Gulf Keystone Pet Ord New

Apologies for this delay in starting. We have a unscheduled fire alarm and had to evacuate. We're now back in the building. So thank you for joining Gulf Keystone Petroleum's 2023 half-year results. I'm John Harris, and I'm Gulf Keystone Petroleum's Chief Executive Officer. I'm joined today by Ian Weatherden, Chief Financial Officer, who will be talking you through our financial performance. I'm also joined by John Hulme, COO, Gabriel Papano-Legree, Chief Commercial Officer, Alistair Robinson, Chief Legal Officer, and Aaron Clark, Head of Investor Relations and Corporate Communications. Over the next few slides, we'll run through our operational and financial performance in the half year and year to date, talk about the current situation on the ground in Kurdistan and Iraq, and explore the outlook for Gulf Keystone Petroleum in the second half. Following that, we will open the line up for your questions. Slide two, disclaimer. I would like to remind you that the presentation slides are available to view on our website, I will leave you to review the legal disclaimer in your own time. Next slide, please. Highlights. We entered 2023 following a year of record profitability, cash generation, and shareholder returns, and with strong momentum in the Shaikan field driving increases in profitable production growth. On March the 25th, the world changed, with the closure of the Iraqi-Turkey pipeline and the suspension of the Kurdistan crude exports. Our operation on financial performance was materially impacted with reduced profitability and cash generation in the first half of the year, driven by the suspension of oil sales and continued delays in the Kurdistan regional government payments. In response, we moved quickly to preserve liquidity, suspending all expansion activity, reducing the organization and canceling the 2022 final dividend. Decisive action has placed us in a much better position to manage the current situation. Deep cost cuts have reduced our average monthly run rate of net capex operating costs and other G&A to around 6 million in the second half of the year. We have also started and increased local sales to around 23,000 barrels of oil per day towards the end of this month, selling over half a million barrels of crude to local buyers since 19th of July. At current volumes and realized prices, we're able to cover our monthly costs and manage our accounts payable with greater flexibility. The economic and political environment on the ground remains complex and continues to evolve. However, we have seen steps in the right direction. Slide five, please. Overview of current operating environment. Crude exports from Kurdistan have been suspended for over five months following the closure of the Iraq-Turkey pipeline on the 25th of March. The pipeline was shut in by Turkey following the award to Iraq of its long-standing arbitration against Turkey at the International Chamber of Commerce in Paris, which dates back to 2014. While no official timeline has been announced for the reopening of the pipeline, negotiations remain active between the Kurdistan Regional Government, Iraq and Turkey. Recently, meetings with senior officials from all three governments have taken place in Erbil, Baghdad and Ankara, with supportive statements made regarding the need to resume exports as soon as possible. The prolonged suspension of exports has in turn put pressure on the Kurdistan region government's finances and extended delays to international oil company payments. Overdue receivables to Gulf Keystone Petroleum amount to $151 million net based on the KBT pricing mechanism with the last oil sales payments received in March 23 for the month of September 22. The approval of the 23-25 Iraqi budget marks significant political progress in creating a framework for the exchange of Kurdistan production for budget transfers, potentially paving the way for the Kurdistan Regional Government to broadly cover its monthly expenses, including ongoing international company receivables. However, negotiations are ongoing between Kurdistan and Iraq regarding its final implementation, as well as regarding the creation of a new Iraqi oil and gas law. As the situation continues to evolve, we have responded in three ways, focusing on what we can control. Firstly, we have moved aggressively to preserve liquidity, which I will talk about on the next slide. Secondly, we have commenced local sales with domestic demand for Shaikan crude from local buyers emerging in July. While the market remains unpredictable, there are signs demand is increasing in the continued absence of export availability. Realized prices for Shai Kang crude to date have averaged around $30 a barrel, which is in line with what we are currently seeing in the local market considering different crude qualities. Payments are made in advance, eliminating payment risk, and GKP keeps its entitlement share currently around 36%. Thirdly, Gulf Keystone Petroleum and other international oil companies are making our collective voice heard with the Kurdistan Regional Government and other key stakeholders through the Association of Petroleum Industry of Kurdistan or APICURE. APICURE was established at the beginning of this year with Gulf Keystone Petroleum as one of its founding members. The association advocates for the common interest of its members towards all stakeholders and provide a forum to share industry information and best practice. Regarding the current situation, Africa is emphasizing the importance of restarting pipeline exports, resuming timely oil sales payments, and in general, protecting the contractual rights embedded in our production sharing contracts, which are governed by English law. We continue to be encouraged by the assurances from the Kurdistan Regional Government that production sharing contracts have sanctity, in line with the Kurdistan Regional Government historic track record. Next slide, please, operational activity. Gulf Keystone Petroleum's operational activity in 2023 has shifted rapidly from a focus of driving profitable production growth, with record production levels achieved in March, to a focus on liquidity preservation following the suspension of exports. Following the ITP closure, production was curtailed and diverted into storage, with the Shai Canfield shutting in on the 13th of April when storage was full. We also suspended all expansion activity, including drilling, well workovers, facilities expansion, and well-paid preparation and regrettably reducing the organization, including a 55% reduction in our expat workforce and a reduction in working hours for our local workforce. While our focus has been aggressively reducing capex and costs, we have maintained sufficient operational capability to both quickly resume exports and to restart more labor-intensive trucking operations for local sales. On July 19th, we commenced local sales from PF1, with sales starting at PF2 in August. We have sold crude from storage whilst restarting a number of PF1 and PF2 wells. To date, we have seen no degradation in well performance from the extended shut-in, but continue to ramp up production gradually to limit drawdown on the reservoir. Since we started, we have steadily increased volumes with gross average sales of around 23,000 barrels of oil per day between the 19th and the 29th of August. We are focused now on increasing sales, and there appears to be significant demand for Shai Kang crude. Nonetheless, volumes and pricing remain difficult to predict, and we continue to retain significant flexibility to dial operational activity up or down. If we are unable to maintain sustainable local sales, we have identified options to reduce monthly costs by up to $2 million. However, these could potentially delay a timely return to full production. Next slide, please. Local sales. It's excellent to be producing and selling crude again and the teams at PF1 and PF2 have done a fantastic job in a challenging operating environment to transition smoothly and safely from pipeline operations to trucking operations which were last implemented in 2019. We are currently loading over 120 trucks per day and looking to move to 24-7 operations when local sales increase. Throughout the period, we have maintained a rigorous focus on safety, even in the face of new operational challenges presented by trucking operations and temperatures on the ground that have approached 50 degrees Celsius. Next slide, please. EKP in the Shaikhan field. Given the challenging operating environment at the moment in Kurdistan, it is easy to forget the prize we have in front of us once the situation stabilizes. Looking back, we have overcome several challenges to generate profitable growth from the Shai Ken Field's substantial reserve base and significant shareholder value. Despite the current situation, there remain a number of attractive fundamentals to note about the Shai Ken Field and GKP's track record. First, we continue to operate a large, long life with over 800 million barrels of gross 2P reserves and 2C resources, confirmed by the 2022 Competent Persons Report and external third-party audit. Second, production is low-cost, and Gulf Keystone Petroleum has consistently had one of the lowest operating costs and G&A per barrel among Kurdistan and international peers. Third, we have a strong track record of profitable production growth with over 117 million barrels produced to date and 40% production growth between 2018 and 2022. Fourth, we have demonstrated a commitment to shareholder distributions with 440 million distributed in dividends and buybacks since 2019. This adds up to considerable upside potential should the operating environment improve. With that, I will now hand it over to Ian for the financial review.

Ian. Thanks very much, John, and good day, everyone. Now moving to slide 10, please. Building on our strong financial performance in 2022, in which we generated record profitability in cash flow, distributed $215 million of dividends to shareholders, and repaid our $100 million bond, we were on track for another strong year in 2023 until closure of the Iraq-Turkey pipeline. As John mentioned, the suspension of exports and continued delays to KRG payments materially impacted our financial performance in the first half of the year, reducing profitability and cash generation. In response, we moved quickly to preserve liquidity aggressively reducing our costs with a significant step down in activity from Q1 to Q2, which is evident in the bottom right net capex chart. Today, increasing local sales are enabling us to cover our estimated monthly expenditures, which I'll talk more about shortly. Next slide, please. Adjusted EBITDA in the first half of the year decreased from just over $200 million in the first half of 2022 to $34 million, primarily reflecting the suspension of exports and lower realized prices in the first quarter. While we enjoyed record production levels in the first quarter, gross average sales in the first six months of the year almost halved relative to 2022 to 23,256 barrels of oil per day with no revenue from the 25th of March. Dated Brent prices decreased from $108 per barrel in the first half of 2022 to $80 per barrel in the first quarter of 2023. The Brent price impact was compounded by the KRG unilaterally changing the reference price from dated Brent to Kurdistan blend, resulting in an increase in the discount per barrel of about $6. Combining these impacts, our realized price was down $33 per barrel from the first half of 2022 to $51 a barrel in the first quarter of 2023. Next slide, please. The impact of lower adjusted EBITDA and increasing delays to KRG payments drove a significant reduction in free cash flow from $177 million in the first half of 2022 to a cash outflow of $10 million in the first half of 2023. The closure of the pipeline towards the end of March has resulted in only two KRG payment receipts this year, with the last payment being received in March for September 2022 sales. Accounts receivable totaling $151 million net to Gulf Keystone for October 22 to March 23, oil sales are now all overdue. The resumption of pipeline exports and consistent budget transfers from Iraq to Kurdistan are likely required before we see a return to more normalized KRG payments and the KRG providing international oil companies a plan to address the outstanding arrears. Net capital expenditures were $47 million in the first half. Capitalizing on the momentum from 2022, we had a very active drilling and facilities expansion program in the first quarter. With delays in the reopening of the pipeline, we quickly reduced expenditures to preserve liquidity, resulting in a two-thirds reduction in net capex from $35 million in 1Q to $12 million in 2Q. Following the payment of a $25 million interim dividend in March, We canceled the payment of the 2022 final dividend to preserve liquidity. We continue to believe dividends are important to reward shareholders and will review reinstating the dividend when the environment and our liquidity position improve. In July, we started local sales, which, along with cost reductions and managing accounts payable, have supported our liquidity position. Our cash balance as of yesterday was $82 million. To manage credit risks, buyers are required to prepay for all local crude purchases. Gulf Keystone as operator has collected sales proceeds on behalf of Mole and the KRG. Prepayments for crude not yet lifted and amounts due to Mole and the KRG totaling $8 million are included in our current cash balance. Next slide, please. Gulf Keystone has consistently maintained strict control of its costs and has one of the lowest operating costs in G&A per barrel among Kurdistan and international peers. While costs have been increasing in the first quarter of the year, reflecting increased operational activity and investment in the Shaikan field, following the suspension of exports, we moved quickly to reduce our costs to preserve liquidity. Operating costs in the first half of the year were flat relative to the prior period, reflecting increased costs in 1Q related to higher production offset by a 36% decrease in 2Q as production was shut in and nonessential maintenance deferred. After adjusting for non-recurring corporate costs of $2 million and an increase in non-cash depreciation of $1 million, other G&A expenses were flat. from the first half of 2022. We continue to review our cost structure and look for further reduction opportunities. Next slide, please. Deep cost cuts have been key to preserving liquidity. Our current estimated aggregate net capex operating costs and other G&A monthly run rate of around $6 million in the second half of 2023 is down two thirds from the first quarter of the year. The declining run rate reflects a steep reduction in CapEx guidance from 160 to 175 million to the current 60 to 65 million dollars. Current guidance reflects 10 million dollars of cost savings realized in June. We now forecast less than 15 million dollars of net capital expenditures in the second half of the year. Assuming a continuation of gross average sales of around 23,000 barrels of oil per day, and average realized prices of around $30 per barrel, our entitlement share of 36% covers our estimated monthly run rate of around $6 million net, and provides us with increased flexibility to manage the timing of payment of our accounts payable. While the demand for Shikan crude is promising, and we are targeting further increases, sales volumes and prices remain unpredictable. As a result, if sustainable local sales do not materialize, we would consider taking additional liquidity actions. This includes identified options to reduce our monthly expenditures by up to $2 million. We would take this decision carefully as it could potentially impact our operating capacity and delay the time it takes to return to full production when conditions improve. While good progress has been made, we continue to pursue further cost reductions in inventory sales and will consider further sources of liquidity as necessary. With that, I'd like to now hand it back to you, John.

Thanks, Ian. Final slide outlook. To summarize the suspension of exports and continued delays to the Kurdistan regional government payments have had a material impact on our performance in the first half of the year. In response, we've taken rapid and aggressive action to preserve liquidity, enabling us to reduce our average monthly capex costs to around six million in the second half of the year. With current local sales and prices, we're generating enough cash to cover our monthly costs and increase our flexibility to manage our accounts payable. Nonetheless, while demand for Shai Kang crude appears significant, the market remains unpredictable and we would take further actions without sustainable sales as we remain relentlessly focused on cost reductions and preserving liquidity. Looking at the bigger picture, we continue to believe the suspension of exports will be temporary and that the Kurdistan Regional Government's payments will normalize in due course. As an industry, we are continuing to engage with the Kurdistan Regional Government and other key stakeholders to make our voices heard. with the objective of protecting the interests of all our stakeholders and returning our industry to its role of generating significant economic value for Kurdistan, Iraq, and our shareholders. When conditions improve, we look forward to returning to a balance of growth and returns. With that, I'd like to thank everyone for joining. I apologize for the late start due to our fire alarm. I hope you found it informative, and I'll hand it back to the operator for questions. Thank you.