Member Info for Crabbo

Kistos (Buy): Dutch tax headlines yesterday pm - reports yesterday indicated the Dutch government is considering imposing a solidarity tax on oil and gas companies. Details are sp**** but media reports essentially describe the EU’s proposal for a 33% tax on excess profits generated in 2022 - excess profits defined as those which are more than 20% above the average of 2019-21.
View: we recently included the 33% tax for 2022, and the Dutch proposal of a sales levy in 2023/24, into our base forecasts and valuation. Therefore, if confirmed, the solidarity tax would have no effect on our numbers or 670p price target. Reiterate our Buy rating.

Kistos's H1 results highlight excellent operational performance in the first half, and strong cash generation with the company comfortably in a net cash position. We expect cash flow to strengthen in H2 with the Greater Laggan Area (GLA, UK) assets now in the portfolio, and the company's unhedged production fully exposed to the strong UK and European gas price environment. The company remains focused on growth and will use its balance sheet to grow through acquisition, and also develop organic opportunities in the portfolio. If gas prices stay high through much of 2023 it is likely, in our view, that the company will also have the flexibility to return some cash to shareholders. Kistos remains a core holding in our E&P coverage given its pure-play exposure to gas pricing, and we reiterate our Buy rating.

Backdrop - European gas markets remain tight whilst Europe continues to grapple with the security of energy supply following the Russian invasion of Ukraine. So far, continued pipeline flows from Russia, US liquefied natural gas (LNG) cargos and weaker demand owing to warmer weather have eased pricing slightly and helped rebuild inventories. At 537 TWh, gas storage is currently 49% filled, 5% below the five-year average for this time of year, having bottomed in mid-March at 25.5%. I continue to expect the market to remain tight, especially as we head into next winter, given that reliance on Russian flows remains unsolved and expectations that competition for LNG molecules remains intense. Therefore the environment remains very attractive for gas exposed E&P’s… with the generation of strong cash flows and attractive FCF yields

Drilling down - The current portfolio comprises production and development assets in the Netherlands (acquired for €223m in May 2021) and the Greater Laggan Area (announced in January 2022). The investment case is supported by low unit costs and high European gas prices (European gas prices (TTF) averaged €99.5/MWh in Q1 2022, and UK gas prices (NBP) averaged 232p/therm), ensuring that production growth is highly cash generative. Pro forma costs for 2021E c$6.40/boe, sit at the lower end of our coverage. Kistos generates a FCF of £296m and is trading on FY 2022/23 EV/EBITDA of 0.4x/0.5x …our risked is NAV 886p/sh.

PRODUCING ASSETS -
Kistos’s current net gas production originating from the Q10-A gas field, sits at c16mmboe. Based on our long-term modelling, we arrive at a risked NPV of Gbp661 per share contribution to Kistos

GLA - assets possess a CO2 intensity of c13kg/boe, roughly 40% below the UK North Sea average of 22kg/boe. Current gas output originating from the GLA stands at 4mmboe net… leading to GBp209 per share on a risked basis

UNDEVELOPED ASSETS: Glendronach development adds a risked incremental value of c€89m net to Kistos (January 2023). The licence partners are working to mature the project to FID during 2022, with first gas expected in 2024. Further, Orion holds c43mmboe net, which we currently expect to be brought onstream in 2024, contributing 619p to our risked NAV (at a 75% chance of success). In addition, despite the Q11-B appraisal result the company continues to examine a potential tie-back to the Q10-A platform with an update also expected later in 2022.

"In a mixed operations update GKP has confirmed strong YTD production from Shaikan of 44.9Mbbl/d, with FY22 guidance tightened to 44-47Mbbl/d (PHe current FY22 47Mbbl/d). Robust production against a backdrop of a strong oil price has put the business in a strong financial positon. US$190m of cash dividends (26% yield!) have been declared, along with plans to call the US$100m bond in July. Elsewhere, politics has added uncertainty to the outlook, with FDP approval yet to occur and an escalating dispute between the KRG and Federal Government complicating the picture. We remains Buyers, TP 348p."

The company is now debt free. This anticipated update comes on the back of recent receipt of net $38m payment for April crude sales and payments of a $25m ordinary dividend on 15 July and a $50m special dividend on 29 July.

$50m special dividend, 19.54p/sh, will be paid on 29th July to shareholders on the register at 15 July.

GKP have confirmed strong YTD production from Shaikan of 44.9Mbbl/d.
Robust production against a backdrop of strong oil price has put the business in a strong financial position. US$190m of cash dividend (26%!!)

Gulf Keystone's AGM statement highlights the company's financial muscle, with
outstanding cash flow generation, shareholder returns, and now its intention to repay
early the outstanding debt. All while still maintaining a very significant cash position.
The previous arrears owed to the company by the KRG have now been fully recovered,
the company expects to pay $190m dividends in FY22E, and repayment of the $100m
bonds will soon leave Gulf Keystone debt free.
Operationally, Shaikan field continues to perform well but pending installation of water
handling facilities it is clear there is a need for careful output husbandry. In addition,
one production well has been offline for much of H1 and two others have not delivered
pre-drill expected rates. As a result the company has narrowed FY22E gross Shaikan
production guidance to 44-47 kbopd (from 44-50 kbopd).
Approval of the Shaikan FDP is still pending. While no timetable has been given, the
tone and the indications of preparations to resume drilling suggest good progress.
We think the new production guidance has little value impact, as we see it as shortterm deferred output with very little follow-on implications. We maintain our BUY rating
and 335p target price

Backdrop - European gas markets remain tight whilst Europe continues to grapple with the security of energy supply following the Russian invasion of Ukraine. So far, continued pipeline flows from Russia, US liquefied natural gas (LNG) cargos and weaker demand owing to warmer weather have eased pricing slightly and helped rebuild inventories. At 537 TWh, gas storage is currently 49% filled, 5% below the five-year average for this time of year, having bottomed in mid-March at 25.5%. I continue to expect the market to remain tight, especially as we head into next winter, given that reliance on Russian flows remains unsolved and expectations that competition for LNG molecules remains intense. Therefore the environment remains very attractive for gas exposed E&P’s… with the generation of strong cash flows and attractive FCF yields

Drilling down - The current portfolio comprises production and development assets in the Netherlands (acquired for €223m in May 2021) and the Greater Laggan Area (announced in January 2022). The investment case is supported by low unit costs and high European gas prices (European gas prices (TTF) averaged €99.5/MWh in Q1 2022, and UK gas prices (NBP) averaged 232p/therm), ensuring that production growth is highly cash generative. Pro forma costs for 2021E c$6.40/boe, sit at the lower end of our coverage. Kistos generates a FCF of £296m and is trading on FY 2022/23 EV/EBITDA of 0.4x/0.5x …our risked is NAV 886p/sh.

PRODUCING ASSETS -
Kistos’s current net gas production originating from the Q10-A gas field, sits at c16mmboe. Based on our long-term modelling, we arrive at a risked NPV of Gbp661 per share contribution to Kistos

GLA - assets possess a CO2 intensity of c13kg/boe, roughly 40% below the UK North Sea average of 22kg/boe. Current gas output originating from the GLA stands at 4mmboe net… leading to GBp209 per share on a risked basis

UNDEVELOPED ASSETS: Glendronach development adds a risked incremental value of c€89m net to Kistos (January 2023). The licence partners are working to mature the project to FID during 2022, with first gas expected in 2024. Further, Orion holds c43mmboe net, which we currently expect to be brought onstream in 2024, contributing 619p to our risked NAV (at a 75% chance of success). In addition, despite the Q11-B appraisal result the company continues to examine a potential tie-back to the Q10-A platform with an update also expected later in 2022.

"In a nutshell… Kistos' (Buy, TP GBp730) is probably the best exposed E&P in our coverage universe for investors wanting exposure to the strong backdrop for EU gas and the role of gas as a transition fuel. It also comes with an incredibly compelling relative valuation (FY 2022/23 EV/EBITDA of 0.4x/0.5x, EV/DACF of 0.7x/1.3x). Recall, the company currently produces c12 kboe/d (set to grow with the GLA deal closure) and sits with a very favourable balance sheet position of €6m net cash, leaving the company primed for potential compelling future shareholder returns coupled with scope for significant in-organic growth. The company is currently fully unhedged on its exposure to European gas markets .. which on the Berenberg commodity deck drives a FY 2022 FCF yield of c71% and a risked NAV of 886p/sh. The risk/reward here looks very favourable in my view – especially as we look beyond summer seasonality and the prospect for yet another tight winter in global gas markets."