our contract. And then there'll be a reconciliation and then that point -- from that point onward, we would get paid as per our contract. So that's the outlined mechanism that we're working with at the moment.

Very good. Thank you, Jon. Next question, really around local sales. So our trucking sales going to be running if the pipeline is open? And if so, what percentage? And would this cover the cost of the company?

So at this point in time, the amount of production that remains in Kurdistan to meet local demand is being debated between the KRG and the Kurdish authorities -- the KRG and the federal government of Iraq, sorry. And I don't know what the answer of that is going to be. So our local sales going to be available? What prices are those sold out to the Kurdish refiners? Again, we don't know that. That's being debated as we speak. So I really can't shine any more light on that.

Okay. Thank you, Jon. So a couple here on receivables. So I think this question really sums up all of them. So what payment schedule will be acceptable to GKP on the receivables? And do we have any visibility on when they will be repaid?

Yes. No, thanks, Aaron. That's a really good question because, as you know, GKP has over $150 million net that is to us. So definitely, we keep a close eye on wanting this capital getting back to us. In terms of the mechanism, we've said that we really want to see a framework in place before we go back into the pipeline. Does that mean that we need to have all the money in our bank account? No. What we really want is the surety and the way it's going to be put on this, we haven't had formal kind of proposal put forward by the government. But what they've said is that they fully acknowledge that those debt to the IOCs they're committed to repay them. So I think it's probably going to be more a mechanism that will take some time. So if you recall, in 2019, 2020, we were owed some invoices as well that the government ended up repaying. So that's an example that over time, they could repay in excess of their entitlement to repay those arrears. But to tell you exactly is it's going to take how many months or from when, it's still unclear, but we're really focused on getting the entire amount of this back to us.

Very good. Thank you very much, Gabriel. So let's move on now to capital allocation and specifically field development and investment in the field. So a couple of questions on this. First, when will you start reinvestment in the field and how much would you invest? And there's a question linked to that, how quickly could you get back up to the 55,000 barrels of oil per day mark and what CapEx would be required to reach that?

Okay. So the one -- the first one is about timing of investment. Obviously, once -- if -- really to kick off the major investment, we would very much look at a cadence being established around our exports and payment of those exports, plus also the repayment of the arrears and having a kind of regime mapped out, as Gabriel alluded to. And we'd like to see that occurring before we would commit to restarting. I think the actual amount is that because it kind of -- it's a self-funding model, production sharing contract is a self-funding model, we would look to moderate our expenditures so that we were recovering a large portion of our costs as we were outlaying them. The actual volume of that CapEx, obviously, we're considering what we need to do to get back on to our development. And if you remember, our previous development was drilling a number of wells, probably a 2- or 3-year program, which is kind of sort of like somewhere between 8 and 12 development wells. And that would take our production back up to the sort of numbers that we were talking about before. But the timing and speed of that, like I said, will be subject to looking at this kind of circular funding model that the PSC allows for. So in terms of how quickly we would take to get back up to 55,000 is really a function of when we start drilling new wells because -- so I can't really answer that until we get into export and we see regularization of payments and only then we consider investing.

Maybe just the other point to add is around the water handling. This is something that we're looking forward later this year to come up with a recommendation or a decision because at the moment, both our facilities can only process dry oil, and it's normal in the life cycle of an asset that at some point, water will come. And we have identified some wells that could produce more if the facilities allow for water handling. So there is definitely some scope for increasing production back with the use of those water handling facilities or expansion to the PF-2 facility as primary. But it's a little bit too early to talk about kind of quantum time line, but it's definitely something on our agenda, on our focus, and we look forward to come back to the market this year with an update on that.

Very good. Thank you. Next question linked to investment. Will there be a revised CPR in the short term?

I think if we were to see exports restart and start to be funded, we would look to do a CPR probably towards the end of the year when we had clarity around our investment plans -- agreed investment plans with the state, and we could therefore map out what that meant in terms of ultimate recoverable resource in the PSC time frame.

Very good. Thank you. So let's move on to other areas of capital allocation. So maybe starting with returns, quite a few here on the distributions framework. Let me just start off with a couple of questions on the buyback program, which we announced expired today. So there's a couple of questions on why only a limited amount of shares were bought during that program. Gabriel, maybe I can give that one to you.

Yes. No, no, that's a good question. So the -- if you recall at the time of the moment that the buyback was expanded or the second program was launched, the share price was kind of in the mid- to low 120p. And we saw that there was definitely an attractive opportunity. But quite rapidly, the market has really bounced up, and we just wanted to pause because we looked at the last [indiscernible] or the last program in June or from May to July. And we saw that essentially the share price went up straight at the start of the buyback and went back straight before. So we wanted to be a little bit more tactical on that one. We saw that there's been across the whole sector, including the other IOCs, a strong run-up in the last few months. Obviously, the positive engagement on the export pipeline resumption has driven the share price to quite healthy level. And in the back of that, considering that we've distributed $25 million of capital today, we're just pause for the time being on the buyback. But absolutely, if we see that the outlook and the share levels are reducing, we'll definitely take -- we're going to continue to monitor and opportunistically, we'll look at additional programs and further buybacks because that's a great way to return capital to shareholders over an extended period of time.

Very good. Thank you. And then just on the dividend policy. So Gabriel, I mean, you explained this on your slide, but the question here is there are 2 payments for the year, one announced today, payment in April. And then when is the other payment to be announced, maybe we could just dig into that again.

Yes. No. So basically, the way we've wanted to -- it's a little bit too early to move into a policy like we had before where we said we're seeking a minimum of $25 million per year because there's still a bit of uncertainty in terms of basically the strength of the local sales. Obviously, it's been doing great, but there is still some uncertainty. Also very important to understand the transition back into the pipeline. From the operational side of it, it's relatively straightforward, but we really want to understand how that payment is going to come back to our pocket. So it's great to inject the oil, but if we don't get paid, it's not really helping us. So if you're thinking about the framework is that twice a year, like today with the announcement of full year results, the company looks at the excess cash beyond the needs of the next 12 months or so and the outlook of the sector. The other point in time during the year would be in our half year results, which is going to be in -- towards the end of August. And so basically, you have those 2 points twice a year that there's a rigorous assessment of the capacity of the company to come out, depending on how much we've been able to generate on free cash flow and the outlook. So watch this space later this year, there should be another point of review and some update with the [ aperture ].

Very good. Next question on M&A. So where does M&A currently sit within GKP's capital allocation priorities?

Yes. So at the moment, we're very much focused on Shaikan. There is -- as Jon said, there's a lot of untapped potential. And so we're really focusing on getting after this as we can, prior to the pipeline, but also beyond, continue to be very tight on our costs, generate free cash flow and bring the capital back to shareholders beyond what the company needs. Obviously, if we see some opportunities that are accretive in terms of cash flows to the business as it is, absolutely, we would consider this. But for us, it's not a must do and it's not strategic priorities. It's more a bolt-on that would come. But our focus is really on Shaikan, getting back into the pipeline, getting paid, getting the arrears and grow this asset that has still a lot of potential.

Thank you very much. I think with that question, we'll leave it there as we've answered a lot of the questions in, I think, by theme. So maybe I could just hand it back to Jake to close.

Absolutely, guys. And thank you very much indeed for being so generous of your time then addressing all of those questions that came in. And of course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended. But Jon, perhaps before really just looking to redirect those on the call to provide 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 just to wrap up with, that would be great.

Great. Thanks. Yes. Like you said, we would really value your feedback after this call, always looking -- seeking to improve our interactions with shareholders. I think just to summarize, I think we're really pleased with the performance in '24 and we entered '25 in a very strong position. Production is -- we're maintaining production. We're going to spend a little bit of money this year on -- as we've steered $5 million to $10 million on a lot of low-cost big impact well interventions, and we're hoping, therefore, to keep the production at similar levels. And like we said, we've steered our guidance between 40,000 to 45,000 barrels a day. That is subject to a stable local demand. And if we do put oil into the pipeline in the near future or even later in the year, we will then obviously come back and revise our guidance at that point in time about volumes and costs and everything else. Like I said, we're excited about the prospect of exporting crude again in the near future and what that does for the company in terms of generation of free cash flow and with underpinning our commitment to shareholders to distribute our free cash flow to those long-standing and new shareholders who are showing commitment by staying with us. So with that, I'd like to thank them for participating today and look forward to continuing the interaction in the future. Thank you.

Perfect, Jon. That's great. And 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 order that 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 to you all.