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I always find it quite amusing how many people get upset with a proper fundamental DCF valuation, just because it does not support their hopes and dreams. Being able to do some basic math is a life skill in this business that not many seem to possess...
OK here is my valuation input:
- Brent @ US$65. Don’t want to spend too much time on this. Global oil market is a cat and mouse game between OPEC+, US and China. Vested interests most likely aim to keep things balanced in a US$50-75 range. So US$65 seems a reasonable working assumption to me and using the usual US$20 offset.
- Production level 55k bpod. From what I understand there is no economic incentive to push this any higher in a hurry. Best working assumption is 55k bpod for the foreseeable future.
- I’m expecting that we’re getting our US$70mn arrears back over the next 2 years. So I’m just adding that to monthly cash flows.
- R-Factor will be rising to 2 within 5 years. That means no more cash from Cost Pool and income is reduced to Profit Oil. That’s the part most stubbornly try to ignore. Read the PSC, do the math.
- Choose your discount factor. 10% is the minimum. Given the risk of the investment 20% is more appropriate.
When you plug in all of the above you get about 300p fair value give or take 50p. Hence any elusive T/O bid would be 400p at best. As far as I’m aware, quite a few of the major shareholders happy to sell north of 300p.
In any case I’m more than happy to sell my shares at 500p to anyone who firmly believes they will go to GBP10. Let me know, we can do an off-market cross ;)
Map out GKP’s earnings & cashflows at 55k bopd for the next 5 years, show us what figures you get for those cashflows and then do an NPV10 or NPV20. I’ll give you a hint. The result won’t be GBP10/share, as much as I wished it possible.
I think 300p is fair given the continuing risks for POO in general and KRG’s solvency in particular. Of course that doesn’t mean the share price can’t go higher, but there would have to be some catalyst that either drives POO much higher (unlikely in my opinion) or the KRG is suddenly solvent and sticks to agreements and payment deadlines (also unlikely in my opinion).
What could get us closer to 300p in the foreseeable future is stable POO around 65, continuous payments including back-payments for the amount, no fuss with the KRG, some form of capital return, maybe faster than expected increase in production to 55k bopd.
The share count has dropped a little bit but it’s not a huge factor in price movement.
@ 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
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.
Let's start from the beginning:
Annual Gross Revenue (AGR) = 365 * BOPD * (Brent POO minus Offset)
Annual Net Revenue (ANR) = 90% * AGR
Profit Oil (PO) = 60% * ANR
GKP PO Max = 80% GKP Share * 30% * PO (if R-Factor <=1)
GKP PO Min = 80% GKP Share * 15% * PO (if R-Factor >=2)
GKP PO R-Adjusted = Linear interpolation of above Min & Max when R-Factor in between 1 and 2.
Cost Recovery (CO)= 40% * ANR - Cost Pool Reduction Adjustment
GKP CO Max = 80% GKP Share * 30% * CO (if R-Factor <=1)
GKP CO Min = 80% GKP Share * 15% * CO (if R-Factor >=2)
GKP CO R-Adjusted = Linear interpolation of above Min & Max when R-Factor in between 1 and 2.
Annual Net to GKP = GKP CO (if any / R-Adjusted) + GKP PO (R-Adjusted)
@ holleraa,
why take everything personally? I'd love for GKP to go to the moon. I'm still a shareholder. But I don't want to waste time day dreaming on false premises. Do the calculations according to the PSC outline published and prove me wrong. Trust me, I'd love to be wrong.
CCC is making a fair point and I'm trying to understand what I may have overlooked or misunderstood. That makes CCC's post constructive and valuable for others. Same for PUTUP, because he lays out calculations for anybody to independently verify. Hopes and dreams are for gamblers.
@CCC,
Assuming POO 63 and 55k bopd should get you an annual gross revenue in the order of say 850mn. 36% of that is about 300mn. Reduce that by your 80mn cost you still get a cost pool reduction of 220mn. Admittedly that sounds rather large. But if there are any caps in place, I haven't seen that documented anywhere. Could you point me to where to read up on that?
At current POO and with current PSC mechanics in mind, GKP fair value is 200-250p give or take. Unfortunately that's all that you can get out of the projected cash flows. To get a much higher share price you'd need a much higher POO (unlikely in my opinion, as various vested interests including Russia don't want that) or changes in PSC (also unlikely as far as I can tell).
When various posters talk about the billions of barrels in the ground, don't forget that GKP doesn't own them. GKP is just hired help to get them out of the ground. When you call the plumber to your house, he doesn't own your house either.
@PUTUP
As suggested I had a detailed look at pg 26 of the Jan 2020 presentation. Doing the calcs in Excel, I'd agree with your sample results. The gradually increasing R-factor is going to dramatically reduce monthly cashflows. At R = 1.5 and zero Cost Recovery I get about 6.9mn/mth, and at R = 2 about 4.6mn/mth.
PUTUP,
Could I trouble you to share your calculation on what you think GKP’s monthly receipts will be (given the conditions you have outlined). Many thanks in advance!
Alternatively, where can I find the details that govern the calculation?
Ok, so we’re going to spend 400mn to get from currently around 44k bopd to 75k bopd over 3 years? And what is the Brent average price going to be over 3 years? Honestly nobody knows. So if GKP doesn’t undertake any systematic hedging program it will be incredibly reckless to go on a major capex program not knowing what kind of margin can be locked in for that period. If prices turn south again in 3 years you would have burnt 400mn to collect absolutely nothing in return.
Nufc9,
You do realize if Brent tanks again and the KRG becomes insolvent again, then 1bn barrels in reserve are pretty much worthless. GKP won’t get paid. Not sure why people don’t get that the macro risk exposure to Brent spot prices matters to shareholder value. It’s time for management to add some value and make some smart moves to a) reduce dependence on Brent pricing and b) extract some additional favorable terms from the KRG in the wake of their default on payments.
Shakineven,
The pain of the past is irrelevant except for the lessons to be learnt for the future. And the clear lesson learnt from March 2020 is that GKP cannot afford to be completely unhedged to Brent prices because our one and only customer is insolvent below US$50. At US$60 the company is clearing a nice profit margin, hence some collar hedging strategy for a certain range like US$45-75 seems appropriate. If Brent were to tank again the same will happen to GKP’s share price. Why bother investing in a stock with costly management when it’s just a glorified long Brent contract?
Rising oil? Perhaps, there is a window for a supply squeeze. But there is no real shortage of oil. So at some point that squeeze will be met with plenty of excess capacity coming online. A more realistic scenario perhaps is a 50-70 range. As such, the bright lights at GKP management should consider collaring the firm’s exposure to that range. **** happens as we saw in March 2020. I don’t ever want to be exposed again to the brink like a year ago. Survival is more important than an elusive potential of a moonshot by staying unhedged. Don’t forget our only off-take client is insolvent below 50 bucks.
I’m usually not in the business of praising other comments but PUTUP is truly knowledgeable and brings a few issues down to the point: Shorting is a normal and healthy activity for markets. And we all (some apparently unknowingly) do it all the time via credit. You bought your house with a mortgage? Then you are long your house and short GBP.
I’m not sure we really need the board to manage on-the-ground operational issues. We need them to be effective in managing the relationship with the KRG and the macro risks facing the firm. You can have top notch project management & operational expertise and still get sunk by a collapsing oil price.