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I prefer to consider how it is in reality :)
@PUTUP, here is how i pictured the separate subsidiaries operating and then the benefits/downsides of them working as one.
Subsid 1 would have CRP1 running on empty at the start of every month, a trivial amount of CO allowance then being used and the rest going down the PO route. In the time it would take for the other Subsid to get to break even ,the R Facctor1 would have increased and reduced the PO1. In the meantime Subsud1 would be accumulating cash but at a reducing rate, everything else being equal.
Subsid2 would have to borrow money to start up, every agreed Cost would boost CRP2 and this would keep happening until there was production from the expansion stage, probably beyond. Up until that point they would have to keep borrowing, the PO2 would be trivial, probably not enough to pay the coupon of the debt. It would take years before the original costs were recovered from the CRP2. Dread to think how long it would take for the expansion to pay for itself.
So what are the benefits/downsides of them working together?
Subsid1 lends Subsid2 the funds to get started but as a result reduces its cash holding.
Subsid2 lets Subsid1 use its CRP2 and transfers it to CRP1. How long does it take for Subsid1 to get the loan back? Somewhere between the pre agreement instantaneous and many years, I’d settle for a few months as opposed to a specific number but it’s the short time that matters.
Another benefit for Subsid1 is the R factor1 is brought back under control.
The money that Subsid1 lends Subsid2 keeps recycling, maybe needing a bit of a top up occasionally but in a hopefully non-threatening way.
The R factor is a different discussion and, yes, it isn't reset. When the CRP is large one has to wait for capex to be returned. When it is low or 'cleared' each month the return of capex via CO is swift.
Of course the R factor affects the share in PO and it will mean a share below 30% eventually.
Don't forget, the PSC, in the laying out of the R-Factor returns, makes quite plain that it's the CUMULATIVE figures, from the date of signature of the contract, that are defining. The clock isn't reset when you reach 55Mbopd or 75Mbopd or whatever.
R = X/Y
X = Cumulative Revenues actually received by the Contractor
Y = Cumulative Costs actually incurred by the Contractor
For R < 1, the % share of Profit Crude Oil is 30%
For R > 1 but < 2, the % share of Profit Crude Oil becomes (30 - (30-15)*(R-1)/(2-1)
For R = 2 or greater, the % share of profit crude oil becomes 15%
Capital investment (as some seem to be suggesting, to be undertaken only when the historical Capex has been returned) will struggle to positively influence the R-factor (or PO revenue) by very much - unless it is a very significant Capex sum (and always assuming POO stays high).
As TM has pointed out, and quite apart from the PSC's strictures, the KRG's reputation is not conducive to making very large investments "at one go".
I disagree. A fundamental point to understand here is that the "beyond 55k" investment scenario should not be modeled standalone. It benefits massively from the ability to "push" 55k production from PO to CO. Were it standalone the investment would accumulate in CRP 2 and only the cash flows of beyond 55k could provide recovery. As a result, the payback period of the additional investment is longer and the returns to equity lower. Instead, recovery is 'immediate' (albeit 2 month delay) because production from 55k is pushed from PO (when CRP is normalised) in which the contractor shares little into CO in which the contractor gets the lot. This works when there is enough headroom in the 55k production to absorb the investment via a shift from PO to CO. This shift is limited by the PSC formula. For a given oil price scenario you can work out how much investment can be absorbed into CO and repaid immediately without accumulating CRP.
Not claiming a thorough understanding, previous experience leads me to believe that is when the problem comes back and bites you.
@PUTUP is running the expansion model based on the established production funding the process.
Now picture it as being done by two separate subsidiaries, the first runs the set up from when 55k is reached, the other the expansion to 75k.identical PSCs but distinct CRPs and receipts.
I think doing the second one helps increase ones understanding of what is happening in the original case - maybe that’s just me :)
"IMHO investing in this company without a thorough understanding of the PSC and the CRP is extraordinarily foolish." Agreed. Thanks for your very full answer. I'd have been better off buying the oil than the shares, but that's now changing as the oil price levels off and excess cash is returned, however it is returned. Lesson learnt.
The presentations have the bullet points. You don't see the nuance in the voice overlay. And it's only the case once the CRP is normalised. Before that point, they do indeed need to fund the capex for longer periods. When it is normalised, the capex of one month is repaid in two months' time - assuming of course the KRG stick to a two month payment cycle. Because production is pushed from PO to CO (and the contractor gets little of PO and all of CO) the capex is borne by the KRG. The cost to the contractor is the delta in their PO share which fell as production was pushed from PO to CO by the capex.) Once you understand the PSC, realising the foregoing is just a skip away. You can work out how much capex the company can 'afford' on an annual basis without building the CRP again (and thereby pushing out payback periods and lowering returns to investment). Hint: at $70 oil they have plenty of headroom.
And ain't it just funny that the timing will coincide relatively nicely? Pure coincidence? Nah. Give management some credit. No point pushing hard beyond 55k until the CRP has normalised.
But agreed re communication on buybacks. It's easy for many company management to fall into the EPS accretion story as a rationale. Yes, they can be EPS accretive and more accretive if purchased at a lower price. But that assumes the market doesn't impound excess cash in the EPS multiple applied (and that all businesses are valued on a PE basis). Far better, in my view, to stick to the simpler rationale of returning cash to shareholders while allowing those who perceive the stock to be cheap to increase their holdings rather than receiving a taxable dividend (unless your pithy stake is held in a tax exempt manner).
Part of your dissatisfaction stems from an expectation that they should do everything for the financially challenged (or illiterate), often lazy (as exhibited so often here), retail investor. If you did IR you would realise quickly that you simply can't cater to everyone and that you need to draw the line somewhere higher up the register. That said, GKP has always answered my questions in a full and clear manner including helping me understand a worked example of the PSC on a monthly basis. Once you have that, and many examples have now been posted here for everyone to follow along, it's a relatively simple extension to understanding the P&L (Opu still can't calculate revenues) and cash flow of the company on an annual basis. You can also work through a month by month estimate (it won't be perfect but perhaps 'good enough') of the CRP and even the R factor. IMHO investing in this company without a thorough understanding of the PSC and the CRP is extraordinarily foolish.
"When the CRP is 'normalised' the capex burden is mostly borne by the KRG with just a small portion borne by GKP and MOL (the foregone PO)."
Putup, thanks for that correction. I am surprised the company can't communicate all this in its presentations. All I remember of them are those huge capex figures required at each development stage. I feel I have been deliberately misled by our BoD in its communications (the presentations and annual reports) - especially that value-accretive bull**** from our Chairman on the buybacks. They don't do anything to get rid of the Ponzi scammers that attract idiot shareholders and they don't do nice worked examples in their presentations of how the profits are divided up between us and the KRG. Our BoD could do better.
"But we will need $500m, at least, for the next stage to 75k bopd"
Nope. Understand the PSC and you will understand they only need working capital (a couple of months). When the CRP is 'normalised' the capex burden is mostly borne by the KRG with just a small portion borne by GKP and MOL (the foregone PO).
There is no way at the moment that you can rely on any payment agreement with the KRG, they have reneged on 4/4.
I’d see what happens in the short term and if payments are regular i’d set up two internal accounts. One for money to be paid out to investors through buybacks/dividends as before and the other to be allowed to build up to pay for the next stage of development.
At some stage, if I the level of confidence warrants it, I’d then start releasing the funds from that second account.
Regular payments are now the key to future investment.
JH clearly knows where we are with 55k bopd;; he's already indicated the direction of travel in his half year report by way of his commitment to capital investments in the second half of 2021 @ ca.$50m.
He now needs cast iron assurances about regular receipts to enable the self funded growth so clearly evidenced by any sensible modelling.
He's in the middle of a sensitive negotiation at the moment.
In card playing terms it's not a difficult proposition; twist or stick.
To twist he needs absolute confidence in future cash flows.
To stick he needs to do nothing. Just return capital to his long suffering shareholders.
And/or sell.
That's the beauty of his negotiating position.
I just wish JF could have seen it for what it was. In fairness, GKP never reached 55k on his watch, so he never had that luxury.
So bb contributors...twist or stick?
BTW, if the oil's there and the cash is there then so is the massive payout imo.
And the contractual terms encourage it by way of continued rewards for re-investment.
For me the buyback for cancellation method coupled with some dividend payouts can only ratchet up the pressure both on the KRG and the Markets
.
But I think JH has already worked that out.
$100m back to shareholders in his first twelve months is bound to concentrate minds around around the negotiating table!!!
The cash flows drop off because the cost pool is depleted. If we're investing in expansion to 75K then the cost pool is refilled as we go and the money gets recycled so it's fine as long as we get paid (as ever).
They are accumulating too much cash to just sit back and do nothing." But we will need $500m, at least, for the next stage to 75k bopd and the cash flows are expected to drop off in 2023 even if exchange rates and oil prices remain constant. Sure, we can borrow, but that's risky with the way payments from the MNR are often delayed. I think we are forced to carry excessive amounts of cash just because of the way the MNR treats us.
I’ve got a return to 44kbopd generating circa $31 million in total.
Below that would be very illuminating!
Above it would also be but much more difficult to unravel as to where and when the benefits have come from.
Shamaran Paid.
https://shamaranpetroleum.com/news/shamaran-september-2021-payments-received-122790/
GKP up soon... Nice $30m+
BUYBACKS / DIVIDEND should be happening soon. They are accumulating too much cash to just sit back and do nothing.