Genel Energy (LSE:GENL) — Interim Results

0:00 Good afternoon, and welcome to the GENEL ENERGY PLC investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and could 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 it receives during the meeting itself. However, the company can 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. I'd now like to hand you over to Paul CEO. Good afternoon, sir.

0:31 Good afternoon, everybody. My name is Paul Weir, and I'm the CEO of GENEL ENERGY. I'm joined as usual by our CFO, Luke Clements. Welcome to our half year results presentation. There are two subjects that have a significant bearing on the business so far this year. The first, the headline, is our proposed acquisition of Capricorn Energy announced at the start of July, a transaction that delivers on the growth strategy that we've been talking about for some time. The second is the temporary suspension of production at Tawke that began at the end of February and lasted through until the end of June, a full four months of the six month period being reported. That production suspension was, of course, the result of hostilities in the region that spilled over and closed to our operational footprint.

1:21 I'd like to offer some quick guidance upfront to manage expectations about what we can see on today's presentation. We're in an offer period, so on the Capricorn transaction, our update will be consistent with what's in the published announcement and the scheme document, and we'd ask you to look there for the detail. And as in our March update, we won't be able to provide a regional security update or offer any sort of an insight beyond that which is publicly available. Notwithstanding all of that, today, we'll take you through the performance of the business in the period, where things stand currently, and the catalysts ahead. I'll walk through the slides fairly briskly. It should take about fifteen minutes, and then we'll be happy to take your questions within the parameters that I've just mentioned.

2:08 Onto the first slide then. We start with an overview of the business, and this slide is now our standard slide with the key metrics for the period. You can see clearly the negative impact on performance of suspended production for four out of the six months. A daily average production rate of 6,600 barrels a day, precisely one third of the 20,000 barrels a day we were expecting in the WPNB, and with EBITDAX, the the top line impacted accordingly. Despite that setback, you can also see that we retain a strong low leverage balance sheet with cash at the end of the period of $199,000,000 and the net cash position of $108,000,000. The building blocks at the foot of the slide are the ones we set out in March, and they are unchanged.

2:58 A world class asset in Turkey, significant cash ready for deployment, and material organic upside. Onto the next slide, please. This slide, again, I hope a familiar slide by now sets out our strategy in the way that we think about it every day. Maintaining a strong balance sheet, those of you who follow us closely will already be aware that following the Capricorn announcement, we have tapped our bond for an additional $35,000,000 that we now have available for deployment. Maximizing cash generation from the assets we have, the talking metrics again should be familiar to regular followers, and we're pleased at being able to resume investment drilling there, and of course, adding new sources of cash flow in a disciplined and value accretive way.

3:46 We remain focused on all three boxes, and in particular that bottom banner where we build a business that supports recommencement of a regular dividend. I won't dwell on the detail because the big news for this period is on the next slide, the proposed acquisition of Capricorn, which of course is an ideal component for that third investment box on the right hand side of this slide. Let's take a look at the acquisition in a little bit more detail then. On July 2, we announced a recommended all cash offer for Capricorn Energy. At announcement, we held irrevocable undertakings from approximately 39% of Capricorn's issued share capital. The shareholder vote on the scheme is expected on the August 18. The full terms are in the scheme document and on our website, and as I've already mentioned, I'd point you there rather than rely on a summary here today.

4:38 So why Capricorn? Well, Egypt's been one of our focus countries for some time, and we have tracked and evaluated a number of opportunities there, particularly since thanks to the efforts of the relevant ministries, there's been an improved focus on regular payments to oil and gas investors and creating an environment that encourages further investment. This transaction will give us an immediate and material position in a mature but important hydrocarbon province with very significant potential for further organic and inorganic growth. This acquisition provides scale for GENEL, doubling production and significantly increasing our 2P reserves base. GENEL sees this as the start of a long term relationship with Egypt, not a financial trade or a short term investment.

5:25 Our engagement with EGPC and with the ministry is well underway, and the dialogue's been very constructive. We've highlighted the fact that as a well established upstream e and p company, we have a long term vision with a fifteen year planning horizon with great technical and operational bench strength that will allow us to find the real value within existing mature assets and as we grow with a new as yet unrealized opportunities. That approach requires a long term investment strategy. We've pointed out that such an approach is good for our shareholders, but is also good for Egypt too. These points seem to have landed well and jive with Egypt's own objectives of attracting more international investment, arresting and eventually reversing decline, developing Egyptian talent and local content, and operating to international standards of safety and environmental care.

6:18 The pro form a figures on the right hand side of this slide give you an idea of the impact on the business. It broadly doubles. Two p reserves increased to a 117,000,000 barrels of oil equivalent. Working interest production increases to an average of around 30,000 barrels of oil equivalent per day, all while retaining balance sheet strength. In practice, that means two geographically diversified production hubs rather than one asset in one geography. A stronger reserves base, near term cash generation, and exposure to the international oil price, alongside the organic upside that we already hold in Kurdistan, Oman, and in Somaliland. The combination business on the other side of this deal is summarized in the right hand box.

7:06 A larger independent MENA focused E and P business, significant near term resilient and diversified cash generation, strong balance sheet, significant resource upside across all regions. All in all, a very positive outlook. So I'll turn back now to the extent business and first to Tawke. The world class characteristics of Tawke are well known and the first two months of this year demonstrated them again. Gross production was running at around 80,000 barrels a day up to the end of February, essentially where we exited December with two newly drilled Tawke wells on stream. Following the start of the regional conflict on the February 28, as a precautionary measure, the operator sensibly suspended production. That was absolutely the right call, and we remained close and supportive to DNO throughout that period.

7:59 Development operations resumed on the April 9, and then production operations restarted on the June 20. Since then, two more wells have been spudded at Peshkabir as the investment program resumes after a near three year gap. The contractor group is keen to maintain that investment level, but obviously we will need to regulate the number and nature of activities to suit the prevailing security situation. So the half year averages on this slide, 26,400 barrels a day gross, 6,600 barrels net to us, reflect four months without production in a six month reporting period. Realized pricing on domestic sales averaged $31 a barrel up to the point of production suspension. Since the restart, it's been running at around $37 a barrel.

8:49 Notwithstanding the fact that most production activities within Kurdistan were disrupted to some extent by the regional conflict, we've kept a close eye on the arrangements surrounding international export arrangements from Kurdistan and remain hopeful that circumstances there will allow us at Tawke to resume international exports too. The security situation remains uncertain, and we continue to monitor it closely with DNO and other stakeholders. Obviously, we're pleased to hear that The US decided at the weekend to halt hostilities in anticipation of peace negotiations with Iran is resuming this week. We will continue to follow that situation very closely, of course. Right. On briefly now to cash. Rather than walk through this slide line by line, I'll pick out the key takeaways. There are three, I think. Firstly, the effect of the suspension on the income statement was effectively four months of lost proceeds.

9:44 Despite that, operating cash flow was still breakeven. Spend was carefully controlled and optimized during that disruption, although some important capital investments continued mainly on Tawke, but also on Block 54 in Tucson 1. This really shows the resilience of the asset and our business. Secondly, free cash outflow for the half was $25,000,000 with closing cash at the end of the period of a $199,000,000 and net cash of a $108,000,000. And thirdly, after the period end in July, we tapped our existing bond for a further $35,000,000 nominal, issued at an implied interest cost of around 9.7%. That takes the total debt to a $127,000,000 against a facility with a capacity for up to $200,000,000.

10:34 So some significant headroom there. Cash at the end of July was $240,000,000, 41,000,000 higher than it was midyear period end.

10:46 Okay. Next, I'll briefly cover our preparatory activities on Block 54 and Oman. On Block 54, the focus this year is straightforward. Simply do the work that ensures that our first well is drilled in the best location. That means integrating the data collected during the Bartha West 1 well reentry at the time of the year, some basin modeling, reprocessing of existing three d seismic, and acquiring and reprocessing new three d seismic. All of that's ongoing in line with our plan. Finalization of the actual well planning will follow as we work towards drilling in 2027. We are targeting reservoirs proven in the adjacent Block 53, the Mkizna Field and in Block 4, as well as on the legacy Block 54 well locks.

11:34 As a reminder, the remaining work program for this first exploration period, the work commitment, which runs to May 2028, is 300 square kilometers of three d and two exploration wells. Block 54 Oman is is is the kind of organic opportunity that we really like. It's a it's a modest capital investment. We have a clear work program. We are undertaking data led decision making, and there will be meaningful upside if the subsurface case continues to strengthen. We continue to work closely with the operator, OQEP, on all of that. And on Somaliland, the opportunity remains a material discovered resource addition from within our existing portfolio, and we continue to make steady progress towards drilling Tucson One in 2027.

12:26 Tucson 1 targets the best estimate prospective resource of 650,000,000 barrels across multiple stacked reservoir objectives, and we've got six further high graded prospects right behind it. As first mover, our commercial terms are attractive enough that even a modest discovery would likely be commercial, and anything we find benefits from proximity to the the Port Of Berbera, which is a stone's throw away in African terms. In terms of readiness, the majority of the civil engineering is complete and around 80% of the long lead items are already in inventory, and the well delivery stage gate process is ongoing. We remain measured about this. There's still a need for this staff to align operationally, commercially, and geopolitically.

13:13 The message today is that we maintain optionality over this opportunity through continued progress alongside continued investment in the well-being of our host communities to strengthen our very important social license to operate. So let me wrap up by returning to the three strategic pillars, our resources today and the catalyst that lie ahead. Number one, maintaining a strong platform. We finished July with $240,000,000 of cash, low debt relative to the asset base, and resilient cash generation from Tawke now that production has restarted. Secondly, maximizing cash generation, continued cost discipline, resumption of the drilling program at Tawke, and working towards export pricing, which on its own could more than double the free cash flow from the license, reinforcing its quality as an asset.

14:07 And thirdly, diversifying production and free cash flow. A number of exciting workflows against this pillar, completing the Capricorn acquisition and getting to work in Egypt is of course the big one, finalizing and executing the plan to drill two wells in Block 54

14:23 and progressing to San Juan. In the near term, of course, the most important goal, as I've said, is completion of the Capricorn transaction and the step change in production and cash generation that follows. Those pillars are straightforward. They are mutually reinforcing, and they remain the right framework for GENEL value delivery. And we, the management team and the entire team, remain clear and determined on our direction of travel. That was a very brief run through the slides. Thanks for your time this afternoon. Luke and I will now be happy to take your questions. That's great. Thank you very much for your presentation this afternoon. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab situated on the 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 investor dashboard. Paul, could I 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.

15:28 On exports, you've you've talked about exports. What does it take for GENEL to start exporting?

15:41 We've said from the get go that that the thing that we need to see before we resume exporting is that we and indeed all exporters from Kyrgyzstan are being paid in a manner that's consistent with the PSC. We want to export, we'd love to export, we'd love to begin exports just as quickly as we possibly can. But we've always felt that it was important that that we and other producers get paid in accordance with our contracts. Now the many stages that that comprise the arrangement that's been put in place so far, those stages have been realized sequentially over time. And while things haven't happened quite as quickly as anyone thought when they when they began that process, everything that needs to happen has been happening.

16:30 Right? People have been getting paid their initial fees in line with the budget law, The the independently... The the appointed independent assessor has undertaken his technical work and submitted a report to the the federal government. And although we can't speak about it with great confidence because we're not part of the arrangement, what we hear is that that that report has been submitted and has been accepted by the authorities. The next stage, as far as we understand the process to work, is for those who are exporting to be given a top up payment. And that basically means that oil exporters are being paid in a manner that's consistent with their PSCs and such a development would allow us to reconsider our position in relation to exports. Thank you, Paul.

17:19 And then two questions on. At the full year results, you said two seven one is progressing through a series of internal gates... Stage gates. Could you elaborate on which stage of that process the project has now reached and what key criteria remain before management approves the next stage?

17:39 We we look upon the two San Juan exercise as a project and and we've adopted what the industry would recognize as a fairly standard stage gate process which comprises five states... Stage gates. A pre select, define, execute, and commission. The the next stage gate for Tucson is the select to define gate, and we anticipate... That's only a matter of weeks away. And and and that would allow us to complete the procurement of the long lead items that we need and to embark on to embark on a tendering exercise for the goods and services that we need to drill the well. The subsequent stage gate, which is currently scheduled for very early next next year is the big stage gate, is the defined to execute stage gate, is effectively a commitment, a final commitment to to spend big money in pursuit of of drilling this well.

18:36 Understanding well cost with a much lower tolerance than the tolerance that we enjoy today is really the next major consideration to allow us to proceed. Thank you. And another one on Somali land, and there's not many questions today. You also said that operational, commercial, and geopolitical elements all need to come together before drilling can commence. Without disclosing commercially sensitive information, could you indicate which of those is the principal constraint and whether that position has changed since the full year results? Well, I don't think there is a principal constraint. I think, you know, it's a fair question, but it doesn't lend itself to an easy answer. There there are multiple constraints and the the the the relative importance of those constraints changes over time.

19:25 I mean, as part of our stage gate process, we have been working to progressively better understand what the technical and operational challenges are that we might face and how much this will might cost. And obviously, I've outlined the process by which we sort of narrow in our estimate with regards to those considerations. But of course, the geo... Geopolitical constraints are very significant and and change with time, and I would point to, for example, I would point to increased activity around the streets at the opening of the Red Sea where the Houthi rebels as part of the wider regional conflict have become much more active. And if that were to be sustained, could potentially threaten the physical supply chain in and out of Somaliland.

20:11 It's not necessarily a huge issue at the moment, but it's one of the many variables that we're keeping an eye on when we try to determine when the right time to commit is. Thank you, Paul. Those were all the questions about the business that we can answer today. If you have further questions, please feel free to email us at GENEL ENERGY, and we'll be happy to pick up any further questions that you may have. That's great. Thank you for answering those questions you can from investors. And, of course, the company can review all questions submitted today, and we'll publish those responses on the investment company platform. Just before redirecting investors to provide you with their feedback, which I know is particularly important to the company, Paul, could I please just ask you for a few closing comments?

21:00 Sure. Thank you. Listen, thanks everyone for attending. I think I'll just repeat what I normally conclude with during these presentations. Our strategy has three strengths, maintaining a strong balance sheet, maximizing value from what we have, and seeking and securing additional income streams in places and in a manner that's value accretive. I think we can demonstrate that we're doing a good job of keeping the company in good financial health, notwithstanding the challenges of international exports from Kurdistan. I hope you'll realize that we're doing a decent job of maximizing production and earning decent income from our efforts, And, of course, a successful conclusion to the Capricorn opportunity lands the accretive diversification that we've been striving for. Exciting times.

21:47 Please stay tuned. Thank you very much. That's great. Thank you for updating investors today. Now please ask investors not to close this 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. This may take a few moments to complete, and I'm sure it'll be greatly valued by the company. On behalf of the management team, we'd like to thank you for attending today's presentation, and good afternoon to you all.