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Thanks to all who replied with corrections to my post on size of the possible extra payment for January oil sales and on the time left on the PSC. I'll try to read the entire prospectus properly and the 24 page notice of meeting that explains the design of the staff retention scheme/value creation plan, the latter to understand Bravedog's post and to have a more informed view about our BoD . Thanks to all who did DCF valuations and who discussed the discount rate , and especially to those who provided helpful insights into calculating the monthly amounts due under the PSC. Many thanks. I look forward to dividends or buybacks or both and to the restart of the expansion project to reach 55,000 bopd and hopefully to swifter payment of the receivables due.
One of the other debt repayment plans specifically referred to “working barrels” which I why I have used the Contractors’ Oil as a whole.I.e. the 52.2% of production.
I believe the two terms are interchangeable but if anyone comes up with a link to an alternative definition I’ll see if I find a reference to mine.
Thanks. I missed that. That's an extra $0.6m net for January, excluding any payment of arrears. So expect $17m for January plus (still) $1m if KRG upside in profit oil (only) is split 50:50 with the contractor.
If production stays the same for February the receipt is expected to be $18.7, excluding any payment of arrears. If KRG upside above $50 in profit oil (only) is shared 50:50 (GKP 80% of 50) for the full month that's $2.3m of arrears payment. (The delta in net receipt for a 500 barrel increase in ADP is $200k.)
PUTUP, GKP’s Sparebank1 presentation slide 4 gives average daily production for January of 44.405 barrels.
"For average daily production of 43,000 bopd that amounts to $1.2m receipt IF the agreement begins on Jan 1."
EDIT: this is the Contractor Receipt. G KP get 80% of this. It assumes that the upside from Royalties (at $54.774 vs $50) and CBC are NOT shared.
"So payment will be 0.8*0.522*31*44400*0.5*4.77 so just under $1.4 million IMO"
Calculate what the KRG would get from profit oil at $54.774 oil (average price for January) and then again at $50 oil and divide the difference between the two by 2. For average daily production of 43,000 bopd that amounts to $1.2m receipt IF the agreement begins on Jan 1.
I should of course have qualified that by adding "...and assuming the request was granted".
GKP made a Declaration of Commercial Discovery on 1st August 2012 to the Shaikan Block Management Committee under Clause 12.6(a) of the PSC. The declaration was made in respect of a Crude Oil Discovery (with associated natural gas).
The Development Period is defined in Clause 6.10 of the PSC as 20 years, with an automatic right to a 5-year extension.
If commercial production from the production area is still possible at the end of its development period then, upon request, the contractor shall be entitled to a 5-year extension under the same terms as the those provided in the contract. Such a request must be made in writing at least 6 months before the end of the development period.
So, PSC expiry either 1st August 2032 plus 5 years, meaning 1st August 2037.
OR
Expiry 1st August 2037 plus 5 years, meaning 1st August 2042.
Take your pick…
11 years and 5 months,
16 years and 5 months,
or 21 years and 5 months?
Assuming you do actually request the extension(s), and depending of course on how capital-hungry the beast has become, you might wish at that point to consider your options.
FH1, don’t know if you missed my earlier post 13:36 or have me filtered :)
Just in case it’s the former, here is the crucial bit I hope you have built in to the long term calculation.
The problems arise with a next stage “of do nothing” because the stings in the tail of the PSC - specifically designed for the high production but low cost to operator stage. Have you allowed for those, how long before you think they will kick in individually and what do you think the longer term combined effect will be?
Nobull, I disagree with your calculation, don’t know how you got the first number, here is my version.
GKP gets 80% of the Contractors’ Working Barrels which is 52.2% before CBC (CO+PO = 36+16.2 from PSC)
So payment will be 0.8*0.522*31*44400*0.5*4.77 so just under $1.4 million IMO
Interested to see why you got a bigger number.
Good point. 30 years of PSC. Need to double my cash to 6bln. Lovely jubbly.
"(1.066m working interest barrels x 0.5 x $4.77)"
Your calculation is wrong right there... (even at that oil price and volume and assuming the full month)
Nobull, I'm pretty sure your wrong with your statement "the production sharing agreement expires in 2032"
GKP and MOL, as contractors, have the exclusive right to develop and produce the Commercial Discovery for a period
of 20 years from the date of discovery, with an automatic right to extend for an additional period of five years and an optional further five year extension. In their modelling ERC Equipoise have assumed a licence expiry of 2043, representing a 30 year production window for the PSC
What does it say in the contract about compound interest on debt one wonders ?
Does it only apply if we owe the MNR ?
Whatever the rate is - it should amount to a tidy sum on $74m over 3 years (or more like sometime never).
Perhaps I get it wrong as usual - Is GKP a legally registered charity in Kurdistan (or anywhere in the know universe) ?
The $74m arrears will probably take about 3 years to pay back, I wonder. Tomorrow's (or the next day's?) extra payment for January might be about $2.5m (1.066m working interest barrels x 0.5 x $4.77) if the proposed arrears payment arrangement is accepted. The Kurds are masters at stopping us getting our own money back in a timely manner. The proposed arrears arrangement appears to be an incentive scheme to ramp up production. JMV.
PS if the production sharing agreement expires in 2032 and if it takes 5 years to ramp up to 75,000 bopd, I can't see how we could get out more than about 135m barrels between 2027 and and 2032, not a lot of time to get back our $500m capex , and for that matter anybody else were somebody else to do the work. The EV/2P valuation is therefore a misleading metric for making investment decisions: I think BBB/Simon Murray may know this too!
What monthly payment do you think GKP gets in three years time if capex is minimal? Pick whatever oil price you like, just tell us what you used.
Yes, $73m is owed, but everyone knows that. The receivable is worth 25p per share, assuming no recovery is embedded in the current stock price.
Goldman Sachs say 75 POO this year. So why start with 55? In 5 years predict 100 though some say 150. Basic maintenance is covered in lifting cost so don’t need 12m a year capex. KRG need to pay back 74m.
I can assure you the cost of the company's equity capital is more than 10%. You may be happy earning a 10% annual return on your money in GKP but I need a LOT greater return to compensate for the risks involved. It's cost of debt capital is the current market rate on its bond (or where it could issue more bonds) adjusted for the corporate tax shield. The WACC (weighted average cost of capital) that ought to be used in any DCF would reflect the balance of debt and equity in the company's capitalisation.
@ FH1
In DCF models the discount rate is a combination of prevailing interest rates + risk premium. In short it’s pretty much the same as the cost of capital for the company. It has nothing to do with the net cash position of the company (be it long or short). Presently the cost of capital for the company is around 10% - and if you’re so inclined you can bump up the risk premium further.
@FH1 - I have a very simple model built for GKP. I calculate ~$1128MM net cash generated (undiscounted) in 15 years for GKP..... based on the following assumptions:
- $55flat PO
- 55kbpd production
- $20MM CAPEX this year then $12MM every following.
- $0.28 per bbl OPEX
I havent included corporate of financial costs. I'm not sure how your figure in 15 years is $3Billion?
TM: "will the company be allowed to do nothing" - this is something in the back of my mind too. However right now the constrain on production (55k) is imposed by the MNR, they are the ones who have turned down FDP's due to gas management and they are the ones who have included "no planned flaring" in the PSC.
I feel a bit like a broken record, but no matter who has this field, with however much money it will not get developed beyond 55kbpd. The only thing that will allow that is
a) The government provides infrastructure to allow gas to be taken to market
b) the MNR have a sudden change of heart and scrap the "no planned flaring rule" which with all the ESG focus recently (Iraq being the worst in the world for emissions per bbl) is unlikley to happen.
So in short, the only option (right now) is for GKP to do nothing! If the MNR want more production they are the ones who have to act.
FH1, first question is, will the company be allowed to do nothing?
Suppose it is, could you briefly show the figures needed to get “So in summary just doing nothing will generate easy 3 billion. “?
My modelling suggest GKP is already in cash cow mode and it will improve with the spending of the $20 million to get to 55kbopd.
The problems arise with a next stage “of do nothing” because the stings in the tail of the PSC - specifically designed for the high production but low cost to operator stage. Have you allowed for those, how long before you think they will kick in individually and what do you think the longer term combined effect will be?
@kaaran
Why should DCF be at 10%. With zero capital investment GKP only needs to pay off 100m. Doesn’t need to borrow any more. So in fact it’s almost clean money. Just a bit of maintenance but that’s largely covered in the operating cost.
Goldman Sachs forecast 75 for poo this year. Also many are saying record low capital investment in oil will push it much higher in next 5 years. Maybe not 150 but 100 is quite likely.
So in summary just doing nothing will generate easy 3 billion. This will have to be returned to shareholders. So a 50% dividend at current sp prices. Given all the crap involved with dealing with KRG this is now my preferred way forward. Why bother trying to deal with all the political risks just sit back and rake in the cash and to hell with developing their field any further.
@ FH1
Not very likely. Firstly I think long-term POO of 70 is a bit optimistic. I'm using 60. But fair enough, nobody knows - 70 is as good a guess. Secondly, I'm not sure what discount factor you are using. It should be at a minimum 10% (yield on GKP bond), maybe even 15% given that we have a bloody unreliable captive client in a volatile region. Lastly, I'm assuming an R-factor of >2 from year 4 onwards, i.e. GKP is pretty much only receiving cash from the Profit Oil part of the PSC at a 15% share (not the 30% that it is now).
Taking all that into account it's hard to justify beyond GBP1bn market cap.
At 55kbpd with oil at 70 GKP discounted cash flow worth £3bl. At 100 worth £5bln. No dependency on external valuation purely internal.