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

Good morning, and welcome to Gulf Keystone Petroleum's 2026 Half Year Results Presentation. At the end of today's presentation, there will be an opportunity for Q&A. [Operator Instructions]. I'll now hand over to Chief Executive Officer, John Harris. John, please go ahead. Thank you.

Welcome to Gulf Keystone's 2026 Half Year Results Presentation. I'm John Harris, CEO; and I'm joined by Gabriel Papineau-Legris, our CFO. Over the next few slides, we will discuss our operational and financial performance in the first half of 2026 and the current outlook for the business. We will then open the line for questions. Next slide, please. This is our regular legal disclaimer, and I'll leave you to review at your leisure. The presentation slides are available to view on our website. Next slide, please. Jobs Keystone delivered a resilient operational financial performance in the first half of 2026 during a period of significant regional disruption caused by the conflict between the U.S.A. and Iran. Our priority throughout has been the safety of our people. Despite the challenging circumstances, we are pleased to have extended our track record of 0 lost time incidents to over 3.5 years. Decisive active reducing expenditures borrowing the production shut-in enabled us to minimize cash outflow and maintain a robust balance sheet and pay a $12.5 million dividend to shareholders. We are pleased to have recently restarted production at exports with volumes continuing to ramp to prior levels. Looking ahead, we are focused on unlocking full production sharing contract entitlement or export sales at international prices, which could bolster cash flow generation in the second half of the year and support a return to production growth in 2027. Turning now to operational -- to the operational review. Next slide, please. Production in 2026 year-to-date has been impacted by 2 precautionary shut-ins related to the regional security environment, totaling almost 5 months. Gross average production in the first half of 2026 was 14,600 barrels of oil per day compared with 44,100 barrels per day in the first half of 2025 reflecting the shut-in from the 28th of February to the 23rd of June. Chakan field and the team on the ground responded exceptionally well to these disruptions. Prior to the first shut-in, production has exceeded 44,000 barrels of oil per day on several days in late February, thanks to the completion of several well workovers. Following the restart on the 24th of June, the field ramped up quickly to exceed 45,000 barrels of oil per day before the second shift in on the 19th of July. On August 16, we were able to restart production again following the extension of the tripartite interim export agreements and our view of the regional security environment. Gross volumes are currently approaching 40,000 barrels of oil per day and well activities are underway to increase production to prior levels soon. Our focus for the remainder of 2026 is completing the ongoing ramp-up and maintaining stable export sales, subject to the stable security environment continuing. Next slide, please. Investment and activity in the first half of 2026 is focused on the enhanced production enhancing production and improving safety and reliability of our facilities. Almost half of the $18 million net CapEx in the period was spent prior to the shut-in on the year on 28th of February. Subsequently, we moved quickly to moderate expenditures and preserve cash. Nonetheless, we have actively continued to progress safety critical and strategic projects during that period. In particular, the installation of water handling facilities are to. We're making good progress and remain on track for full start-up in Q1 2027. Once operational, the project is expected to unlock 4,000 to 8,000 barrels of oil per day of incremental gross production above the baseline expand total capacity to around 77,000 barrels of oil per day and reduced reservoir risk. Looking ahead to the remainder of the year, we will continue to further progress the work program provided production remains online. We are also positioning for a return to field development and drilling in 2027 once we have unlocked full production sharing contract in title for export sales at international prices. Next slide, please. Despite the disruption to production this year, the tripartite interim export agreement signed in September '25 between the IOCs, Kurdistan regional government and Federal Government of Iraq have worked effectively. IOC remuneration has improved relative to local sales and payments have been consistent with our delay following crude liftings. Realized prices in entitlement invoices have been very robust. With the Sika discount to Brent in the first half of the year at around $9 a barrel. The decrease in discount relative to Q4 2025 has been driven by strong demand for cook blend of crude marketed at Chan from the Iraq-Turkey pipeline. Due to the market disruptions caused by the U.S. Iran conflict, some cargoes of Kurdistan Group were sold at a netback price, which included a premium to the Cook blend official selling price. We will keep a close eye on how the discount evolves going forward, but it is too early at this stage to provide long-term guidance. In June, the independent consultant review of IOC invoices and contractual costs were submitted to the government of Iraq. Gulf Keystone and other IOCs are now focused on reconciling export sales since September '25 to international prices. As you can see from the chart, we have a top-up receivable on our balance sheet of around $80 million net to Gulf Keystone. This is estimated value for the differential between cash received to date of $30 a barrel and international prices in the entitlement invoices is subject to the implementation of the independent consultants review. We are seeking to recover the receivables through the commencement of a dishoThings in September 2026. The interim export agreements have also been extended for 6 months to the end of January 2027. This was the final step enabling the recent restart of export and followed the 1-year extension of the Iraq-Turkey pipeline agreement earlier this month. Our focus is now on replacing the interim arrangements with longer-term agreements at international prices. Next slide, please. Chico remains a large, long-life asset with significant growth potential. As of the end of 2025, the Jurassic reservoir had 416 million barrels of internally estimated gross 2P reserves implying a reserve life of 27 years of 2025 production levels. The field also contained 311 million barrels of estimated gross contingent resources including 157 million barrels in the Triassic reservoir based on the latest CPR from 2022, returning to stable exports and payments at international prices would provide the foundation for renewed investment in production growth. In preparation, we are discussing a revised field development plan with the M&R and positioning for a credential return to field development and drilling in 2027. The draft field development plan targets a more than doubling of current production from the Jurassic a test of the trial to gross or up to 10,000 barrels a day and the elimination of routine gas flowing through a gas management plan. We will provide further updates as we firm up our plans. With that, I'll now hand over to Gabriel for the financial review.

Thank you, John. We delivered a resilient financial performance in the first half of 2026. By reducing expenditures, we were able to minimize the free cash outflow protect our balance sheet and return cash to shareholders while continuing to progress safety critical and strategic projects. Next slide, please. Adjusted EBITDA increased 26% to $52 million in H1 2026 compared with $41 million in the first half of 2025. The increase was driven primarily by considerably higher realized prices reflected in entitlement invoice for export sales and as well as lower operating costs. This more than offset the impact of lower production from the temporary shut-in of the Shaken field. Next slide, please. By taking decisive actions to reduce costs, we have been able to protect our balance sheet through the shut-in while maintaining our ability to quickly restart production at full capacity. Operating costs reduced by 25% to $20 million in the first half of the year relative to H1 2025, while other G&A expenses were 6% lower at $4.3 million. OpEx per barrel, while elevated over the entire period due to the lower production denominator was around $4.4 per barrel prior to the February shut-in, in line with prior years. G&A expenses were also down in H1 despite incurring the one-off costs related to the Oslo turalisting. Looking ahead, we remain focused on exercising strict custom draw following the recent restart of production and exports. Next slide, please. The reduction in CapEx and costs during the period enabled us to limit the free cash outflow to $2 million. Working capital outflow primarily reflects the difference between cash received at around $30 per barrel and the international prices reflected in the entitlement in horses. As John mentioned, the difference is accrued as a top of receivable, which increased to around $80 million net to GDP at the end of the period. To begin recovering the receivable, we are seeking the allocation by some of additional liftings of crude in September 2026, with payments expected no later than 30 days after scheduled cargoes. GKP's net entitlement of Shaken fuel sales was approximately 36% in the first half of the year, in line with prior periods. Future net entitlement will depend on realized prices, production levels and the outcome of the ongoing commercial negotiations with the Ministry of Natural Resources. A return to international prices would quickly deplete the current report Costco incentivizing future investments. Next slide, please, GKP's robust balance sheet and ability to moderate expenditure enable us to weather disruptions in the first half of the year, while paying a $12.5 million semi-annual dividend in April. We remain committed to returning excess cash to shareholders. We are, therefore, pleased today to announce an interim semiannual dividend of $10 million for payment in September 2026. The dividend decision follows a careful consideration by the Board of GKP's operating environment, outlook and cash balance. Achieving full PSC entitlement for export sales could strengthen cash flow generation in the second half of the year, while the company maintained significant flexibility to reduce CapEx and cost if required. As John mentioned, export sales at international prices would also support a return to field development and drilling in 2027 as we firm up our plan with the Ministry of Natural sources. Looking ahead, we will remain true to our strategy, balancing disciplined investment in production growth while shareholder distributions and a robust balance sheet. With that, I will hand out to John for closing remarks.

Thanks, Karl. Summarize, our performance in the first half of 2026 demonstrated the resilience of our business during challenging conditions. By acting quickly and decisively, we've been able to protect our people our assets and our balance sheet while continuing to progress strategic projects and returning cash to shareholders. Following the recent restart of production and exports, we are focused on completing the current ramp up to prior levels and unlocking full production sharing contract entitlement for past and the price of present and export sales. Achieving the latter with bolster cash flow generation supporting our decision to date to announce a semiannual dividend of $10 million and provide the foundations for return to production growth in 2027. As I conclude, I would like to say a big thank you to our staff, shareholders and wider stakeholders for your continued support. With that, I will now open the line for questions.

[Operator Instructions] We will take our first question from Werner Riding of Peel Hunt.

Just a question on reserves. Mentioned that your estimate of 2P reserves shows 27 years of productive life based on last year's production. When I look at the license bar, including the 2, 5-year extensions, the license expires well before this. So I'm thinking, well, I would like to kind of be your thought. Do the revised discussions you're having on the new FTP with the M&R, do they factor in a development period that will allow you to produce all of those reserves? Or how do those 2 things marry together?

Werner, thank you. Thanks for your question. The simple answer is yes. Those are our reserves, and they are the reserves produced within the license period. Essentially, I think during the presentation, I mentioned that we were looking to ramp up production to some maybe 5,000 barrels a day, which is really producing there. So clearly, that would shorten the 27 years life based on last year's production considerably, not quite sure it halves it, but nearly basically. So yes, they are the reserves they are produced within the period, and it does assume a production ramp up.

Okay. And so with the revised FTP, it's possible that we'll see an extended license period as well to kind of enable you to do that?

We are not -- that's not part of the field development plan at the moment, of course, it might become part of future negotiations.

Okay. All right. Maybe 1 for Gabriel. Just wondering how much of the H1 operating cost reduction reflects the temporary shut-in versus, I guess, more sustainable structural efficiencies?

Exactly. So I would say the majority is related to the to the fact that we were shut in. So we were spending less on diesel on chemicals, so we had to implement some other staff-related savings. So -- but as you can see in the first half -- in the first 2 months, we were bang in line with costs, and we always look for opportunities to find savings that can carry on. But for the first half, specifically, given the high level of production going down, it's primarily related to the shedding.

Our next question comes from Teodor Nilsen from SB One Market.

A few questions from me. First, on the ongoing ramp-up you discussed. You indicated to increase production back to the pre-supplevel of around 40,000 barrels per day. So how do you think when will we reach that level? And what should we expect production for the second half? I assume there won't be any more shutdowns? And second question is on reserves. How do you think around any potential impact of the reserves because of the production shutdown and the production restart and then shut down again Will there be any impact at all? And final question, that is on the receivables. I understand it's difficult to prefile answer it. But how should we think about like the repayment profile and -- how much do you think should be recovered this year?

Right. Okay. I think your first question was around how quickly did we get back up to previous levels. I think I said during the sort of production ramp back in June through to July, which is like the 23rd of June to the middle of July. So that was like 3 weeks. We got to 45,000. We've just started on the 16th of August that we've restarted production. So here we are not even 10 days into that. core tubing is in the field lifting wells. As we speak, I'd expect to be over 40,000 by tomorrow in terms of the production run rate, it's really about 3 weeks since we start -- I'd expect us to be back close to 44,000, 45,000. First on the production ramp on. So hope it answers that question. You said with the production shutdown and start and shut down again. Do you expect the reserves to be affected. I mean, the numbers we're talking about, I wouldn't expect those to really materially affect the overall research position because we will be producing at a much higher rate. And the fact that we haven't been producing that kind of obviously plays into how we produce in the future, but I don't expect the reserves to be affected materially by that.

Yes. And I think what you've seen in the activity on the field, it hasn't, as we ramp up the well, stable come back, and there hasn't been any issues. So that's from a mechanical or a subsurface perspective. So that's still -- and on your point on the receivable, basically, we're really focused at the moment, dealing with the Q4 2025. That is following the submission of the independent consultants review, and we're working quite hard with the other IMCs in the M&R and so won't get some combos allocated from September. So we'll have to see -- we also need to recognize that in the summer the volumes, the throughput of oil going through has been kind of impaired by the security concerns, the fact that us and others, other fields have been limited. That impairs I suspect, a little bit the ability for a quick Hanover and additional cargoes. But now that we are back online, production is ramping up, we hope that we're going to be able to see some of those cargo coming up soon. And the priority is really get that first cargo, get Q4 over the line -- and then basically, then you start a program to deal with the first half of this year. And as John mentioned, production, the first part of this year was essentially January, February for the launch part. So where we'd expect it should be also relatively quick to get the top-up for that period. at an elevated oil price that we're seeing at the moment. But let's focus on Q4. That's the priority right now, and we'll then move up ourselves to Q1 after that.

Okay. And then 1 final question, if I may. That's on CapEx, given the accelerated production in the second half, should we also expect you to spend more in second half than in first half?

At the moment, it's a little bit too early to tell if it's just -- I don't think we could say it's going to be double -- we still have some discretionary spend that we can put forward in order to kind of prep for next year's activities. But that's also kind of tied with international pricing and the recovery of cash flow. So it's -- that's why we didn't reinstate guidance. But for example, on strategic projects like the wet train and the shutdown and some of the things that we had decided to carry on regardless or not of the production shut in, those are carry on. But some well activities and planning for next year's activities like long leads and stuff like that are more discretionary, and we will navigate those as we go through the remainder of this quarter.

Our next question comes from Charles Sharp from Canaccord.

A couple of questions actually, if I may. In terms of the recovery of the Q4 true-up, do you think you need to have agreement on the full export pricing before you get that perhaps September lifting. And how has that Q4 receivable for the true-up being agreed with the various authorities?

So basically, the Q4 receivable was part of the independent consultants review. And so now that, that number has been validated, it's now moving to allocation of additional cargoes to turn those receivables into money. But there is also a longer-term element to discuss a lot kind of future production long-term prices to ensure that we move away from that interim period to get future production. So we're also in par having conversation with the different stakeholders to put in place long-term exports agreements, which would allow us to get international prices right from the beginning, but I see those as being disconnected. You can still recover the receivables from the Q4 in advance of agreeing long-term agreements related to ongoing production.

Okay. That's great. And 1 short follow-up. You talked about maybe a return to growth next year and drilling next year. Do you have in mind a possible timetable for that drilling? And would that need, in your mind, to have agreement on the FTP or approval of the FTP?