Member Info for PUTUP

" PS PUT UP, I asked for your latest view of the Chairman and the Board.This was a genuine request that values your opinion so it would be great if you could respond."

Hi. Sorry I missed this. In short the Chairman needs to be changed. I don't believe he's providing the required leadership and he is a poor communicator. I like the CEO but he's only just getting going. For now he's benefiting simply from the operational foundation of his predecessor. Time will tell. Our FD in particular needs guidance/encouragement to run a much more realistic capital structure and the present board doesn't seem to be providing such. Better leadership from the top will help a lot. If we don't see progress soon in this arena I'd vote for change. Martin is very solid but as an independent he's more of a 'check and balance' than a 'driver'. Obviously Mr Soden is taking orders from the key shareholder and not an independent but I feel very aligned with the principal investors. I don't have a particular view either way on Ms Wood or Mr Thomas.

Opu still doesn’t understand and likely never will

Just as you would not selling in a buyback

You guys are hilarious. Management doesn't get a break from you even when they do the right thing. Have you read any of the company's investor presentations? The company has a plan beyond 55k. Some of us remain at this stage unconvinced that it will produce adequate returns but they do have a plan. That plan will adapt to circumstance. And over the course of 2021 they should raise production circa 28%. They can't get beyond 55k until 55k is achieved. Give them a break on operational strategy. On financial strategy, yes they're running a grossly inefficient capital structure. Buy the stock back. With oil in the 70s all is good for quite some time yet.

"Share buybacks proved to be a failure last time round as sp sank while they were buying. Give us the cash."

They did give cash back with the buybacks. YOU (and/or others like you) just declined to take it.

"Junes invoice returns will be much better" (sic)

About 5% better probably. $1.3m more for June vs May is my expectation. (One less day in June obviously.) Expecting $25.3m net plus approx $4.9m in arrears. 79% of the June receipt remains cost recovery. All largely known quantities and unlikely to surprise significantly.

"I thought buybacks and divis would have same net effect according to you."

For the company they're the same. For the individual investor it depends on how bullish you are, your tax position etc. I expect buybacks to follow the dividends. Receiving and reinvesting a dividend imposes costs on me. I don't like leakage to the tax man and brokerage fees when I want my money invested. With a buyback, I can choose not to participate in the capital return by not selling into it. The two dividends are a small step towards capital structure efficiency but, as previously demonstrated, they've still got a long way to go. At current levels the company could easily justify buying back 30% of its outstanding shares. They should execute the already approved 10% buyback swiftly and then seek approval for more.

"Just need to decide on a strategy going forward, right now the company is in a bit of limbo."

That's a bit harsh. The company has 55k bopd production well in its sights. Need to get to that before going further. The only easily addressable thing that's really lagging is capital efficiency. I expect that to change once the special dividend is out if the way. If they don't get going with buybacks after that it will be time to yell.

Obviously understanding the cost recovery pool mechanics in intricate detail is important. I too am of the view that the cost recovery component continues to operate even as the R factor swings higher. It would seem very odd that it wouldn't. Perhaps I am wrong.

"and assuming that PO at 15% when R gets > 2 does not add much value"

We can gain a sense of the general magnitude of this. For ease of calculation let's assume 100% of production is profit oil (if I am right it never quite gets to 100% because some of the production is covering cost oil which is dollar out and a dollar in over time). The R factor swings above 2. Contractor share of profit oil falls to 15%. At $70 Brent GKP gets about $64 million per annum if daily production is 55k bopd. Let's be generous and assume this continues indefinitely. The PV of a perpetuity is the periodic payment divided by the discount rate. In this case the discount rate is the WACC which, given debt will have been repaid, is the required return on equity. Let's assume 25% given the risks involved. So we have 64/0.25 = $256 million or £185 million which is 87p per share.

The foregoing begs the question: what might the profit oil stream be worth? I typed out my view but then decided it would be much more fun to see what others come up with...

Good point TH. I note that GKP slipped in the word 'gross' in their disclosure:

"As at 31 December 2020, there were $548 million gross of unrecovered costs, subject to potential cost audit by the KRG. Cumulative revenues were $1,182 million and cumulative costs were $1,439 million, resulting in an R-factor of 0.82."

Obviously applying a factor of 0.8 to the unrecovered cost figure alters my confidence in 'easy upside'.

One key problem with multiples of reserves - in this situation - is that it confers a sense that the reserves are owned. We know they aren't. We also know that while eventually we receive back our capex, the return of such is deferred more so than it would be normally (because of the PSC). Lastly we know that once the cost pool is recovered receipts fall dramatically. Far better to value the PSC. Sure that will churn out an implied value per barrel of reserves but it isn't comparable to situations where the operator has full rights to field production.

A more sensible multiples based valuation for our current situation is, in my view, to examine enterprise value to (the sum of) cost pool plus (in the current case) arrears. At least in the short term. When oil prices are high the cost pool is recovered quickly; longer in the case of lower prices. Thankfully, currently prices are such that we have the former. That remains the case even if Brent corrects 10% from here.

As of today's close the company has a market cap of $526.8 million. The company stated that it had a cash balance of $195 million as of 10 June. Pro forma this for the $27.4 million received on 28 June for April's production and the $25 million dividend paid and we have $197.4 million. With $100 million of bonds o/s that's a net debt figure of $(97.4) million. So we have an enterprise value of $429 million.

I haven't modeled the cost recovery pool. I should do so (see below). But the company has stated that as of 31 Dec 2020 it was $548 million. Presumably it is lower now given the receipts of the first 4 months of the year. Let's use the higher figure for simplicity for now. As of 28 June the arrears balance was $58.9 million.

So the company is trading currently at approximately 0.7x Cost Recovery plus Arrears.

Is the discount warranted, particularly when such a multiple doesn't have a profit oil component in the denominator? That's for each individual to decide. At current oil levels the company is pulling in cost recovery to the tune of almost $20 million a month while opex and capex add to the balance probably something like $6-7 million a month. So the cost recovery pool is a relatively 'near-term' asset at current oil/production levels. In my view the answer, for now, is straightforward. Obviously it is less so if the stock rallies another third or more from here. We can worry about that once it happens.

It would be sensible to model the cost recovery pool and use a figure as of June 30 as well as pro forma receipts/cash balances for May and June billings given these are easily modeled. Do so at your leisure.

Valuing the PSC as a price per barrel is a fool's errand

In my opinion all charts need to be rebased for capital distributions and adjustments. I note that many providers have not done this for the GKP ordinary dividend. Perhaps this is because it was an 'ordinary dividend' and adjustments for ordinary dividends are most often immaterial. But that isn't the case here. It will be interesting to see what approach is taken for the 'special'.

In a nutshell, as expected, the stock adjusted downwards by the amount of the capital distribution (with of course nothing to stop it ebbing and flowing from there). The small tick up could quite likely just be attributed to some buying tension from those reinvesting. Neither here not there. Dividend yield is basically 0%. Nothing to see here.

you just had it

"The most attractive part of both contracts, TSC and PSC, is (or was) the fast return of your invested capital."

In any 'normal business' one invests capital and receives all of the cash flow it generates. The structure of the PSC lengthens payback periods for investment because 60% of the cash flows generated are shared as 'profit oil' of which we only get a small percentage.

"Note that my expectation for the arrears payment for May will fall (more than halve) if the proposed agreement on arrears (percentage above $50 moves from 50% to 20%) is adopted."

Correction: I had already amended the formula to reflect 20%. $4.1m reflects the proposed cut to 20%.

Looks like GKP will be paying corporate tax soon

(Brentavge -$50)*#Days*Prodbopd*Repayshare*0.8

Where Repayshare was 50% but it has been proposed that this is lowered to 20%

Note that my expectation for the arrears payment for May will fall (more than halve) if the proposed agreement on arrears (percentage above $50 moves from 50% to 20%) is adopted.