Genel Energy (LSE:GENL) — Half Year Results

0:00 Good morning, and welcome to the GENEL ENERGY PLC investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can 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 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 public responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. And now I'd like to hand you over to Paul Weir, CEO. Good morning, sir.

0:32 Thank you and good morning, everybody. My name is Paul Weir. I'm the CEO of GENEL ENERGY and I'm joined today by our CFO, Mr Luke Clements. Welcome to our half year twenty twenty four presentation. I'm going to walk you through a very short presentation outlining where the business is today, and what we will be focused on in the coming months. As we get through this short pack, you can submit questions or you can submit questions at the end and Luke and I will do our best to answer as many of the questions that we can. This first slide is very similar to the slide that we started with in our full year results presentation earlier in the year. Some of the numbers have changed for the better, I'm pleased to see. The left hand box illustrates the strong resilient platform that we've established over the past year by shedding unprofitable assets and reducing costs significantly.

1:26 A platform we maintain by being determined to exercise financial discipline and only being prepared to invest where we are confident that we'll see appropriate returns on that investment. The Tauke PSC remains the cornerstone of our business with consistent reliable

1:48 half of the year. In this new and hopefully short lived reality, where sales are being limited to the local market at around $35 a barrel, that cash generation has more than covered our cash outflows in the first half of the year. So we have a strong balance sheet with a significant cash balance and a net cash position of over $120,000,000 The three boxes to the right show what lies ahead and where our focus is to move the business forward. We continue to pursue the resumption of exports and access to international prices that will materially improve revenue and in turn support further investment in the Telkie asset and consequently support continued strong production performance. We continue to look for new accretive production assets to diversify geographically, to diversify our cash generation, to build our portfolio and to deliver production upside.

2:43 And finally, of course, we have been focused on the arbitration, which has commenced by the KRG in 2021. Since when we have taken the necessary action to protect shareholder value. This presentation will now provide a little color on each of these four subjects. During our results presentation in March, we guided that we would be cash flow neutral this year with an expectation that the first half of the year would see a small outflow as some nonrecurring expense went down. And then the second half of the year, we'd see a modest build in the cash position. Well, we've done a little better than that in the first half of the year with our cash balance now $7,000,000 higher than it was at the start of the year, standing at $370,000,000, with an expectation that we will indeed see that further increase in the second half.

3:31 So we maintain the view that net cash will be well over $100,000,000 throughout 2024. Our nominal debt is unchanged at $248,000,000 but with a low net interest cost on that debt of around 4% or so, this is low cost cash that has continued to provide optionality to the business in the first half of twenty twenty four. During this time, the domestic sales situation has become better established. We have reshaped the organization and mitigated some liability risk. Our bond debt is now only fourteen months away from maturity. As you would expect, we continually assess the appropriate levels of cash and debt that the business needs to pursue its key strategic aims. And today, we have announced a tender to buy back some of our bond debt, and we aim to reduce the level of debt by at least $25,000,000 in the next couple of weeks.

4:25 Our cash continues to support our pursuit of M and A opportunities, and that measured and careful search for new assets continues. We've spoken to you regularly about the type of deal that we are trying to secure, and we'll cover the key characteristics of the opportunities we're searching for again later in the pack. Tawke is our cornerstone asset comprising the Tawke and Peshkabir fields. It's a truly world class asset. It's very much prized. The Tawke Field passed the three fifty million barrel production milestone in the period, and its consistency and predictability are well established. Peshkabir Field continues to improve, and we saw reserves added through the CPR process earlier this year. We see around 300,000,000 barrels still to come from this license, 25% of which is GENEL's.

5:13 That's around 75,000,000 barrels. So there's a very significant value still in the ground. Both fields are very low cost with a per barrel cost of around $2 and the cost of oil capacity is such that we can efficiently ramp up activity when the circumstances are right. Given that we're currently obliged to sell to the local market at a heavy discount, we have not drilled any wells in the first half of this year. But good work has been done by the operator to maintain production at levels that meet our needs. And as the exports issue unfolds, we will continue to review the situation with the operator, DNO, to ensure that we are taking the right decisions and making the right investment decisions that best serve our shareholders. On this next slide, you can see that the level of demand, local demand, has been fairly consistent since the start of the year and at around 80,000 barrels a day on average in the second quarter.

6:07 This is higher than our original expectation for the year, and we hope it will continue. Initially, there was a tender process to determine pricing, but pricing is now negotiated. And we've seen an improvement in price from just over $30 a barrel at the start of the year to a fairly consistent $37 a barrel in the past few months. As you may be aware, there have been eight government licensed buyers since the end of last year have competed for our oil. These buyers have been reliable. They've paid upfront by bank transfer and then collected oil for refining in Kurdistan. And as I just mentioned, this chart shows that prices improved in the last quarter, which is good news. So the combination of positive demand, improving pricing and positive working capital has resulted in the Tauke PSC generating more than $40,000,000 of free cash flow in the period, which is higher than our expectation at the start of the year.

7:01 That free cash flow has been more than enough to cover our costs. And as you can see, some of those first half costs that we knew would fall away as the year progressed, costs like arbitration, SATA relinquishment and certain payables, will not remain in the second half of the year. It's obvious, and I've said already, that free cash flow generation would benefit enormously from the pipeline reopening and that exports and consistent payment would not only provide access to international prices, but would also create a situation that would allow an increase in investment and maximization of production from the TALKi license. When exporting internationally, entitlement from that license can generate over a $100,000,000 of free cash flow per annum for GENEL.

7:47 So far, sadly, we see little progress regarding the resumption of exports, but there have been recent intergovernmental talks and tripartite meetings, which at least demonstrate that there is willingness in all sides to invest time to try and unlock the impasse, and it suggests that a negotiated solution can be found. Unfortunately, at this stage, there's not much more I can say in terms of predicting when the issue might be resolved. All I can say with certainty is that GENEL remains fully committed to working with the regional and federal governments to try and find a solution that treats all parties fairly. We take comfort from the fact that both the KRG and the federal government of Iraq have reiterated their intention to respect the contractual rights and commercial terms of the Kurdistan PSCs. We see no reason why resumption of fuel production should not be quick once the political challenges have been resolved.

8:39 Our search for value accretive acquisition opportunities continues. We're looking for cash generated production. We're looking for opportunities that have upside and that we can develop further. It's important for us that we diversify geographically too and reduce reliance on any one particular operating locale. Such a change would certainly reinvigorate our portfolio, but of course, the entire M and A effort is aimed towards the eventual reintroduction of a resilient and sustainable dividend programme and providing value for shareholders. We all know that good deals are hard to find and we are patient. We are still seeing sufficient opportunities in suitable geographies and with characteristics that suit GENEL's technical, operation and commercial capabilities to believe that we will be successful and will find the right deal to move the business in a new direction.

9:29 There isn't a great deal I can say in arbitration other than to repeat what we've told you before. As a reminder, we invested $1,400,000,000 in these licenses, which were terminated by the KRG in 2021. The KRG then filed an arbitration claim against the GENEL subsidiary, GENEL ENERGY PLC, a declaration that the KRG had the right to terminate both licenses. Consequently, that subsidiary was left with no choice but to defend shareholder value and file a counterclaim that the KRG, to begin with, did not have the right to terminate and had committed repudiatory breach, and therefore owed the company compensation for its losses. Being confidential, we can't provide further details on the case, but most recently, the arbitration evidentiary hearing has concluded.

10:17 That came to an end at the end of Q1, and then final written submissions and replies were provided to the tribunal in May and June of this year. The arbitration tribunal is currently considering what it's heard and read, and we expect to hear the decision of the tribunal by the end of the year. Moving on to Somaliland, where we see exciting exploration potential and where a discovery could be transformational both for our business and for Somaliland itself. As a reminder, the civil engineering work completed in late twenty twenty three focused on the well site and access road and was an important milestone for the project. That civil engineering work has concluded in a manner that allows us to pause operational activity in the field. We have mentioned earlier in the year that a license extension has been granted by the host government.

11:08 In country team remains fully committed to our marvellous CSR effort, which provides mobile medical unit care to a community that's much in need of such support. The mobile medical units have seen more than 20,000 patients so far this year, and we are delighted to announce that we've extended that initiative further, as part of our commitment to Somaliland. Our teams in Somaliland and London continue to undertake proprietary work, in order to maximise the chances of success on this exciting project. We continue to pay very close attention to the geopolitical and security situation in and around Somaliland, especially with presidential elections scheduled towards the end of this year. So in closing, here's our outlook and our focus on the road ahead. We continue our effort to build the business with resilient, diversified cash flows.

11:59 Tauke is the cornerstone of the resilient base that we've established and shall maintain. It generates significant cash flow, and we'll continue to work with the operator to optimize that cash generation, while at the same time ensuring our cost base and capability are appropriate for the company to achieve its key objectives. We will continue to work relentlessly and creatively with our peers and our host government to push for a deal that will allow Kurdistan exports to resume. We aim to diversify our asset base, and we will, of course, continue to develop and mature acquisition opportunities to add the right value accretive assets to our portfolio. And finally, we await the outcome of the arbitration to see what impact that has on the future of the business. I hope you can see that much has been done to consolidate the business.

12:47 We are far from content with the current situation, but we have a resilient platform and will maintain our discipline and keep our energy focused on delivery of value for our shareholders. So thank you very much. We're now going to look at the questions that have come in and Luke and I will do our best to answer those. Paul, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab situated on the top right hand corner of your screen. Just while the company take a few moments to review those questions submitted today, I'd like to remind you that recording of this presentation, along with a copy of the slides and the published q and a, can be accessed via your investor dashboard. As you can see, we have received a number of questions throughout today's presentation. Now please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end.

13:34 Thank you very much. We've had a few questions and they kind of group into three themes. So let's start with the first theme which is Kurdistan. Paul I think simplest to ask what is now stopping exports from restarting in Kurdistan?

13:52 Okay. Well, the the regional government in Kurdistan and the federal government in Baghdad have yet to agree terms on how Kurdistan oil will be paid for. And will that payment features in relation to the transfer of federal budget funds from Baghdad to Erbil from the federal center in Baghdad. And until that agreement is made, Kurdistan oil is being prevented from export and is being sold locally. The extent to which the IOCs themselves are being allowed to participate in these negotiations sort of comes and goes ebbs and flows. But when they are being consulted, they are listing a series of key conditions to an agreeable outcome that include the agreement such as it is has to be tripartite and on agreeable terms for both governments and the IOCs.

14:46 The economic model of the existing KRI PSCs has to be honored. We strongly believe in the sanctity of our PSCs. And there has to be surety about past and future payments. What that means is an arrangement has to be put in place that allows us to recover the debts that we are owed, and the mechanism for payment going forward has to be reliable and predictable. It wasn't before, as you all know. None of this is confidential on you. I would direct you towards the press releases gazetted within the website if you want to see the position of the IOCs who are part of the Trade Association. But what's clear, I think, is that this isn't really a commercial or an industry issue. First and foremost, it's a complex political issue tied up with other complex political issues that the IOCs simply have no part of. It's primarily a political issue that politicians need to sort.

15:37 Until then, we do what we can to help break the impasse and make sure that we act in a way and importantly position ourselves in a manner that's in the best interest of our shareholders. Right now, in terms of income generation, that means negotiating the best local sales deal that we can.

15:55 Next question is when will dividends resume? Yeah, you take that one. Yeah. Dividends are important to us. You can see there in the center of that triangle on the screen. It's what we're trying to build the business towards which is a reinstatement of a dividend program. To reinstate the dividend program we need repeatable cash flows, resilient cash flows and ideally diversified cash flows And that's what we are working hard to get get back into our business not only in Kurdistan but also through diversification. We've lost over 100,000,000 of cash from the export pipeline being shut. So the small free cash flow we've built this year is really balance sheet. It's really building our cash balance. It's really trying to find ways to get our capital to work and build our portfolio and diversify our cash generation.

16:55 Those are the priorities of the business and we set them out through this presentation.

16:59 If we can make progress with those priorities we would of course look back at the dividend decision pretty quickly or in the event we have surplus cash. So work to do, we're certainly focused on building a business that delivers a consistent diversified resilient dividend but we are not there yet.

17:22 Next question on the third theme which is Somaliland. Please share an update on the operations and what progress has been made since the last investor meeting. When will the projects resume drilling and perform the remaining activity to reach production?

17:44 Okay. I'll take that one. It is worth bearing in mind, I think, that what we're talking about when we talk about Somaliland is a frontier exploration project. And it's always the case in an environment like this that the stars need to align in a number of aspects, both above and below ground, commercial, operational, and geopolitical, to allow you to proceed. And and the latter is particularly predominant in Somaliland this year for a number of reasons. We've seen a a memorandum of understanding being signed between Somaliland and Ethiopia, which is ruffled some feathers in neighboring Somalia. We've got an ongoing conflict in and around Lassenot, which has which has not attracted the attention of the international media. Lord knows they've got sufficient other conflicts to report on, but the conflict around Lassenot is very real and it's very much there.

18:44 And we've got upcoming presidential elections towards the end of the

18:48 year, introduces even more uncertainty into an already very dynamic situation. So for those reasons, we've gone into a position of relative pause, certainly as far as field activity is concerned, and consequently spend this year, other than the very successful CSR project that I mentioned during the course of the presentation, where a very large number of people are getting very important medical support as a result of our programme. So we continue to keep our eye on the bigger picture. We've been granted a licence extension, and the opportunity certainly remains for those stars to align going forward.

19:34 We've continued to work very hard sort of behind the scenes in addition to the team that we've established and maintained in Somaliland. We've got people in London working very hard to optimize the Weld Delivery Programme to give us the best chance of success. It's impossible for me to put a date on when activities in the field will resume, but I think the message that I'd like to impart is that we have not lost our enthusiasm for the project and we're doing what we can behind the scenes to give us the best chance going forward. Okay, thank you. So we've got a question on the ITP. Is your view that Turkey will give the one year notice on the pipeline rather than defaulting to a five year extension with the Iraq Central Government?

20:19 I think it's an... Well, I haven't spoken to anyone in the Turkish authorities about this issue, but from what we know, I think it's highly unlikely that the Turkish government would be happy for us default into an extension of the license under current terms and pretty sure that everybody's going to be keen to try and reestablish new conditions for a contract extension going forward beyond mid twenty six. Thank you. Question here. With the debt maturity approaching, what is management's strategy towards refinancing the bonds and what is the target timeline for this? Is the m and a strategy continued on addressing the bond maturities first? Well, yeah, take the bond maturity piece for sure. Sure. On the on the debt maturity,

21:06 call price on the bond is currently 103. We, as Paul said in the presentation, we're currently paying under under 4% of interest costs so it's pretty low cost versus the cool price to maintain the cash. Clearly we're going to look to address that maturity in the coming months. We have various work streams ongoing at the moment to think about when and how we do that, but it's certainly on our mind and when we look at M and A, which kind of rolls into the next question, we're very mindful of that bond maturity and how we deal with that either through refinance or repay. You know in in the world what we've done in that position. So it's very much on our mind. We're we're we're we're very careful about it and we're going to step through it very carefully as we think about that bond maturity.

21:56 There's a question here. Please provide some color on why G and A has increased by 25 year on year when all other costs appear to be falling. That's probably one for me to take. Indeed.

22:08 Principally that's arbitration costs. You know we've been in a pretty intense and extended arbitration process which means you need pretty good legal advice as you go through that and that impacted our G and A and we believe that's the right thing to do to defend shareholder value and invest in protecting the value that we had locked up in those licenses for many years. We take the payment enforcement? Do you want me to take that? I haven't seen anything. Yeah, go for it. How will management enforce payment from KRG in the event of a successful arbitration result?

22:48 Well, of course, we're not taking a successful result for granted, but as you would expect, now that we are no longer entirely preoccupied with the evidential hearing, we have turned our mind to how recovery might be executed. And we've actually got our legal team in the second half of this year working up a recovery plan. I, you know, I can't obviously talk about specifics, but there are measures that can be taken, and you'll need to look at

23:21 other instances of other oil companies who have been in dispute with their host government to see what those measures are. But we are, of course, considering all options for debt recovery. In the event that it's not forthcoming, we shouldn't take that for granted either, I guess. So we are preparing a plan. That plan is going to take a while, and the plan is going to have to be reviewed and endorsed by the board. But our preparation work is underway. Interestingly, we seem to be getting some questions in Spanish, but I'm afraid my Spanish isn't up to answering any of those. But what we will do, as we always do with these things, is we're we're gonna take these questions that we haven't addressed away, and we'll try and provide a suitable response where we can.

24:08 I'd like to thank everybody for their attendance today. I'd like to thank you all for sitting through our presentation and for asking the questions. In closing, I just want to reiterate, I think, the key points from the presentation, which is that we have been through a consolidation process. We have established a resilient core. We have a great foundation for the business in Telkie. And we continue to work hard to pursue each of the catalysts that you've heard us mention in the last couple of presentations. And with luck, we'll be able to shed more light on success around those three catalysts when we convene again for our full year results presentation early next year. Thank you all very much. Paul, Luke, thanks for updating investors today. Can I please ask investors not to close the session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations?

25:03 This will only take a few moments to complete, and I'm sure will be greatly valued by the company. 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.