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"We can all lament that potential loss of $151m, "
Without the clear path to the recovery of this, the short term upside is limited IMHO. A lot is priced in - both with respect to losing the $151m (negative) and reopening of exports (positive).
"without its recovery being a structural impediment to progressing GKP's self-funding proposition."
Growth and the self funding proposition depend heavily on the contract and its cost recovery element. Yet another area of great uncertainty.
So we have $151 million of receivables and future growth up in the air...
We've still got historical costs to recover: the circa $121 million embedded in the receivables balance and, I'd estimate, a further $45-50 million beyond that. After that we just have the profit oil stream (as cost recovery = cost incurred). Free cash flow generation in the future will not look at all like the last couple of years.
"And the ICG feel no natural responsibility for the $151m debt because it was not incurred by them. It's not their contract.
If they're going to take it on, it'll be on their terms. Almost certainly ugly for us. But they probably won't.
And that's what we've got to recognise. A problem. "
Of course it's a problem and one fully recognized by all. It's already written off in the current stock price. Also, it represents a quarter (actually just over) of my forward fair value price. That's a big hit if it's gone.
The more nuanced question is the following. Let's assume the ICG say the debt isn't theirs and that the KRG have no way of paying i.e. we never get it. What will be the position taken by the ICG/SOMO with respect to the circa $122 million of it which is cost oil recovery. Will they say "you invoiced it, and it's not our problem that you weren't paid, and hence it can't be invoiced again and recovered from us." That is materially different from a situation in which that $122 million is still recoverable (from SOMO/ICG). In the latter case the hit is only the $30 million of profit oil. Who knows...
No one knows. Correctly, in my opinion, the current stock price has discounted the $151 million to zero - even though the final outcome might possibly be much better. Assuming such a discount is appropriate, and assuming a return to exports in Q4 and NO material impact to the current contract, I believe the market has priced in almost all the value of 50k production through to the end of the license. I make it only 10% cheap at current levels (on those assumptions).
(And paying today for 90k rather than 50k would only add about 60p of value.)
So a lot of value rides on recovering the receivables or at least the cost oil recovery therein.
That doesn't change the fact that the company is carrying excess cash which should be returned (alongside any near-term future cash generation from local sales or otherwise) via a buyback.
Therein lies the rub and why any contract discussions will be so important. Should GKP ever again embark on field development that requires the significant use of its capital? When the company was first formed they spent a bundle of shareholder and bondholder capital on behalf of the KRG knowing that it could only be recovered many years hence. It ended in disaster for many. Should they take this risk again? If so, to what extent? How much investment (FDP) can be conducted within the recovery envelope provided by an agreed contract?
Now that the field is operational, with reasonable baseline volume, my view is that they should not and that they should only invest to the extent that expenditure is recovered within payment terms. If great amounts in excess of this are demanded of them, $30-40 million or so will likely be rounding error. Return the excess now and let us decide if the risk is worth it should we ever be called upon to invest great sums of stakeholder capital again.
Management are doing what they can. Unfortunately SOMO and ICG have yet to engage with them on a serious basis. They are carrying excessive cash in light of current cash generation and balances. They should return that excess to shareholders via a buyback. That be my view. While I would have preferred them to act when the stock was below £1, I'm happy to increase my relative stake, without deploying additional personal cash resources, at these levels. If management are confident, they should do it. If they don't, that says a lot about their confidence.
Straycat, I don't think the non-executive Board have had much to consider of late. Twiddling their thumbs the lot of them. Management, however, is doing a very good job of controlling costs and managing to eke out a little free cash flow. Well done management and operations staff. That's entirely obvious. Considering the severity of the situation (to belittle it is totally disingenuous) they are doing what they can. Discussions with SOMO re contracts and FDP remain ahead. Let's see how they do. The Board are hardly heading anywhere at the moment.
The fact that local sales are the only thing keeping the lights on will not be lost to SOMO/ICG. If they move to halt those then it really will mean they want to go nuclear... It won't matter whether there's $86 million in cash or $50 million in that case.
So your single point is that you don't want the company to distribute any cash. Ok. I disagree. Was that it?
The weather? Much more pleasant than London earlier in the week. A nice time in the sunshine. Current temp about double London's. The beach looks very inviting... How about you? Traveling as well or moping around home?
Straycat, thoughts on what exactly? Were there questions in your ramble?
"Oh yes, and we’re sat on an oil field with a twenty eight year expiration date." Well, this bit is wrong but that's been pointed out already.
Your item 6 is where a big chunk of value rests / is at risk. It's a particularly big chunk because it contains a lot of cost recovery.
Re 7, yes, they will consider investment (as opposed to the current minimal maintenance capex) when/if things (contracts, arrears, exports) are resolved to their satisfaction. Not before. "these are choices GKP will make whatever the ICG think or say." A Field Development Plan requires an agreed contract (particularly with respect to cost recovery). Both go hand in hand. The level of cost recovery in the contract scopes the size of the FDP that can be agreed. If the discussions, when they start in earnest, break down fundamentally (e.g. low cost recovery envelope in the contract and large FDP expected) then we are really in trouble. Sure, we have no debt. But we do have a current equity value to lose. What would that be worth if there was complete and utter disagreement with our employer? If you've no business then the existence or not of debt doesn't matter that much.
So, as I've said before, everything is at stake. Luckily, we are still likely best-placed to develop our field (just as the other APIKUR members are with respect to their fields) and so replacing us isn't a sensible option for SOMO/Iraq...although it doesn't have a zero probability should discussions get protracted and ugly.
Or simply look at the company’s own disclosure, published on its website, included in the 2016 prospectus, specifically under section 13.2 on pg 175. People here would do well to read also the paragraphs that follow relating to FDP, work approvals and budget submissions that the contractor is obliged to do.
'For crude oil sales into the ITP from 1 January 2023 to 25 March 2023, capacity building payments were deducted from the monthly crude oil sales invoice amount payable to Gulf Keystone and no direct payment was made to the KRG. For local sales from 19 July 2023 to 31 December 2023, the KRG received capacity building volumes in kind, which they then sold to local buyers.'
This we knew ages ago.
"The value of licence, rental and security fees has been accrued and is not expected to be paid, but rather offset against historic revenue due from the KRG, which have not yet been recognised in the financial statements."
It will take a very long time to whittle down $152 million in this manner. Make no mistake, we need a return to exports to recover the arrears in a timely manner.
Personally, I am pushing back (again) my 'restart of exports' assumption date from the beginning of June until the beginning of September. That brings my model's YE fair value price, based on this and other assumptions including CONTINUITY OF THE CURRENT CONTRACT TERMS, to 204p if arrears are fully valued and 151p ex receivables. Discounting these YE numbers to end April (using my 20% discount rate - likely too low) yields 181p and 128p, respectively. Given the enormous uncertainty regarding receivables recovery I'd weight the ex receivables numbers much more than the others. Obviously, any negative adjustments to the current contract terms would have to be factored in once known.
"I agree a united front has been and continues to be strong, but when do we reach the point where it becomes counterintuitive, delaying the point where IOCs individually will need to negotiate individually and directly with ICG/SOMO? I don't know when that point is, but ultimately I think there will come a point where the IOCs will have to go and work out their own terms."
The ICG has, by and large, not yet decided to engage with the IOCs directly. On the contrary, they are largely avoiding the discussion. (In my opinion they're still focused on bringing the KRG to heel.) Until then, it make immense sense to continue for the IOCs to voice a united front and an expectation that current contract terms must be honoured, while at the same time voicing a keen willingness to get back to work (so-to-speak) for Iraq. JH and the others need the ICG/Somo to engage seriously. They will - when they're ready to. In no way is APIKUR a negotiating body for the individual IOCs. They're a PR strategy and a means of expressing a united front to the ICG. That's it.
You miss my point. ' All for one and one for all' still has considerable value at this stage. JH and GKP should work in close cooperation with the other members of APIKUR (regardless of what you think of their appointed PR guy).
One of the things I find amusing about you Straycat is that you pick arguments against notions that no one here (certainly no one of right mind) supports or would support. It's like you love to fight windmills, straw ones at that. I'd be astonished if anyone here thinks Myles IS the answer.
Enjoy your evening.
"To be clear, Myles is definitely not the answer. "
He was never intended to be! He is simply a PR voice for APIKUR. There's a need for that, but why would anyone expect more from him? Responsibility rests with JH and the other CEOs to debate, collectively and individually. For now there's strength in numbers.
What do you expect from a communications consultant (akin to those deployed by public companies to help with their investor communication)? You should expect zero.
What matters is the CEOs and other management from the affected companies getting down to face-to-face discussions. Shame there haven't been many of those...