Genel Energy (LSE:GENL) — Full Year Results

0:00 Good morning, and welcome to the GENEL ENERGY PLC Full Year Results Investor Presentation. Throughout this recorded meeting, investors will be in listen only mode. Questions are encouraged to be submitted at any time via the Q and A tab situated on the right hand corner of your screen. Simply type in your questions at any time and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Head of Communications,

0:31 Andrew Benbow. Good morning, sir. Thank you very much. Good morning, everyone. Thank you for joining us. Thank you also to those who have already submitted questions. I hope we'll answer most of them in our presentation, but we'll cover off as many as we can in the Q and A afterwards. I'm afraid there's one topic which we won't be able to take any questions, and that's relating to the Miran and Binabawi arbitration case, and that's due to the strict confidentiality about the process. As you'll see, we'll give an update, and we'll say what we can. But unfortunately, it's not something we can take any questions on. As always, Paul Weir, our CEO, will now lead you through the presentation. Paul will be joined for Q and A by Luke Clements, our CFO and Mike Adams, our Technical Director. And with that said, over to Paul.

1:10 Thanks, Andrew, and, good morning, everybody. I'm gonna spend the next few minutes walking through a dozen or so slides, designed to tell you more about GENEL's business today and what's been achieved in 2023 and what we will be working towards in 2024. At the end of that session, as Andrew has just mentioned, we'll have Luke and Mike on hand to go through your questions. This is an important first slide. It summarizes the key characteristics of the business we've shared today, and it also lists three important areas that we're focused on. Today, GENEL is a resilient platform with a strong balance sheet and a year end '23 net cash position of a $115,000,000. Local sales revenue from Tauke is now more than covering our total corporate costs, and this gives us a sound platform from which to deliver our strategy in spring forward in 2024.

2:02 The reopening of the Iraq Turkey pipeline and establishing a suitable arrangement to resume exports has the potential to immediately increase profitability quite significantly. We remain focused on the acquisition of new production assets to diversify our income and, again, increase profitability. And we continue to defend our contractual rights regarding the Moran and Bina Bawi arbitration. The evidentiary hearing of that case ended at the start of this month. I'll talk more about all of these points as we move forward. This next slide models the key features of our strategy. As just mentioned, we maintain a strong balance sheet. We focus on cash generation and actively seek new cash generative opportunities. All necessary as we move towards the reestablishment of a sustainable dividend.

2:51 These features are underpinned by a very careful consideration of risk, strong financial discipline, and, of course, due regard for ESG. On the right hand side of this slide lists what we delivered in 2023 to establish the strong and resilient platform I've just mentioned. You'll remember that even before the ITP was closed a year ago, we had already begun to reshape and simplify the business to maximize cash generation and shareholder value. It's fair to say, though, that our focus on reduction of the cost base and driving business efficiencies accelerated in 2023 in response to the pipeline closure. We have significantly changed the size and shape of the organization with the SARSA and Karagdag licenses removed from the portfolio and the total workforce being reduced by 70%.

3:40 The place of Tactac in the portfolio is currently under review. Total organizational spend has been brought down materially by more than 40%. At where, as a reminder, spend is cost recoverable, we agreed with our partner, DNL, on appropriate spending reductions there. We also supported establishing a new income stream there through local sales. These now material and predictable local sales coupled with diligent cost control help protect our balance sheet. We'll provide a brief update on the pipeline issue in a few minutes, but worth mentioning here that we do not want these local sales to be our key source of revenue in the longer term. And we are working with Apicur, the association for IOCs operating in Kyrgyzstan, to try and facilitate an acceptable way forward and reopening of the pipeline as quickly as possible.

4:31 I've already mentioned our continued focus on value accretive m and a and the defense of our contractual rights regarding the terminated Muran and Bina Bawi licenses. And despite significant changes in 2023 to our operational footprint, we have maintained a steadfast commitment to ESG. Top of that list, of course, being health and safety, and I'm pleased to say once again we recorded a year of zero lost time incidents and zero tier one process safety events. Our scope one and scope two emissions remain below industry average, and we are working hard to maintain this positive performance while at the same time engaging with and investing in our host communities and operating as a socially responsible and transparent business. This next slide seeks to demonstrate that after all of this activity in 2023, we ended the year with a very healthy balance sheet, indicating again the resilience that we talk about in all of our presentations.

5:27 We ended 2023 with a strong cash position of $363,000,000 and a reported debt of $243,000,000. As opportunities arose during the year, the debt figure was reduced by a total of $26,000,000 at a price of less than $20.95 cents to the dollar. With interest rates having risen, the difference between our nine and a quarter percent coupon on the bond and the interest we enjoy in our cash in the bank means that the net cost of this debt is around $5,000,000 a year, which is a modest charge for the optionality that this money provides. We are therefore very comfortable with our capital structure. Given the current bond market, this is cheap debt, and it allows us to continue our pursuit of new value accretive assets.

6:13 And to stress the point made on the last slide, our operating partner, DNL, has done a great job in establishing a new local sales income stream from Tauke in the second half of last year. So we expect to maintain our net cash position of more than a $100,000,000 for all of this year. This next slide shows how the local sales situation has developed since sales began in mid twenty three. As you can see from the bars on the right, it took several months to build and reach a point of decent sale volumes. We now have local buyers consistently taking our crude, meaning that there have only been a handful of days since January with gross sales below 80,000 barrels a day. It's worth remembering that cash is paid in advance of product transfer, so there's no payment risk under this arrangement.

7:00 And while the price is certainly not what we should be selling at, it is at least a regular and predictable income stream. And, again, it's an income stream that's covering our costs. Our local cost base has been reduced materially with an annual return rate spend set to be around $3,000,000 a month on top of Tauke commitments. With Tauke generating operational free cash flow of more than $3,000,000 a month, that spend is more than covered going forward, should local sales volumes and pricing remain stable. While it's certainly our intent to grow in '24, in the event that we don't spend this cash on acquiring a new cash generative asset, we expect to end the year with a net cash balance of well more... Well over a $100,000,000.

7:47 Looking forward now, Turkey is obviously the engine room of our business and and will provide significant returns for years to come. It's a tremendous asset, already low cost before operational spend was reduced by 65% to come levels. Our net production of 4,300,000 barrels in 2023 was almost replaced by an upward revision in two p reserves, indicating that field performance remains strong, especially if exports and payments resume and facilitate further investment. As a reminder, the spend is cost recovered rapidly, but material investment remains on hold for the time being and until the current situation improves. We've just passed the one year anniversary of the ITP closure, and I have to say it remains quite uncertain as to when the pipeline will reopen.

8:37 As I'm sure many of you follow, there has been a great deal of news flow and commentary, both positive and negative, around when the current issues may be resolved and exports resume. In simple terms, and as Apicur has stated, the failure to export Kurdistan's oil has resulted in a loss of revenue of about $1,000,000,000 per month for Iraq. At the same time, as we understand it, that it is obliged to pay Turkey $800,000 a day penalty for not using the ITP. While bad for all of Iraq, this situation is, of course, hitting the people of Kurdistan particularly hard with oil and gas investment levels dropping and jobs being lost. It seems that there remain significant barriers to the pipeline reopening, some of which appear more political rather than commercial.

9:26 While solutions are there to be found for the pipeline to open, I'm afraid we're not in a position today to estimate when that will be. We hope for a timely solution, and indeed that's possible. We remain fully engaged with our industry peers and with our host government to try and make that happen. In the meantime, we continue to focus on our costs, maximizing local sales revenue, and delivering on our strategic goal of diversifying our income streams. The resumption of exports will not only deliver stability, but also return to much more material cash generation. This slide aims to demonstrate a couple of important points. Our current sales price of between 32 and $34 a barrel is less than half of the Brent oil price and considerably less than Soma was previously enjoying at the Turkish port of Ceyhan.

10:17 If exports resume, therefore, our free cash flow would fall, and this slide demonstrates in these ascending bars how monthly free cash flow improves once export pricing and volumes resume when the pipeline opens. We're exploring all avenues for the payment of the $107,000,000 of reported receivables that we owed for exports prior to the pipeline closing. While payment is not necessarily linked to the reopening of the ITP, the reopening would likely help to facilitate the payment of this debt to us. Indicatively, as again seen at the right end of the slides chart, if a debt settlement agreement was made where it was paid back over two years, that would add $4,500,000 per month to our free cash flows. Obviously, recovery over a one year period boosts monthly free cash flow even more.

11:08 It's worth remembering that we've always fully recovered amounts owed to us in the past, and we have received repeated commitments from our host government that we will be paid all we are owed. So far, though, we haven't seen a payment plan, and given the size and importance of this balance, we will, of course, take whatever action is required to defend this value for our shareholders. I'll now give you what color I can and what I know is an issue of significant interest for our shareholders as we continue to defend our contractual rights regarding the terminated Moran and Bina Bawi PSCs. Our spend to acquire and develop these assets was in excess of $1,400,000,000, so it won't be a surprise that senior management has spent a considerable amount of time and effort on this arbitration process.

11:56 As you can see from this timeline, there's been a lot going on behind the scenes, so to speak. Over the last two years, there's been an enormous amount of work on exchanges of pleadings, document disclosure, exchanges of factual witness statements, and exchanges of expert reports, etcetera. That culminated in a two week evidentiary hearing in London, which began in mid February and then concluded as scheduled on the first of March this year.

12:21 Closing written submissions are being prepared and will be made in April this year, and replies to closing written submissions will follow in May. The timing of the result is uncertain, but we expect it to happen by the end of this year. After all of this activity, our view on the merits of our case are unchanged since the arbitration process commenced back in 2021. We still hold that GENEL need every effort to engage with the KRG on the development of the Bina Bawi and Moran fields and submitting numerous development proposals for approval. KRG made clear its intentions not to permit development of the fields in accordance with the PSC terms, and our board concluded it was left with no choice but to accept that the PSCs are terminated as a consequence of the KRG breach and to seek compensation.

13:12 Moving on to growth catalysts and starting with the existing portfolio update, work has been paused for the time being on the two San Juan Well project in Somaliland, and the authorities there have granted GENEL and its partner a license extension that will allow work to resume in due course. There remains significant potential in Somaliland, which is why civil engineering work was completed in late twenty three by our team there in a manner that keeps us drill ready. The environmental, social, and health impact assessments have also been completed in anticipation of the project resuming. All of this work was completed safely, on time, under budget, and it was a great result and testament to our team there, especially considering that this is frontier exploration with very little infrastructure and without local experienced service providers.

14:02 I wanted to close on the issue of m and a. In short, our dedicated team continues to work hard in pursuit of suitable m and a growth opportunities. We continue to screen and pursue a range of opportunities, and we continue to be selective, rigorous, and careful in our analysis. As you've heard from us before, we're looking for production or an opportunity that is very close to production. We seek opportunities that will generate cash, contribute to our balance sheet, and are value accretive. That cash generation, the fact that they are a prompt contributor to shareholder value is extremely important for us and more important than any notion... Notional geographical parameters. Although, clearly, we would seek to establish a presence in a place that was stable and predictable and a good place to do business.

14:51 Successful addition of the right assets and the associated diversification of income, even on a relatively small scale, would have a significant impact on the outlook for our business, increasing profitability and diversifying our cash generation, improving resilience, and introducing new paths to further increasing shareholder value. Our parameters are unchanged, but are important and worth restating here. Cash flow is king, and a good way of summing up our criteria is our desire to reestablish a sustainable dividend program. We find that the reflective question, will an asset addition help us move towards the reestablishment of a sustainable dividend, a very useful guide. That question trumps geography and means that we are happy to look outside the MENA region to find the right opportunity for a value accretive deal.

15:43 In addition to a resumption of KRI exports and the recovery of receivables, doing the right deal would be a significant catalyst and could lead to a positive rerating of our stock.

15:56 I'll finish with a slide that nicely complements our strategic goal slide at the beginning of the pack. We continue to focus on delivery. We will continue to remove costs from the business and optimize cash generation, retaining our strong balance sheet as we look to diversify our production base. We look forward to positive words being matched by action that will lead to the reopening of the ITP pipeline, and we will continue to play an active part in APACORE in working towards reaching an agreement and facilitating the opening of the pipeline and resumption of exports. So in closing, GENEL has today a firm grounding, a very significant value creation potential ahead. And with that, I'm gonna pass you back to Andrew who will take us through the questions that have been submitted by Europe.

16:42 Thank you very much. Andrew? Thank you, Paul. The first question we have relates to the receivable of a $107,000,000 that GENEL is owed, and it's... Is the recovery of the receivable tied into exports restarting? Luke, do you wanna talk about receivables? Sure. Sure. Firstly, KRG have been consistent saying they'll they'll pay the the full amount that's owed. And, you know, hopefully, they've recently asked for IOCs to confirm the the balance of the receivables, which which demonstrates it is on their mind. That... That's good. In the past, you'll know receivables have been recovered through an override type mechanism, so linked linked to production. So if you're if you're betting, that might be the most likely way to recover the receivables.

17:29 But I don't think it's out of the question for it to be recovered in in various different ways depending on how the KRG and SOMO work out, how they're gonna deal with the the sector going forward and balances that are already related to it. So, you know, in one scenario, there might be a partial or full bullet payment. And in another scenario, it might be through an override mechanism. Let... Let's see. Thank you very much, Luke. The second question actually relates to Tactac. And what do you mean by saying that Tactac's place in your portfolio is under review? I'll take that one. Tax tax getting closer to the end of the asset cycle. You know, we think there's still money to be made there in the right contractual conditions. But for us, we're not certain that it represents a wise investment option.

18:24 Tactact was a minor contributor to our free cash flow even when we were exporting, feed around a million dollars in operating cash flow in 2022. So what was now a little bit more of a cost pool, meaning that a resumption of expels would come with a higher margin for a period of time, we don't see it as being a long term contributor for us. So even though the team there has done a great job in reducing costs, at present, they're still paying out about $500,000 a month on that license. So the time is right for us to consider whether it's something we we really want to hang on to or whether someone else has a better chance of getting better returns on their investment in that license going forward. Thank you very much, Paul. We've had a number of questions on Somaliland. I'll try to amalgamate them all into one. It's effectively people asking for an update on progress in Somaliland.

19:16 When do you think you will drill, and what's the reason for the current pause? Mike, that's your area. Sure. Sure. Thanks, Paul. Yeah. Happy to take that. Starting perhaps with a quick look back. So completion of the 2023 phase of the civils work, which which focused on the well site and was clearly an important milestone for the project. And as Paul alluded to already, it was the latest demonstration, really, that work can be undertaken here safely and successfully on time and on budget despite the front end nature of the project by by working collaboratively with local service providers and and communities. Our focus since completion of that work has been really on consolidating our presence as as guests in that local community. So we certainly look to treat our hosts with the respect they deserve, and we we strive to find ways to help make their lives better both short term and in short of longer term in in exploration success.

20:23 To that end, we were able to provide jobs and and precious income last year for well over a 100 local people. And we're currently working with a local NGO to deliver mobile medical services to around a 100,000 people. So that's what we've been doing of... Particularly of late. On timing of the drilling, the second part of that of that question, for a number of reasons, and I would say that is always the case when it comes to drilling frontier exploration wells.

20:53 The stars need to align on on many aspects, above and below ground, commercial, operational, geopolitical. So whilst we made tangible progress in 2023, we won't be drilling in 2024 and consequently not spending materially this year. However, we have been granted an extension as as Paul mentioned that gives us every opportunity for those stars to align in the future, and we remain very excited and very energized by huge potential value that may be present below the ground in in the SL 10 b 13 license. If it's there, it's been there for tens or hundreds of millions of years, so it's not going anywhere in the meantime.

21:38 Thank you very much, Mike. And while we're talking about future value creation, I'll try and amalgamate a couple of questions about m and a. One of them related to what our parameters were. I think that Paul touched on that nicely in the presentation. But are we still finding a lot of m and a opportunities coming our way, and is MENA still the focus?

21:58 I'll take that one, and and I'll start with a couple of points that on face value probably appear a little bit contradictory. Our cover is far from there. There is a lot that we are looking at, but good deals are hard to find,

22:17 especially given the strength of the oil crisis, and especially given that we are looking for ideally producing assets. You know, to give you a rough idea, at any moment in time, we probably have around 30 opportunities on our watch list. And and a lot of opportunities... A lot of other opportunities will have been rejected and not made it onto our watch list. And then we will focus on a relatively small subset of those 30 opportunities.

22:44 And during the course of our examination, many will be... Many of those... Many of that subset will be rejected. We might not like the asset. We might not like the cost. We might not like the risk profile. But there are others that we will seek to to progress, and we have been progressing. Sometimes it doesn't work out, but we remain confident that we are going to find the right deal. We are determined not to rush towards the wrong deal. We we continue to reiterate the point that we are disciplined and rigorous in our examination of m and a opportunities. We... There is a natural inclination, one might imagine, that we would focus on the MENA region, and we are very, very open to m and a opportunities in the MENA region. But we recognize that that's a constraint that we needn't necessarily place upon ourselves.

23:30 We are currently casting the net far and wide in search of the right deal. Thank you very much, Paul. A bit of a continuation theme, but moving towards financing. We've had a question asking that with the bond maturing in 2025, can you please elaborate what the refinancing strategy would be if some of the cash were to be used for an acquisition?

23:49 Shouldn't the bond refinancing be addressed first or concurrently with any M and A transaction? That's clear to you, Genev. Sure.

24:01 So obviously, we have the October 25 bond maturity in mind when we look at any opportunity. Different different assets we look at have different debt characteristics. So some can support an RBL type debt, others others different types of debt, and clearly have different levels of debt capacity as well. So every asset is different, and how that helps us work through the next year or so into that debt maturity is different for each asset. But I think, you know, why not deal with the maturity now? I think when we're in a domestic sales scenario and we still have a little bit of time to go before we get to the debt maturity, it would be a bit premature to think about sizing of debt and also probably have an... You know, a a cost of debt that we don't don't really want to pay.

24:54 We've always said, as we try and do m and a, what we want to do first is get the right assets into the portfolio. And second, or at the same time, get the right capital structure around it. So I think in short, I'm saying we're very mindful of it. We we think about that maturity when we model the various cash flow scenarios without... With each asset that we review. And the answer for how we deal with the existing debt or bring on new debt is different for each asset. But we're we're very mindful of it. We recognize it. We'll go... We'll do the right thing to manage that that maturity appropriately.

25:30 Thank you very much, Luke. Well, we've had, as you'd expect, we've had a wide variety of questions regarding the pipeline. I think actually the variety of the questions really does illustrate the varying and differing media reports that investors have been seeing in recent months. So we've had questions regarding whether or not the Kirkuk, Mosul, Turkey pipeline will come back online. We've had questions regarding what will happen if we get to next year when the ITP agreement expires.

25:57 I think we can almost roll them all up into one question, and and that is the... What are the things that are blocking at the moment the pipeline from reopening? And what will happen to, you know, what do we expect to happen if the pipeline doesn't reopen? Do we have a contingency in place? Well, I think there's a couple of things that we can I think there's a couple of things that we can point out? And and I would start by pointing out that as things stand today, our costs are covered. And if the ITP were to remain closed and for as long as we continue to enjoy local sales, GENEL can survive quite nicely as things are for the foreseeable future. So GENEL isn't staring at the edge of a cliff. As far as, what are the major impediments to reopening and how is that gonna happen, it's it's actually very difficult for us to provide a coherent answer to that.

26:48 We we get the same intelligence as market analysts get, and we read the same news flow as as everybody else sees. It's a complex issue, but primarily, it's a government to government issue. Primarily, this is a this is a negotiation that's taking place between the federal government of Iraq and the regional government of Kurdistan. And to a large extent, the IOCs are bit players in this drama and kind of standing at the edge of the stage. Now we we recognize that,

27:17 we recognize this is obviously a very, very important issue for the IOCs, and the IOCs have been working together very, very, closely under APACO to try and influence things as best they can. But at the end of the day, this is a government to government issue, and we rely on our regulator and our host government to try and do the best for the IOCs.

27:37 And while the pipeline remains closed, you've had a question to ask us to explain our decision to produce at near capacity at local sales prices despite what is characterized as a limited two p reserve. Well, I think the I think the answer there is that, you know, we have a business to support. And at the risk of sounding a little bit glib, any money is better than no money at all. Right? We have a contractual obligation to produce these fields as best we can. And in a world where there is no option but to produce it in the local market, then that's what we'll seek to do. And it makes sense to do that if we can do it in a manner that avoids the business from sync. It also might just be worth clarifying that the two p reserves figure that we gave in this presentation was net to GENEL. So there there is plenty of running room at Yeah. At Turkey.

28:27 It's worth it's worth adding. I think DNO gave guidance on their RTP about a year ago. And when they gave that, I think it was around nine or ten years RTP ratio. Moving towards the final questions now and possibly the final question. An update on Morocco is asked for. Okay. Yep. One for one for me, I think. Yeah. Yes. So on Morocco, I think we've spoken before about the phase that we're in at the moment, which is around seeking a seeking a partner on the license. We have seen some interest from a number of companies, and those companies have ranged actually from majors to to regional players. That was over the second half of last year and actually into q one of this year.

29:14 We're currently integrating results of ENI's Cinnamon one well into our understanding of Lagxera. Now Lagxera sits in a in a different structural and geographical part of the basin. So with that comes a good degree of independency of of prospectivity, I would say. But then in the meantime, the spend on Morocco is is very limited. It's focused on the small minimum work obligation, which is around studies and some site reprocessing, both of which we we anticipate adding to the to the sales case as they as they progress.

29:52 Thank you, Mike. Well, we'll take we'll take this as the final question. It's back on the pipeline. It's asking about it's a reminder effectively of in terms of when the ITP contract runs out, what would happen then? And would it allow Kurdistan to resume exporting independently?

30:16 Everybody anticipates when the current contract comes to an end, a new contract will be negotiated, and I think that's what's in the mind of the the the Turkish authorities for sure. It's difficult for us to say with certainty when those renegotiations would would begin, but there is a notice period that kicks in at the end of this year, a a full year before the current pipeline contract comes to an end. So we should get an indication this year that renegotiations are underway if indeed that's where Kurdistan wants to go.

30:46 And with that, I apologize if there are any questions that we haven't answered. Please do feel free to contact me directly or give me a call, and I will talk those through. But I think that sums up the key questions that we have received, and so I'll just pass over to Paul to say a few closing remarks. Yeah. I would simply repeat the point I made at at the end of the presentation, which is basically, GENEL is in a very strong position. It it it has a strong base.

31:18 We have a number of catalysts that will, if we pursue them properly, generate a great deal more value for shareholders. And the entire team and I will be working very hard towards that end in 2024.

31:33 Thanks very much. Andrew, Paul, Luke, Mike, thank you for updating investors today. Could I please ask investors not to close this session? They should now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few minutes to complete, and I'm sure it'll be greatly valued by the company. On behalf of the management team at GENEL ENERGY PLC, we'd like to thank you for attending today's presentation, and good morning to you all.