RE: RNS3 Jun 2022 15:35
"Are you suggesting that it is cheaper to use what would effectively be invoice discounting of book debt to fund the whole three/four year investment? Instead of utilising ongoing free cash?
Or are you just talking about funding the possible spikes in the capex injection curve?"
I'm saying they should source whatever debt they can. "Ongoing free cash", as you put it, is equity. I'd rather they paid it out. I don't know about you but my cost of equity for GKP is closer to 20%. Debt will be a lot cheaper. Anyone lending to GKP will realise that the investment cycle (expenditure of capex, and opex, for future recovery and return) is basically dependent on the payment terms (and the KRG sticking to them). When the CRP is normalised (likely in October) capex, opex and direct Shaikan G&A incurred in a month is recovered when GKP is paid for field sales from that month (via cost recovery oil). That's really VERY quickly versus a more 'normal' investment cycle where payback periods might typically be years instead of a few months. At good volumes and decent prices there's a lot that can be put through cost oil without the CRP building beyond payment terms' months (ie two to three months) of expenditure. If I were company management I'd be telling the KRG "you don't pay us on time we stop investment until you do." Of course it never quite works that way but one has to be firm in order to encourage sticking to payment terms. If you strip out the cycling of capex and opex (or keep it in and realise that cost recovery and capex/opex cancel each other) you realise that FDP development, particularly if front-end loaded, is large versus profit oil cash flow generation. (Look at May just completed. The company has likely invoiced about $48m but profit oil less CBC is about $10m from which they need to pay head office and finance costs. The $38 is just recovery of prior expenditure.) So, once again, you're very dependent on those payment terms for speedy recovery of capex and opex. I'm not necessarily suggesting receivable factoring, although it would be great if it were available (I suspect it wouldn't be) but any lender/bondholder would look at the co as being very dependent consistent payment terms. No surprises there.
So you have this push-pull in looking at credit worthiness. On the one hand, the investment can be recovered extremely quickly and so the funding can be recycled quickly. On the other hand the KRG is a poor credit quality and historically unreliable payer. GKP has to be in a much better position to secure debt financing (and reduce their reliance on more expensive equity financing) than ever before. That said, it's not necessarily as simple as might seem. If their one customer had a better credit quality and was more reliable in paying then things would be easier. JH needs to wield a firm stick re investment vs payment consistency to limit buildup of CRP much beyond 2-3 months of capex/opex. Funding with equity would be more expe
Sign In
Follow the stocks
