Genel Energy (LSE:GENL) — Half Year Results

0:00 Good morning and welcome to the GENEL ENERGY PLC Half Year Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time by the Q and A tab situated in the right hand corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. And I'd now like to hand you up to Paul CEO. Good morning to you, sir.

0:30 Good morning, and good morning, everyone. My name is Paul Weir. I'm GENEL's CEO. Welcome to our twenty twenty three half year results presentation. I'm joined this morning by Luke Clements, our chief financial officer, and Mike Adams, our technical director. Thanks to those who've already submitted questions online should anyone have any other questions as we work through this short presentation. Please submit them in the box, which is on the right hand side of your screen. This first slide shows where we are now. This update comes at a challenging time for the Kurdistan oil sector. Where we are today is very different to where we were just over four months ago when we presented our year end results. At that time, we outlined a committed dividend program funded from our free cash flow and the plans to expand our existing business.

1:21 We spoke of our determination to diversify our business using some of our significant cash balance, which stood at close to $500,000,000 at that time. Oil export from Kurdistan was halted in late March, and material production ceased shortly thereafter, more than four months ago. Since we last spoke to you, we have not generated any income from exported production, and that challenge has exacerbated a situation that already saw us facing six months, half a year of outstanding receivables, having last been paid in March 23 for production that was generated in September 22. Since the pipeline arbitration ruling by the International Chamber of Commerce and the resulting pipeline closure by the KRG, the apparent impasse between the federal government of Iraq, the Kurdistan regional government, and the Turkish government continues.

2:13 While we know that dialogue amongst these parties continues on selling arrangements for crude oil produced in Kurdistan, for... On dispersal of the Iraq budget and on the reopening of the pipeline, there is today no reliable line of sight on the timing of resumption of either exports or payments. This has dramatically impacted our free cash flow and liquidity outlook. So far, our forecast year end twenty three liquidity position has been impacted negatively by $170,000,000 from the combination of those overdue receivables and revenue lost since late March. While we're confident that this current situation will be resolved in time and that production and generation of income will be reestablished, the current lack of clarity accentuates the importance of diversifying our business.

3:01 And we continue to search for the right assets at the right price to allow that diversification to happen. Like all of our peers, the current situation has required us to take decisive actions, some planned but accelerated and some others unplanned in order to preserve liquidity and minimize leakage of value from the business. This has resulted so far in a $50,000,000 reduction in our projected spend for the year, with our workforce reduced significantly and by more than 50%. In addition, with the lack of income in the period and no line of sight on precisely when predictable, reliable payments will resume and support a cash generative business, we have taken the very difficult decision to stop the dividend, a decision I can promise you that has not been taken lightly.

3:50 In recent years, we can point to a number of things to demonstrate our commitment to our dividend. In 2020, during the uncertainty of the COVID crisis, when all crises were very low, we continued to pay. But at that time, of course, we ourselves continued to be paid. The position we find ourselves in today with no income since March and with a $170,000,000 negative impact to our cash is unprecedented. Of course, we believe the current situation will be resolved and that regular and reliable payments will be reestablished that will, in time, allow resumption of the dividend. There are signs of progress towards resolution, but at present, it's simply not something that we can control or predict with certainty. The $170,000,000 in lost income that I mentioned is made up of two components, $110,000,000 of overdue receivables, which, as I've mentioned, our last payment was received in March for September 22 sales and $60,000,000 for four months of lost revenue from April until July.

4:52 In recent months, we've been able to realize limited domestic sales at a significant discount to Brent, but there's currently limited capacity to take and refine oil locally, so the value of these sales is not significant. We have also, with our operating partner, been studying possible longer range trucking options to access higher prices and higher volumes, but this is a very significant and complex logistical, commercial, and political exercise. The chart on the right hand side shows how production is split between our assets in Q1 when we were producing all three licenses, with profitable talcay production being around 90% of our barrels produced. Tauke remains our key value driver, and we expect it to generate around 10 to $15,000,000 a month in revenue once normality resumes, depending on oil price and production, obviously.

5:42 We remain entirely aligned with DNO, our operating partner, on plans for that license. The production contribution from Taq Taq and Sarta is low, with Taq Taq barrels marginally profitable at current levels of production and costs and Saq Taq barrels loss making. As as a result of that, we have initiated a cost reduction program at Taq TAC, which is now being implemented by TT Opco, and we continue to work to keep the asset profitable. We will report in progress as we work through that exercise, but, clearly, we will only make further investment in TAC TAC once regular payments have been reestablished and if that makes economic sense. With SATA loss making at its q one production levels, a situation greatly exacerbated by a lack of payments, we see no line of sight on SARTA being profitable in its current form.

6:32 Neither do we see a combination of a technical case and a payment environment that supports risking further capital in drilling wells. So we, along with our partner Chevron, have informed the KRG that we intend to exit that license and are currently in dialogue with the MNR on the relevant terms. We simply cannot justify investing more time and money in an asset that has proved far more complex and less productive than we had expected.

6:59 So we will continue to proactively streamline the business so that when the current position on exports and payments improves, our vehicle is efficient, cost effective, suitable, and prepared for the activities we have ahead of us at that time. We have taken active decisions to reshape our portfolio and our organization and our plans, and we continue to actively examine expansion opportunities. We remain clear on our direction of travel and we retain a material cash position. We are determined to deliver the business that we have framed for you over the last twelve months, namely a business that reduces our reliance on Kurdistan cash flows and is stronger and more resilient. I'm going to pass over to Luke now to take you through some of the more detailed financial information.

7:47 Thank you Paul. Our reported cash at the half year is £425,000,000 a $70,000,000 reduction from the start of the year, with of course £110,000,000 of receivables now overdue. That $70,000,000 movement is made up of three components. First, Kurdistan business cash outflow of $21,000,000 Second, corporate costs and net interest cash outflow of $15,000,000 and third, the payment of final dividend for 2022 of $34,000,000 I'll provide a little detail on those first two components. So first component, the Kurdistan business cash outflow of $21,000,000 includes proceeds of 61,000,000, CapEx of 41,000,000 and OpEx of 22,000,000 and the payment of normal accrued liabilities from 2022 of $17,000,000 which is mainly from the Tawke license.

8:38 If you cut that Kurdistan business performance into two quarters in Q1, the KLI production business generated positive free cash flow of 24,000,000 with two payments totaling $60,000,000 received in that three month period. And in Q2, there was total spend of $28,000,000 which included drilling and partially completing three new production wells on Tawke, which are now ready to be completed and plugged in once production resumes. It's worth noting that spend on Tawke will ultimately be cost recovered through costal. What does that mean? It means that we currently have about $20,000,000 of spend that has not been cost recovered and this will add about $16,000,000 of incremental revenue when sales resume. On the second component, $15,000,000 on corporate costs and net interest, this includes organizational cost reduction, the positive impact of interest income of about $10,000,000 both offset partly by spend on Moran and Bina Bawi arbitration costs.

9:37 Finally, regarding $110,000,000 of overdue receivables, we've had no indication from Macaoji when repayments will commence, but we have been assured repeatedly that it will be paid, that we will be paid all that we are owed. On the next slide. As Paul mentioned, we've taken action within the organization to address our spend in these unprecedented circumstances, principally trying to minimize non value adding leakage arising from the suspension of activity, recap the business to reflect our planned exit on Sarta and maximize the capital we have available to add new assets and diversify our income streams. Our revised CapEx guidance therefore is $70,000,000 for the full year with $50,000,000 already spent in the first half. This is a significant reduction from our original guidance of 100,000,000 to $125,000,000 Much of the forecast reduction relates to the Tauke PLC, where activity has been significantly reduced quickly and efficiently by the operator DNO, but we've also cut spend at Saatra and Taktak and are working to cut more.

10:37 The circa $20,000,000 of spend in the second half on CapEx includes single digit spend on completion of civils work in Somaliland, which includes the well pad and access rates and we'll take a decision around the turn of the year on the timing of what happens next and when we commit to the next phase of that program.

10:54 Following our decision to exit the SATA license, where we are the operator, we've taken rapid action to right size the organization. We've reduced our workforce by 55%, sadly letting some very good people go. Our manpower costs have been reduced to the equivalent to our 2019 levels, which is when we first brought Sarta and Caridre into the portfolio and moved from being a non operator to an operator. And the second half will see us continue to incur costs on arbitration, which likely results in higher corporate costs year on year. Our balance sheet remains robust with net cash of $158,000,000 significant covenant headroom and no debt maturity for over two years. Going forward, we will continue to work with DNO to seek to develop alternative sources of income through domestic sales or wider.

11:41 So far, the limited sales that we've made will provide us with cash of about $5,000,000 but the domestic demand is fluctuating and it's hard to establish consistency. We will also continue to take actions to minimize waste and ensure that the organizational capability and cost structure is appropriate for its level of activities and income. I'll now hand back to Paul to provide an overview of the politics that we hope will soon unlock resumption of exports and regular payments. Thanks Luke. As is often the case with Iraqi politics, it's helpful to step back and look at the bigger and the general direction of travel. The arbitration result and some sort of short term closure of the pipeline, as in weeks, was not entirely unexpected, but the length of this outage, over four months now, has been a surprise to most observers.

12:29 It's now clear that for resumption of exports, a number of key things have to happen. The first is an agreement to be reached between Baghdad and Erbil on how oil produced in KRI and exported from KRI will be handled. A preliminary agreement was reached on the April 17. SOMO, the Iraqi state oil marketing organization, will market Kurdistan's oil, and it was encouraging to see reports of agreements with traders being signed in May, which should provide a frame for future sales. Then the more recent approval of the three year federal budget has helped enshrine the agreement between Baghdad and Erbil and has determined a structure for the transfer of funds from Baghdad to Erbil. Key to the budget, however, will be its implementation, which I'll I'll come to shortly.

13:14 So the last obvious requirement for production resumption seems to be the agreement of Turkey to reopen the pipeline. Dialogue between Baghdad and Ankara has been ongoing for some time now. Reports suggest that Turkey is keen to negotiate a number of issues, including a solution to the 1,400,000,000 arbitration ruling against them and also further planned arbitration hearings before opening the pipeline. On this key point, all sides continue to make positive noises, and we know that a series of high level meetings have taken place recently with more planned. We remain of the view that everyone wins if a solution can be found, and it's worth reiterating that things could change very quickly once satisfactory solutions to the Baghdad anchor issues are found. We maintain a state of readiness and have the ability to resume production quickly when the pipeline reopens, and there is clarity around payments of receivables and overdues.

14:07 The table on the right sets out what the budget is reported to contain, but the key aspect of course is actual budget implementation. We know that there's a stipulation for KRG to export 400,000 barrels of oil a day to Jahan as part of the arrangement. We know that those barrels will be marketed and sold by the federal SOMA, and we know that Baghdad will transfer a 12.67% proportional share of the national budget to KRI in return. And we believe that the federal government of Iraq will also compensate on a per barrel basis for all production and transportation costs. But until barrels are flowing and regular flows of funds have been established, I'm afraid it's

14:46 difficult to interpret exactly what the budget will mean even if on paper, it looks as if the KRG can expect significant and predictable transfers. The next slide shows monthly average KRG income from oil sales over the last two years, as well as the most recent stop gap transfers from Baghdad to help KRG pay civil service salaries. This table serves to illustrate the extent to which interim ongoing transfers compare with previous KRG income. The point being that new budget arrangements that will almost certainly improve on these interim arrangements are likely to put KRG in a better place than it was before. As you can see, the agreed salary transfer of $692,000,000 for July is not very far off the total monthly oil revenue that the KRG received in Q1 of twenty twenty three.

15:36 The key then is what further revenues will be transferred from oil sales and other revenues, and for this we'll simply have to wait and see.

15:43 It's notable that for the first time, Kurdistan barrels will be flowing with the open agreement of Baghdad enshrined in law, and this should be a sort of positive for investors who have previously been concerned by political risk. As we await the reopening of the pipeline, it's worth emphasizing that Prime Minister Barzani has committed to the IOCs on a number of occasions to honor the KRG's contractual obligations under the PSC's, its commercial terms, and to pay all amounts owed to IOCs. The KRG will remain as the IOC counterparty in line with our English law PSCs.

16:20 Again, how the budget accord is implemented will be key. The practical outcome can sometimes be different from what is written, but there is certainly the potential for a framework that is more predictable and less volatile than it has been in the past.

16:34 To conclude then, here is our outlook and focus. We will continue to concentrate on doing the right thing for the business and to protect value. We will continue to minimize expenditure, preserving liquidity to transform the business through acquisition and also to maximize cash generation from Kurdistan once production and payments resume. We will continue to prioritise our liquidity for new production assets and building a business with resilient diversified cash flows that will then be able to fund a dividend. We've reduced our activity and expenditure on the Somaliland exploration well, but continue with critical path activities in the field and maintain a state of readiness that will allow us to ramp up when the time is right.

17:19 Finally, I also want to note that we are progressing towards the Moran and Bina Bawi arbitration hearing in London scheduled for February next year. Thank you everyone for listening, and I'm now gonna hand over to Andrew Benbow to curate the questions that we've received before and during this session. Over to Thank you very much Paul. As always with these questions we'll aim to answer as many of them as we possibly can. If anyone feels that we haven't answered the question or we haven't answered it fully or would like further detail then please just pick up the phone afterwards and give us

17:49 a call or drop me an email. I'll try to amalgamate questions where possible. So the first one we've had coming from two different viewpoints, which is on our future in the KRI effectively. And we've had two questions, one of which is, is GENEL planning to leave Kurdistan? And the other one is the flip side of that, is is GENEL looking to buy more assets in Kurdistan? So over to you. Well, the very... The short answer to the first part of the question is clearly no. We are not planning to leave Kurdistan. I mean, Turkey is our key asset. It's our key value generator. It's a terrific asset with a bright future, and it's in the hands of a very capable operating partner, DNO. So we we have no plans to leave KRI.

18:31 In relation to expanding our footprint in KRI, we've made no secret in the past that we will obviously critically examine any opportunities that come our way, and if there are bargains to be had, then we will clearly look at it. But I would remind the audience that our strategy as it stands today is one of diversification and actually, taking some eggs out of the Kurdistan basket and putting them to some other baskets elsewhere.

18:58 Thank you, Paul. A question for Luke next as it relates to the back payments and due payments of the KRG. We had one question as what is the situation with back payments and due payments in the KRG? We also had another one just asking for a bit for clarification on what the $170,000,000 expected impact is in cash flows. Is this the impact in cash levels you expect to have by the end of twenty twenty three versus 2022 levels? Let me take the second one first. So the 170,000,000 is we're we're over a 110, which is overdue. It doesn't look like that's gonna be caught up on by the end of the year. So there's a 110 of liquidity missing by December 23, and we've lost four months of revenue, which in a in a normal year you would have earned and received by the end of the year as well. So it's a year end cash position which is impacted by a 110 of overdue receivables and 60 of lost revenue.

19:57 On the receivables position, look, it's 110 overdue. We have not had an indication from the KRG when they will commence reducing that balance. We have had consistent

20:13 repeated confirmation multiple levels that we will be paid all that we are owed. Thank you very much, Luke. We've had many questions as you'd imagine on the pipeline closure. I think Paul answered many of them and there's no need to go over those again. But we have had the question from a couple of people relating to a bit more detail on whether trucking oil would be feasible. I know we touched on that. Someone has also asked storage. So are there any alternatives to the pipeline that are open to us? Or is there more storage that we could have available?

20:44 There are alternatives. The alternatives that we can exercise immediately are somewhat limited and we're happy that we've taken full advantage of the alternatives that are open to us in terms of selling oil to local refiners for domestic use. And along with our IOC peers, are trucking oil to pretty much every refining facility that's available within Kyrgyzstan. Obviously,

21:13 are trucking options that would see our oil be exported and taken further afield, and those of you that have been studying Kurdistan will remember that that's precisely how Kurdistan oil was handled prior to the pipeline coming into being. So there are clearly other alternatives, but as I mentioned during the course of my presentation, there are... These are pretty significant logistical and commercial challenges as well as the political issue of moving oil across borders. It's something that we're looking at. It's something that our operating partner has examined in some detail. We're in dialogue with them, and it's something that we'll continue to look at. Well So the opportunities are there. While while we're on the question, someone's just asked if there's a potential export route south at all.

22:00 For in federal Iraq? Yes, there is. As far as infrastructure is concerned, there are some gaps in the infrastructure that would have to be closed before we could actually export the kind of volumes we're capable of producing through means other than the interconnector to JHAN. But there is certainly potential for oil to be moved south, yes. Thank you very much. Moving topic now, we'll move on to Somaliland where we've had a few questions.

22:26 First one is what has been achieved on the ground since the last investor call? Mike? Okay, so probably the best way I could answer this is just with a little bit of recap on where we left this last time. So I think in short, probably famous last words for anybody who knows me. So I think we spoke at full year results in March about the challenges of exploration in a frontier such as Somaliland.

22:58 As a lot of people know, this is going to be the first well in Somaliland for over thirty years, and with that comes challenges on a number of fronts: contracting and procurement and the logistics of establishing supply chains and moving people and equipment. But with that also comes opportunity clearly in terms of benefiting local companies and communities and that's as we know one of our mantras as a company.

23:23 So kind of onto the question against that backdrop, well delivery progress has been good, so long lead items are on order. And then in terms of that boots on the ground activity, the civils work to build the well pad, the pits, the camps and the access road is well underway using a local contractor, and that's a project that will run through to the turn of the year, at which point we'll see where we're at with the project and more holistically as a business in terms of timing for the one itself. Which moves us on nicely to the next question, which we've had, which is around timing of that well. The question that has submitted is, is drilling still expected to happen late twenty twenty three, early twenty twenty four? Now I think I'll state that the late twenty twenty three aim was not the latest guidance, the latest guidance we stated was that we hoped to drill next year. But with that said, Mike, what is the latest on timing? I think you alluded it to at the end of the previous answer. Yes, yes, that's right Andrew, yes and as you say, our last guidance on well timing was I think for the middle of twenty twenty four. That remains valid with the appropriate funding structure in place.

24:33 But but for now, we're we're not getting it unnecessarily ahead of ourselves. So, rather we're we're laying the ground, no pun intended, with those civil works whilst we defer more material non critical path capital expenditure into next year, which is sensible thing to do. And the final question on Somaland, are there any plans for any future acquisitions in Somaliland? Yes, the immediate plans, no.

25:00 Our acreage position is huge. It's very much the sweet spot for exploration in Somaliland. And we have a large inventory of prospects headed by that high graded Tosan prospect. That needs to be tested first and foremost. Our new business focus is on acquiring assets that are cash generative or will be in the very short term. That isn't Somaliland right now, but in shallow, it is in the

25:27 future. Thank you very much, Mike. While we're on the new business subject, there's been a number of questions you'd expect all on the same theme. Could we elaborate on what kind of new assets we are looking to acquire in terms of size, regions and potential cash outflow?

25:42 And then as always, are asking about timing of any transactions, which I know is something we cannot answer on, but I think we can give a bit of color on what exactly it is that we're looking for at the moment. Yeah, I mean, I'll take that one. Timing, as you've suggested Andrew, it's difficult for us to talk about timing. We certainly haven't set ourselves any deadlines and we're certainly not rushing towards a deal and putting ourselves under pressure. We're gonna take the time to carefully examine everything that comes our way and everything that we can seek out and find and make sure that we get the right deal at the right price. In terms of the nature of the acquisition that we're considering, of course, we're interested in producing assets or assets that are very close to being producing and that would give us a high margin and a high rate of return. We are we are pretty agnostic in terms of geography.

26:30 We we know and understand Middle East, North Africa area well, and there's a natural disposition towards that geography given where our current operations are, but we've certainly looked in other places as well. And we are not discounting other areas further afield. Thank you, Paul. Changing tack again, will you be able to sell hydrocarbons at a higher price once the pipeline reopens?

26:57 We would anticipate being able to sell hydrocarbons at a higher price. One of the advantages of having SOMO marketing the oil is that we think that they would probably be able to realize a better price than the previous arrangement had. But until we see details until the pipeline actually opens and we actually see that dynamic play out, it's going to be difficult to talk about it with certainty. Thank you, Paul. And we're moving on to final questions now. I think I believe we've answered many of them in certain iterations. So if people do have any final questions, please submit them. Or as I said before, call me afterwards. One of the questions that we have left though is, do we expect to have new contracts with Iraq after the pipeline reopens? No, we don't expect to have new contracts with Iraq. We have English law PSCs, the counterparty is the Kyrgyzstan Regional Government and we don't anticipate that changing. We've received, as I mentioned during the course of the presentation, we've received a number of reassurances from the Prime Minister himself and from his senior cabinet members that the Kurdistan Regional Government sees these contracts as being on good footing and sound and that they will honor them.

28:07 Thank you very much. The final question then, I believe, unless another one comes in while you answer this one is, are you anticipating any contingent liabilities from the exit of SATA? No, we're not. And on that very clear answer, I'll pass over to you, Paul, for any closing remarks. Well, look, I just wanna thank everyone for attending today. We always look forward to these sessions, and we always look forward to the q and a. We look forward to giving you better news at the next update, and, I'll part by promising you that we are continuing to work very hard to deliver on the strategy. Thank you very much for your time this morning. Paul, Luke, Mike, Andrew, thank you very much for updating investors today. Can I please ask investors not to close this session as you 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 moments to complete, but I'm sure will be greatly valued by the company.

29:04 On behalf of the management team of GENEL ENERGY PLC, we'd like to thank you for attending today's presentation, and good morning to you all.