In their recent 2023 Full Year Results earnings call, Gulf Keystone Petroleum Ltd. (GKP) outlined its financial and operational performance in a year marked by significant obstacles, including the suspension of exports from Kurdistan and delayed payments from the Kurdistan Regional Government. The company reported a sharp decline in adjusted EBITDA to $50 million, down from $360 million in the previous year, and a negative free cash flow of $13 million.
Despite these challenges, Gulf Keystone transitioned to local sales in July 2023, enabling them to cover costs and reduce accounts payable. With a current cash balance of $86 million and no debt, the company is focusing on driving local sales, maintaining cost control, and strengthening liquidity while engaging with government stakeholders to restart exports.
Key Takeaways
- Gulf Keystone faced export suspension and payment delays in Kurdistan.
- Adjusted EBITDA fell from $360 million in 2022 to $50 million in 2023.
- Transition to local sales in July 2023 helped cover costs and reduce accounts payable.
- The company has a cash balance of $86 million and carries no debt.
- Gulf Keystone is focused on driving local sales and strengthening liquidity.
Company Outlook
- Gulf Keystone plans to maintain a lean work program in 2024, with net CapEx estimated at $20 million for safety upgrades and production maintenance.
- The company aims to continue driving local sales, controlling costs, and improving liquidity.
- Restarting exports is seen as a key factor that could significantly enhance cash generation and shareholder value.
- Gulf Keystone is committed to capital discipline and may consider reinstating shareholder distributions as conditions improve.
Bearish Highlights
- Production was halved, with no revenue generated from March to July.
- The average realized price per barrel dropped to $41 in 2023, down from $74 in 2022.
- Free cash flow turned negative, with a cash outflow of $13 million in 2023.
Bullish Highlights
- Since the transition to local sales, the company has managed to cover monthly costs and reduce accounts payable.
- Accounts receivable of $151 million remain outstanding, representing potential future cash inflow.
- The company has a strong cash balance and is debt-free.
Misses
- Adjusted EBITDA and free cash flow saw significant declines from the previous year.
- One-off costs of $10 million were incurred related to wind down and monetization.
- Average realized prices for oil were significantly lower than in the previous year.
Q&A Highlights
- The company highlighted the potential value unlock for shareholders with the restart of exports and return to higher netbacks and regular payments.
- Focus remains on driving local sales, maintaining cost control, and strengthening liquidity.
- The company is actively engaging with government stakeholders to facilitate the restart of exports and improve the operating environment.
InvestingPro Insights
Gulf Keystone Petroleum Ltd. (GKP) has demonstrated resilience in a year fraught with operational challenges. As they navigate through a period of financial stress, certain metrics and insights from InvestingPro may offer a deeper understanding of the company's current position and future potential.
InvestingPro Data shows a Price/Earnings (P/E) Ratio of 2.79, suggesting that the company is trading at a low earnings multiple, which could indicate that the stock is potentially undervalued relative to its earnings. This aligns with the InvestingPro Tip that GKP is indeed trading at a low earnings multiple, which might attract investors looking for value opportunities.
The company's Price/Book (P/B) Ratio stands at 0.53, further underscoring the potential undervaluation when considering the company's book value. This metric is particularly relevant for investors assessing a company's market valuation against its net asset value.
Despite a significant revenue decline of 36.43% in the last twelve months as of Q2 2023, Gulf Keystone holds more cash than debt on its balance sheet, with a current cash balance of $86 million and no debt. This financial stability is critical as the company focuses on driving local sales and improving liquidity. It's also worth noting that the company pays a significant dividend to shareholders, which could be an attractive feature for income-seeking investors.
Investors interested in a comprehensive analysis of Gulf Keystone Petroleum Ltd. can find additional InvestingPro Tips, which include expectations around profitability and cash flow coverage. There are a total of 10 InvestingPro Tips available, providing in-depth insights that could inform investment decisions. For those looking to further explore these insights, consider using the promo code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription at InvestingPro.
Full transcript - Gulf Keystone Petro (GUKYF) Q4 2023:
Jon Harris: Hello and thank you for joining Gulf Keystone's 2023 Full Year Results. My name is Jon Harris. I'm the CEO. And I'm joined today by Ian Weatherdon, CFO, who will be talking you through our financial performance. I'm also joined by John Hulme, COO; Gabriel Papineau-Legris, CCO; and Aaron Clark, Head of Investor Relations. Over the next few slides, we will run through our operational and financial performance in 2023 and the outlook for 2024. Following that, we'll open the line up for questions. Slide 2, disclaimer. This is our regular legal disclaimer and I'll leave you to review this in your own time. And I'd like to remind you that the presentation slides are available to view on our website. Slide 3. 2023 operational and financial highlights. 2023 was a challenging year with an operational and financial performance materially impacted by the suspension of Kurdistan exports following the closure of the Iraq-Turkey Pipeline on the 25th of March, as well as continued delays to payments from our Kurdistan Regional Government. Having entered the year with significant production and development momentum, we were forced to take decisive action to reduce capital expenditures and costs and safely transition our operations to trucking and local sales in the second half of the year. In doing so, we've been able to protect the business and successfully adapt to our new environment while maintaining a rigorous focus on safety. Since the start-up of local sales in July '23, we have been able to more than cover our reduced monthly cost run rate of around $6 million and significantly reduce accounts payable. Excess cash generation is now being used to improve our liquidity position with our cash balance at $86 million as of yesterday, while we continue to review opportunities for further cost reductions. While local sales demand has been difficult to predict and we continue to sell at steep discounts to Brent, volumes have rebounded since mid-January and we are seeing strong demand in the near term with our low breakeven at current prices providing downside protection. While there remains no timeline for the restart of exports or repayment of outstanding receivables, we continue to actively engage with the government stakeholders and see significant value to be unlocked for our shareholders, Kurdistan and Iraq from securing a solution. Now turning to Slide 5, resilient in local sales environment. To start, I'd like to highlight our track record of successfully managing through challenging circumstances to ensure that we remain well-positioned to realize the deep underlying value of the Shaikan Field once circumstances improve. With the increase in local sales demand since mid-January 2024, we have been able to ramp up production and move to 24/7 truck loading operations at both production facilities. Based on March gross average sales to date of around 43,000 barrels of oil per day, we are currently loading around 215 trucks a day. We are pleased that the reservoir and our operations have responded well to the increase in demand. Subject to local sales demand and considering our limited capital program, which is focused on safety critical upgrades and production maintenance expenditures only, we see the current gross production potential of the field at between 43,000 to 45,000 barrels of oil per day. As ever, we continue to manage natural field declines estimated at an annualized 6% to 8% -- 6% to 10% and the productivity of wells to avoid traces of water. We see robust local sales demand in the near term and are focused on maintaining our current strong performance. Looking further ahead, the local market remains difficult to predict with volumes and prices driven by local supply and demand dynamics. Nonetheless, we have downside protection to current volumes with our current gross production breakeven of around 22,000 barrels of oil per day at current realized prices of around $25 a barrel. Slide 6, please. Despite the volatility, we've been able to protect our business and balance sheet and successfully adapt to our new temporary environment. We ended the year with significant momentum with the Jurassic reservoir expansion -- sorry, expansion project, driving production to record highs of over 55,000 barrels per day on several days in March '23 and good progress is being made towards sanction of the Field Development Plan. Following the unexpected closure of the Iraq-Turkey Pipeline, we lost access to our export route. We shut-in Shaikan Field completely on the 13th of April and moved swiftly to wind down all expansion activity in order to aggressively reduce our spending and preserve liquidity. Following a period of negotiations and due diligence on local buyers, we were able to restart production and commence local sales on the 19th of July. All local sales today have been via trucking apart from a brief period of utilizing our pipeline in reverse flow to a refinery in Erbil. Volumes increased steadily from July to October '23 as we agreed terms with new buyers. Lower levels of demand and volumes followed in November and December of '23 as other producers in the region ramped up supply, local refineries became constrained and winter weather impacted trucking logistics and dampened appetite for certain refined products. Despite the fluctuation, we more than covered our monthly expenditures in the second half of the year. In 2024, we have seen a rebound in volumes since mid-January with gross average sales year-to-date of around 33,000 barrels of oil per day. The increases reflect higher market demand for certain refined products, such as heavy fuel, and the easing of seasonally logistic challenges as the weather in Kurdistan has improved. The current realized price is around $25 a barrel, which has reduced since the second half of last year in line with local market pricing. Slide 7. Estimated gross 2P reserves. As I mentioned, we have been pleased with how the field has responded to recent local sales demand, and we have seen no degradation to the reservoir from the extended shut-in. However, we do not expect to consider a return to field development until exports have restarted, and we have confidence in the KRG current production payments and the payments for our arrears and the fiscal and commercial environment. Consequently, we have prepared an internal estimate of gross 2P reserves at the end of '23, incorporating a delay to the development. I acknowledge it is hard to predict when exports will resume. For modeling purposes, we have assumed that they will restart in the Q4 of 2024, but the pipeline may open earlier or there could be further delays. Once exports resume, we will start planning and preparation activities for a potential return to investment once oil sales payments normalize. We are currently assuming that we will resume facilities expansion activities in 2025 based on the assumed restart of pipeline exports in Q4 '24, which would include water handling that we see as a priority to ensure long-term well productivity. Also, we assume a return to development drilling in the first half of '26 as it will take time to procure a rig and acquire long lead items. The estimated development delay drives an 8% reduction in gross 2P reserves to 458 million barrels as at 31st of December 2023. As recoverable volumes are pushed beyond the end of the license period in 2043. I am sure there are further optimizations that could be considered to recover our reserves position, but this will be subject to technical and commercial work once the pipeline is open. Despite the adjustment, Shaikan Field remains a large underdeveloped asset. As demonstrated by our reserves-to-production ratio of 28 years, using production of 44,200 barrels of oil per day, 2022's production number are our last year of full export sales. The reserve-to-production ratio of 28 years underlines the significant upside development potential of the Shaikan Field and compares favorably to our peers in Kurdistan at almost double our closest peer. Slide 8, please. Significant potential upside. Before I hand over to Ian, I'd like to highlight significant value that we believe can be unlocked for our shareholders and broader stakeholder base from an exports restart solution and a return to higher netbacks and regular payments. We have outlined on this slide what an improvement in our operating environment could mean for our cash flow generation capability, capital allocation, and sustainability strategy. If you look at #1, our return to exports with clarity on past and future payments could be transformative for cash flow generation. Selling at international oil prices again could more than double the current realized price we are achieving from local sales, while the unrecovered cost oil from previous investments of around $224 million gross would provide significant support for cash flows. The payment of the $151 million of outstanding receivables by the KRG would add further upside.#2, cash flows would be used to ensure that we maintain a strong balance sheet and would be invested wisely. We only consider material investment in the field with an export restart, KRG payment normalization, and a stable and transparent fiscal and economic environment. Once confident in the investment environment, we would expect to return to field development. #3, we continue to believe in the distribution of excess cash by way of either dividends or share buybacks is important to reward shareholders in line with our proven track record prior to the Iraq-Turkey Pipeline closure. As the operating environment and company's liquidity position improve, we will keep under review our capability to reinstate distributions. In addition to our strategic commitment to shareholder distributions, our highly discounted current equity valuation provides significant upside to investors. Finally, #4, a return to investment would enable us to reinvigorate progress towards becoming a more sustainable business. Due to current liquidity situation, we have paused all work on decarbonization opportunities, including our progress towards sanctioning a Gas Management Plan and the target to more than half Scope 1 emissions intensity. With greater clarity on the investment environment, we plan to review and reinstate this target. In the meantime, we are in the early stages of exploring alternative options to the Gas Management Plan with a focus on optimizing scope, implementation timing, and cost. Beyond emissions, there is significant potential economic value to be unlocked for both Kurdistan and Iraq through the restart of exports and the reestablishment of a constructive investment environment for international oil companies and investors. Billions of dollars of revenues could begin to flow again in the economy -- into the economy, while the significant further investment needs to maintain -- sorry, while the significant further investment needed to maintain and grow Kurdistan's oil production would benefit local suppliers and communities. We continue to work as a company and the industry to push for a solution. With that, I will now hand you over to Ian for the financial review.
Ian Weatherdon: Thanks very much, Jon, and good morning, everyone. Now turning to Slide 10, financial performance highlights. In 2022, we delivered record profitability and cash flow generation, which enabled us to reward shareholders with dividends of $215 million. Also importantly, we repaid $100 million bond ahead of maturity leaving us debt-free. We believe that it is important to maintain a conservative financial position to provide flexibility to manage through the challenges that we inevitably face operating in a high-risk, high-return environment. As a result, we entered 2023 in a position of financial strength with cash of $120 million and no debt. This strength was vital to enable us to withstand the impact of the suspension of export and continued delays to KRG payments, which materially impacted our financial performance. Soon after the export pipeline was shut in, we took steps to aggressively reduce our cost with a significant step down in activity and staffing levels. This is evident from the reduction in net CapEx in the second half of the year to $11 million. Following the successful transition to local sales in July 2023, we've been able to more than cover our reduced monthly costs, enabling us to pay down accounts payable. We exit 2023 with $82 million, which is roughly in line with the net cash level over the past few years. Next slide, please. Adjusted EBITDA decreased from just under $360 million in 2022 to $50 million in 2023. While we enjoyed record production levels in the first quarter, gross 2023 average production halved relative to 2022 to just under 22,000 barrels of oil per day with no revenue from the 25th of March to the beginning of local sales on the 19th of July. Production in the second half of the year was sold to local buyers at an average realized price of $30 per barrel, reducing average realized prices for the year to around $41 per barrel versus the average of $74 per barrel in 2022.Realized prices for local sales currently at around $25 a barrel, are driven by supply and demand dynamics in the local markets. While local sales have been sufficient for us to cover our cost and generate excess cash flow, they remain at steep discounts to Dated Brent. We have consistently emphasized the importance of being a low-cost operator, and we have one of the lowest cost structures in the industry. Low cost enable us to maximize cash flow and provide downside protection. With the closure of the pipeline, we completed a detailed analysis of our cost structure and further reduced OpEx and G&A. Finally, we incurred one-off costs of around $10 million related to the wind down of expansion activity and monetization of inventory. About half of this amount was non-cash. Next slide, please. The impact of lower adjusted EBITDA and increasing delays to KRG payments drove a significant reduction in free cash flow from $267 million in 2022 to a cash outflow of $13 million in 2023. The closure of the pipeline towards the end of March resulted in only 2 KRG payment receipts in the year, with the last payment being received in March 2023 for September '22 sales. Accounts receivable totaling $151 million net to Gulf Keystone from October 2022 to March 2023 oil sales continued to be outstanding. The resumption of pipeline exports and consistent budget transfers from Iraq to Kurdistan are likely required before we see a return to more normalized payments. And the KRG is providing international oil companies a plan to address the outstanding arrears. While local sales were at reduced prices, they were an important source of cash flow and enabled us to more than cover our cost in the second half of the year, allowing us to pay down accounts payable. Local sales cash receipts during the period were about $44 million. To manage credit risk, buyers are required to prepay for all local crude purchases. Our net entitlement is currently 36% of gross sales. Capitalizing on the momentum from 2022, we had planned to spend $160 million to $175 million on drilling and facilities expansion activities in 2023. With delays in reopening of the pipeline, we moved quickly to reduce expenditures, resulting in a significant reduction in net CapEx to $58 million. Following the payment of a $25 million interim dividend in March, we canceled the payment of the 2022 final dividend to preserve liquidity. Local sales, cost reductions, and managing accounts payable have supported our liquidity position. Our cash balance as at yesterday was $86 million. As Jon mentioned, we continue to believe distributions, either by way of dividends or buybacks are important to reward shareholders. As the operating environment and the company's liquidity improve, we'll keep under review our ability to reinstate distributions. Next slide, please. Gulf Keystone has consistently maintained strict control of its costs and has a track record of producing with one of the lowest operating costs and G&A per barrel among Kurdistan and international peers. While costs have been increasing in the first quarter of the year reflecting increased operational activity and investment in the Shaikan Field, following the suspension of exports, we moved quickly to reduce our expenditures to preserve liquidity. Operating costs were down 14% relative to 2022 to $36 million, reflecting the shut-in of production as well as cost saving initiatives. The increase in gross OpEx per barrel to $5.60 is primarily a function of the 50% reduction in annual production to just under 22,000 barrels of oil per day. As production levels increase, we expect unit operating cost to decrease. Other G&A expenses in the year were 14% lower relative to 2022 at around $10 million. The reduction was principally driven by cost savings and no bonus payments to staff. These were partially offset by non-recurring corporate costs of $2 million in the first half of the year. Next slide, please. Aggressive cuts to net CapEx, OpEx, and G&A reduced average monthly cost to below $6 million in the second half of the year. We expect to maintain the monthly expenditure run rate at or below $6 million in 2024, while we continue to review further cost reduction opportunities. It is important to note the run rate includes costs associated with maintaining full production capability to capitalize on increased local sales as is currently the case or a reopening of the pipeline. As Jon mentioned, we have a lean work program in 2024, equating to an estimated $20 million of net CapEx. Expenditures are planned for safety critical upgrades and production maintenance. The transition to local sales has enabled us to cover our monthly cost and use excess cash generation to strengthen our balance sheet. Accounts payable, which includes trade payables and accrued expenditures were down by almost 50% in the second half of the year to $26 million. With the rebound in local sales volumes in 2024, we have now paid all remaining overdue invoices. And today, we stand at an accounts payable balance that is about 1/2 the 2023 year-end balance. At the same time, we have increased our cash balance to $86 million. Looking ahead, we are focused on driving local sales and maintaining tight control of our cost structure with the objective of further strengthening our liquidity position. To illustrate the potential, current gross average sales of around 43,000 barrels of oil per day generates around $6 million of monthly free cash flow at a realized price of $25 per barrel. With that, I'd now like to hand it back to you, Jon, to wrap up.
Jon Harris: Thanks, Ian. Slide 16, outlook. To summarize, following a challenging year, we have successfully protected our business and adapted to the current local sales environment, in which we are resilient and cash flow generative with significant upside exposure. Looking ahead to the remainder of 2024, we are focused on 3 priorities. First, we are working to maintain our recent strong local sales performance in a safe and sustainable manner. While the market remains difficult to predict, we see robust demand in the near term and are planning to maintain the production potential of the field at between 20 -- sorry, 43,000 to 45,000 barrels of oil per day with minimal investment. Second, we are minimizing costs and improving liquidity. We expect our monthly cost run rate to remain at or below $6 million in 2024 as we continue to look for ways to minimize costs while retaining the operational capability we need to respond to local sales demand and the restart of exports. Following the significant reduction in accounts payable, we are now using excess cash to further strengthen our liquidity position. Finally, while there remains no defined timeline, we are continuing to engage with government stakeholders to push for an exports restart solution. We believe this could transform the cash generation capability and value proposition of our business, underpinned by our unwavering commitment to capital discipline. We continue to believe distributions to shareholders is important. As the operating environment and company's liquidity position improve, we will keep under review our capability to reinstate distributions. With that, I now hand you back to the operator for questions. Thank you.
Operator:
Jon Harris: Please, could you open the line to questions?
Operator: There are no further questions on the line.
Jon Harris: Okay. Very good. Thank you.
Ian Weatherdon: Thank you.
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