Gulf Keystone Pet Ord New

Hello and thank you for joining the Off Keystone Petroleum's 2022 full year results. My name is John Harris and I'm the IMGKP's Chief Executive Officer. I'm joined today by Ian Weatherden, Chief Financial Officer, who will be taking you through our financial results. I'm also joined by John Hulme, Chief Operating Officer, Gabriel Papanola-Gree, Chief Commercial Officer, and Aaron Clarke, Head of Investor Relations and Corporate Communications. Over the next few slides, we will run through our operational and financial performance in 2022. and the outlook for 2023. Following that, we will open the line up for questions. Next slide, please. I'd like to remind you that the presentation slides are available on our website, and I will leave you to review the legal disclaimer in your own time. Next slide, please. GKP strategy. Before we talk about our results, I'd like to spend a few moments reminding you of our strategy. We have a clear strategy of balancing investment in profitable production growth with sustainable shareholder returns while maintaining a robust balance sheet and prudent liquidity levels. Looking at our track record, this has created significant value for GKP investors over the past few years. Between 2029 and 2022, we have grown production from the Shai Chem field by 34%, while returning $415 million in cash to shareholders via dividends and buybacks, almost all of our today's market capitalization. Against the backdrop of commodity price volatility, as well as the COVID-19 pandemic and challenges from operating in Kurdistan, we've also been able to maintain a strong balance sheet, ending each year with net cash. Looking ahead, we are focused on extending our track record of delivery. Slide four, please. 2022 operational and financial highlights. 2022 was a year of strong operational and financial performance as we continue to deliver against our strategy. As always, we have focused on safety as a priority, with no LTIs in the year and only one recordable incident. Higher oil prices and production, combined with capital discipline and cost control, enabled us to generate record profitability and cash flow. In terms of growth, 2022 saw a significant increase in operational activity in the field, as we commenced execution of the Jurassic Scope of the Shai Canfield Development Plan. In agreement with the Ministry of Natural Resources, while we advance towards approval of the full field development plan. The 2022 Confident Persons Report published today reconfirms the quality of the SCICAN field and the scale of the opportunity we have in front of us to create value for all our stakeholders. We are realizing the benefit of our 2022 investments with production exceeding 55,000 barrels of oil per day in the last few days, a very important milestone for the company. As we progress, we are reviewing our capital programme and adjusting investment based on the timeliness of payments from the Kurdistan Regional Government and the outlook for oil prices. While we continue to grow, we paid record dividends of $215 million. We are pleased to declare today a $25 million ordinary dividend for the year, increasing total dividends declared in 2023 to $50 million. At the same time, we are focused on maintaining a robust balance sheet which remains debt-free following the redemption of a 100 million bond in August last year. Turning now to our sustainability highlights, slide five. Proving the sustainability of operations is of utmost importance to our strategy, and we continue to make good progress in the year. We are pleased to announce that our annual report disclosures for 2022 will be fully consistent with the recommendations published by the TCFD Task Force on Climate-Related Financial Disclosures. This demonstrated how our focus on climate-related risks and opportunities is embedded in our strategy and our governance, including risk management. Our primary climate-related opportunity is the Gas Management Plan, which will enable us, subject to timely sanction and implementation, to eliminate almost all of our routine flaring and more than half of our scope one emissions intensity by 2025. We have also been exploring other decarbonization opportunities, which will enable us to reduce our emissions further. In particular, we have identified a project to eliminate methane venting from our production facility storage tanks, which we are targeting to complete in 2024. As we progress, we are seeing increases in emissions primarily due to higher production. Looking at our social performance, GKP continues to make a material contribution to Kurdistan and its people. We generated $515 million of revenue net for the KRG in 2022, a 53% increase versus the prior year. We continue to be a large employer of local people, with almost 350 Kurdistan nationals working for us at the end of the year, equivalent to 74% of our in-country workforce. We also spent $64 million with local suppliers, a 31% increase versus last year, and increased our investment in impactful local community projects by 30% to over $1 million gross. Finally, strong governance and business ethics continues to underpin how we do business. We were pleased in the year to have developed our code of business conduct and training program, which we rolled out to all our staff at the beginning of 2023. We have 100% compliance rate this year, with all staff completing the training and signing a compliance certificate. We look forward to providing you with further updates on our sustainability strategy and performance with the publication of our annual report. I will now provide more detail on our operational performance. Slide seven, ShaiCAM offers significant potential for growth and returns. The ShaiCAM field is a world-scale asset. and is the foundation for our strategy and value creation. Since first commercial production in 2013, we have produced over 117 million barrels of oil. While this is remarkable, the 2022 Competent Persons Report published today, an external independent audit of our reserves and resources, show there is significant growth potential to exploit. The CPR has confirmed 817 million barrels of gross 2P reserves and 2C resources As you can see from the chart on the right, 2p reserves have increased 7% to 506 million barrels after adjusting for production of 33 million barrels. This results in 100% reserves replacement versus the 2020 CPR, driven by increasing the Jurassic Reservoir plateau from 75,000 to 85,000 barrels of oil per day. Based on last year's production of 44,200 barrels of oil per day, there is significant running room to further develop the field and grow production, while with a 2P reserves to production ratio of around 31 years. Slide eight, please. Increased activity in 2022 laid foundations for future growth. 22 was a significant operational activity, was a year of significant operational activity in the Shai-Kan field. Working hours increased by over 50% to $2.2 million, while we more than doubled net capital expenditure to $115 million. The increase in activity was the result of starting the execution of the Jurassic Scope of the FTP, as we laid the foundations for a material increase in future production growth. We drilled and brought online the first two wells in the FTP sequence, Shycan 15 and Shycan 16, and spudded the third, Shycan 17. We also prepared well pads and flow lines to enable a continuous drilling program and completed early engineering, procurement and construction works for the production facilities expansion. Finally, we continued our well work over program to optimize production. Next slide, please. 2022 production is in line with our guidance. Gross average production was 44,202 barrels of oil production in 2022. 2% higher than 2021. Incremental production from new wells was mostly offset by our continued management of well production rates ahead of water handling. Production was also impacted in the fourth quarter by the temporary shut-in of a well due to an isolated electrical submersible pump failure. Despite this small increase, our 2022 investments and progress on executing the Jurassic scope have started to bear significant fruit so far in 2023. We have seen strong production from Shai Can 16, which has been ramping up this quarter. We drilled, completed, and brought on stream Shai Can 17 in February. Under budget and ahead of schedule, thanks for the performance improvements we are seeing in our continuous drilling program. Year to date, production has averaged around 48,900 barrels of oil per day, and with a big step up in production in March to date of around 53,500 barrels of oil per day. In the last few days, we have reached record highs with production exceeding 55,000 barrels a world per day, an important milestone for this company. As we look ahead to the rest of the year, we remain focused on delivering our production guidance of between 46,000 to 52,000 barrels a world per day. We continue to manage world production rates ahead of water handling installation. We're also continuing to see estimated national decline rates across the field of between 6% to 10% per annum, and are optimizing production from a single well near the gas cap due to high gas production. Slide 10, 2023 work program. Looking ahead to the rest of the year, we're currently reviewing our capital program and net capital expenditure guidance due to KRG payment delays, which Ian will talk about shortly. Our current net capex guidance of $160 to $175 million includes 30 to 35 million for the completion of the Shaikan 17, the drilling and completion of Shaikan 18, which we expect to start up in Q2 of this year. 40 to 45 million dollars for the investment in well pad preparation and long lead items for continuous drilling, and 85 to 90 million dollars for the advancement of the production facility expansion, with water handling installation and the capacity increased to 85,000 barrels of water per day, expected to be completed in the second half of 2024. With clarity around KRG payments, we will consider continued drilling following SCICAN 18. However, with continued payment delays, we will review potential reductions to our capital program. Slide 11, transitioning to increased investment in profitable growth. Our intention is to transition to increased investment in profitable production growth to exploit the significant potential of the SCICAN field, enhance the longevity and sustainability of our distributions capacity, and generate economic value for Kurdistan. This of course is predicated by better clarity on KRG payments and continued robust oil prices. Ultimately, we plan to do this by executing the full field development plan. The field FTP has three components. Increasing Jurassic production up to 85,000 barrels of oil per day by expanding our production facilities and drilling new wells. Testing the Triassic reservoir and producing up to 10,000 barrels of oil per day, bringing total production up to 95,000 barrels of oil But A, implementing a gas management plan to eliminate almost all of our routine flaring, a requirement of the PSC, and more than half our scope 1 emissions intensity. While the timing of the FDP approval remains uncertain, we are making good progress towards key sanction milestones, such as finalising the technical scope of the FDP last year and continuing to advance the gas management plan tendering process while considering financing options. In the interim, we are executing the drastic scope of the FTP with a flexible capital program. We remain focused on capital discipline, predicating all investments on the timely KRG payments and robust oil prices. With that, I will now hand over to Ian for the financial review.

Great. Thanks, John, and good morning, everyone. Just turning to slide 13, financial performance highlights. We delivered strong financial results in 2022, building on momentum from the prior year. Adjusted EBITDA and profit after tax were up more than 60% due to an increase in dated Brent oil prices from $71 per barrel to $101 per barrel, increased production, and continued cost control. This enabled us to more than double capital investment in the SHICAN field and pay record dividends in line with our strategy to balance growth with shareholder returns. Next slide, please. Adjusted EBITDA of $359 million underpins strong cash flow generation, and we invested $115 million as we started to execute the Jurassic Scope of the FDP. Free cash flow during the year was $266 million, more than double, $122 million in 2021. This enabled us to pay record dividends of $215 million and strengthen our balance sheet by repaying our $100 million Nordic bond about a year before its maturity, leaving us debt-free. Next slide, please. As operational activity continues to increase, we remain focused on strict cost control. Gross OPEX per barrel increased in 2022 to $3.20 in line with guidance. The slight increase in OPEX per barrel was primarily related to increased staff costs reflecting higher activity levels and incremental maintenance activity. 2023 OPEX guidance is 3 to 340 per barrel in line with 2022. Total other G&A was down slightly from 2021. Next slide, please. We received net $450 million from the KRG in 2022, including payments for both crude oil sales and full settlement of historical arrears. So far this year, we have paid net $66 million. We have been paid net $66 million for the August and September 22 invoices. Towards the end of last year, we started to see an increase in the time it takes for the KRG to pay monthly oil sales invoices. The most recent September production month invoice was received more than three months late. October to December invoices amounted to net $76 million, are currently overdue, and we continue to engage with the KRG to reestablish a more timely payment routine. As John noted, timely payments are important for us to continue development of the SHICAN field. We have a flexible capital program that enables us to increase or decrease spending depending on KRG payment, timing, and oil prices. Also, as we recently announced with the September payment, we are engaging with the Ministry of Natural Resources regarding their proposal to change the oil sales reference price from date of Brent to Kurdistan blend to more closely align with the amount the KRG has advised us that they receive for selling our crude. While we have not agreed this change, applying the new mechanism to our September to December invoices results in an average monthly decrease in realized prices of around $12 per barrel compared to the prior pricing mechanism. Given oil price volatility, it is difficult to predict how pricing will evolve going forward. Last month, as shown in the blue bar on the bottom right of the table, the incremental discount decreased to $6 a barrel in February 2023. It is also worth noting that the discount was as low as $4 per barrel in 2022. Next slide, please. We have a disciplined financial framework which underpins our track record of balancing growth, shareholder returns, and maintaining a robust balance sheet. In 2022, we paid a sector-leading dividend yield of just over 40%, and as you can see from the chart, Over the past five years, we have delivered top quartile total shareholder returns. Given returns on incremental capital investment are attractive as payback accelerates with cost recovery, we are transitioning to increase investment. Unrecovered costs declined from gross $437 million at the end of 2021 to gross $213 million at the end of 2022. This amount would have trended towards gross $150 million if the KRG were paying us on a timely basis. By increasing profitable production, we expect to enhance the sustainability and longevity of shareholder distributions. We are pleased today to be announcing the declaration of a final 2022 ordinary annual dividend of $25 million in line with our dividend policy. This increases total dividends declared this year to $50 million, pointing to a competitive yield of around 11%. We remain committed to distributing excess cash to shareholders by way of dividends and share buybacks, and will continue to review distribution decisions based upon our financial framework. This includes regular assessment of expected future oil prices, timeliness of KRG payments, and our capital program, cash flow generation, and liquidity. As we approach FTP approval, we intend to review our financial framework and dividend policy. Next slide, please. Maintaining a robust balance sheet is a strategic priority to Gulf Keystone. It provides us with resilience through the commodity cycle and enables us to manage potential downside risk including those associated with operating in Kurdistan. With strong free cash flow generation in 2022, we repaid our $100 million bond, leaving us debt-free with significant financial capacity. As we progress towards FTP approval, we will continue to review our capital structure and financing requirements. With that, I'd now like to hand it back to John.

Thanks, Ian. Slide 20, our outlook. We're really excited about the remainder of the year and remain focused on delivering against our clear strategy. Building on progress last year, we continue to execute the Jurassic scope of the field development plan as we progress towards full approval of the field development plan. We are already seeing the benefits of our investments with production rates in excess of 55,000 barrels of oil per day in the last few days. We plan to start up ShaiCAN 18 in Q2 as we remain focused on delivering 2023 production guidance of between 46,000 and 52,000 barrels of oil per day. We are currently targeting net capex for the year of $160 to $175 million and gross opex of between $3 to $3.40 per barrel. We're currently reviewing our capital program as we seek further clarity from the KRG on payment timing and our 2023 net capex guidance is therefore subject to change. As ever, we remain focused on balancing investment in growth with shareholder distributions. Following $50 million of dividends declared to date, the board will continue to review opportunities to return excess cash to shareholders in line with the discipline's financial framework. At the same time, we will continue to maintain a robust balance sheet and prudent liquidity levels to manage uncertainties. We continue to engage with the KRG and the Ministry of Natural Resources regarding payments. Following recent political news that the Iraqi cabinet and the KRG have agreed a budget and a method to allocate the Kurdistan share of the budget, taking into account Kurdistan's oil revenues. We are optimistic that approval by Iraqi's parliament and implementation will swiftly follow. It has also been reported that any action following the FSC ruling has been suspended while negotiations continue. Our operations remain unaffected by the FSC ruling. With that, I will now hand you back to the operator for questions. Thank you.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, it's star 2. Again, it's star 1 to ask a question. We will take the first question from David Rowan from Stiefel. Please go ahead.

Good morning, everyone. The first one just on plans going forward. I mean, it's quite interesting. You've got a draft FDP, but you seem to be doing the work anyway. So I'd just like to understand sort of how that's happening. What are the risks? Are there any risks to the recovery of costs? Because I mean, the more you do, the more it feels like you don't even need an FTP. So I'm trying to work out what function the FTP actually plays there. And secondly, just a quick one. Are you able to provide a bit more detail as to the performance of the recent wells, 16, 17, and particularly compared against things like 12 and 13, please?

Thank you. With regard to implementing the Jurassic scope ahead of field development plan approval, under our kind of procurement rules in Kurdistan, effectively we agree every contract that we let over an almost nominal value with the Kurdistan, with the Ministry of Natural Resources. They're involved in the tender process and they're involved in selection and approval and awards. So they see all of the contracts that we're looking to be able to implement, whether that's bad construction, long leads, or actual drilling costs themselves as we spend the money. So we see there's very little risk in any cost recoverable, any of that being at risk from cost recovery, because they've effectively approved every expenditure as we go. I think what we have done is said that something like the Gap Management Plan, which is a sizable expenditure, We are looking for field development and plan approval with including that, as also with the appraisal of the Triassic reservoirs as well. So that's how we're going to take it forward. With regards to performance of 16 and 17, I think we said in the presentation, 16 is doing very well and 17 is also cleaning up and showing great performance. Typically, I think we've said before that our expectations are between 3,500 to 5,000 barrels per day for new wells, and those wells are certainly performing well within that range. I think last year we spoke about 12, and 12 was shut in for a period of time, and then we perforated some of the reservoir and re-perforated the existing zone. And now that's actually producing again towards the top end of our range we'd expect for wells. 13 is also kind of in the middle of that range. So actually we're seeing good performance from all of our recently drilled wells. Recently 12 of course was drilled in I think 20 or 19 maybe. So the last few wells that we've drilled have been producing well with the exception of 14. which again we've had to constrain due to some water management.

Okay, so really regarding the water handling and the restrictions associated with that, is it really only 14 now that needs the extra handling capacity? And is that then just really, let's say, 3,000 barrels a day? Is that all you're missing out on at the moment by not having that water handling?

No, there are some other wells which are constrained due to saltwater production. Okay. Great.

All right. Thank you.

The next question comes from Warner Riding from Peel Hunt.

Morning, guys. So I just want to try and understand some of the key points of difference, I suppose, that between GKP and the KRG. So if you could maybe outline your position regarding payment terms and what you need to see in order to accept or reach an agreement on, I guess, what at this point seems to be a likely lower net back that you'll be receiving going forward.

Yeah, thanks, Werner. I think there are two issues there. One is the actual pricing. of the crude, because I think you referred to net back at the end. Obviously, what we're seeing in February, and we're hoping that trend continues, previously KBT prior to last September was only $4 different from Brent, and we're hoping to see that return, in fact, even hopefully better that, to return to a near Brent price if the budget's approved and the FSC ruling is therefore kind of overridden by the new budget approval. I think with regards to regularising payments, I think, well, we are looking for return to regular monthly payments. Again, encouraged by the budgets agreed and payments start between Baghdad and Erbil, we would also believe that we would see that regular return to payments. And then there'd be a question of addressing the late payments that we've seen over the last few months. And we'd like to understand their plan for that also.

Okay, so that's kind of in reference to reaching agreement on payment terms. In terms of specifically on the FTP approval, what are the critical commercial, I mean, you reference it, you call it commercial discussion. commercial discussions in the presentation. So what are the critical points preventing FTP approval and, I guess, how do they get resolved?

Hey, Werner. It's Gabriel. Yeah, so in relation to the commercial negotiations, you may recall that in the past we have mentioned about the pricing allocation in terms of the PSC split. potential carried interest, implementation of this through a PSC amendment, also historical revenue adjustments on our UF capacity building payments and other likes that are on our balance sheet that we want to get further clarity and resolution as part of our engagement with the MNR. So this is underway as part of the other discussions with the MNR.

And Werner, maybe let me take that up and link it also to the financial statements, which include some disclosures in this regard. You would be aware that there's the PSE terms, and Gabrielle was talking about payment terms regarding carried interest and the like. Economically, those two are basically the same. In fact, slightly positive for us, but we just call them the same. We would like to just firm that up in the first instance. And then additionally, you will note in the financial statements that we've been quite conservative and we've accrued a number of accounts payable. And that relates to the offset arrangement that Gabrielle was saying, but as is always the case in financial statements, you always think about the downside, but you don't think about the upside. And we've disclosed in there that our continuing expectation is with settlement to those that we would expect there not to be a cash outflow and that there would be a net settlement. So from my standpoint and our standpoint, it'd be great just to clean that up, to have clarity going forward, all with the objective of targeting a value neutral, at least value neutral solution for Gulf Keystone and Molar Partner.

Okay, and I guess the $64 million question perhaps is when, but I suppose you can't answer that, so there's no point in asking. I'll move on to, within your guidance, your guidance is based on KRG payments, payment timing, and oil prices. So just wondering what oil price you need to see maintained so that you've got confidence progressing with your ongoing investment plans.

Yeah, I think, Werner, one thing when we think about our capital program, one thing that we always ensure that we embed into it is flexibility. So when we thought about this year's current program, we were just starting to see challenges with payments. So we built flexibility into the entire program. And part of that flexibility is you'll note in the guidance that we've included drilling up to the end of the current well, Shaikan 18. We will then take stock. We'll see where we're at. And if things are progressing better and we've got a view on payment regularization, which I think we would all want, we'd look to potentially increasing guidance. In terms of prices, given in particular some of the very robust production performance recently, hand in hand with with payments now the the current uh uh oil price is more than sufficient to be able to support the current guidance gives us and it gives us flexibility in order to think about and maneuver of course as we think about all prices it's um you know anybody's view but i think that there's there's a common view and we don't bank on it but we do we do see a tightening market as we move through the year and potential support and upwards pressure on prices. We're not banking that at this stage, but that could be a potential opportunity for us to increase capital expenditures. And additionally, that also provides us, as always, the opportunity to consider further distributions to our shareholders, as we've demonstrated in our track record to both invest to grow and also to share that with our shareholders along the way.

And is there a downside price below which you will constrain further investments?

I think it would be fluid. And I think we've got a much stepped up capital program. I think that we could manage if there's downside pressure, we could manage some of that within the the program that we have. Now, if things fall off a cliff, like every other company, we would re-examine at that point in time and take appropriate decisions based upon the then existing circumstances. Okay. All right. Thanks a lot, guys.

As a reminder, to ask a question, please press star one. We'll take the next question from Charles Sharp from Conacord.

Thank you very much. Good morning all. Just a question, if I may, on your reserves report, and obviously congratulations on the replacement. I'm just wondering what it is that's sort of going on behind the scenes, as it were, that has enabled the increase in the plateau rate, I think from 75 to 85,000 barrels a day. And I wonder, is that something that you're putting out there as a kind of target that we should be thinking that you'd be going for even while the FTP has not been approved? And indeed, is 85,000 barrels a day something that you could achieve without extensive gas management investment?

So John Hume here. The increase in plateau from 75,000 to 85,000 barrels a day makes sense, given the license expiry. And our current facilities that are already in design and we're ordering the long leads will allow us to execute that 85,000 barrels a day capacity. We've received strong encouragement from the MNR and the KRG to continue to expand this program. And we believe it makes sense that the value equation works. To say on the FTP specifically, it is progressing. I would say that we are technically aligned on the FTP at this point, and we're progressing towards the gas management plan from a technical and commercial perspective on the bids that are coming up later.

So can you get to 85 without the gas management, or do you need the gas management in place? I guess I'm trying to assess what or find out from you what the general scope of capex might be to get to 85,000.

From a reservoir perspective, the gas management plan doesn't really change our outlook in terms of reserves and production, right?

Sorry, just Charlie, building on that, as John said, reservoir performance is not impacted by the gas management plan. But at the same time, as we're all focused on, we're committed to reduce our carbon intensity per barrel. We had a baseline in 2020, I beg your pardon, and we're looking at reducing that footprint by more than 50%. And that's what the ongoing gas tendering is all about. Once we have more visibility, we'll be able to share that with you. So while the gas management plan doesn't drive reservoir performance, from our perspective, they're both very important. We want to drive production growth, and we also want to lower our emissions at the same time.

Okay, I think I get that, but therefore you do need to have gas management as sort of part of that, and that would be a more than 50% growth from where you are today to get to 85.

Yeah, and maybe let me pick up on that, Charlie, because you're right, because one of the things that is quite positive, if you think about the current production levels, the cash flow that's generated from base production provides us with a lot of optionality in terms of reinvestment, in terms of dividends, distributions. And when we start to think about a gas management project, that is an upfront fixed capital commitment, which is different than what we have right now. Right now, the capital program is is very flexible, as I had mentioned, easy to dial up and down. But as we march forward and we step into the gas management project, we would look to think about financing concurrent with that. And that, to me, is a good opportunity in terms of leveraging the significant financial capacity in our balance sheet to be able to consider debt. We've got the Nordic bond markets. Now, this is a green project. There could be opportunity for green financing. We're keeping our minds open and we're pursuing different options. And that ability to finance the project with this significant capital commitment enables us to move forward, continue to invest in growth, and also think about ongoing distributions through the investment cycle.

I get it. That's very good. Okay, thank you.

As a final reminder, to ask a question, please press star 1. As there are no further questions, I will hand back over to your speakers for any closing remarks.

I'd just like to say thank you for everyone who joined us today. I hope you're suitably impressed with our set of results as we are. We think we've had a great year and it's a great outlook for this year and the future. Thank you.