Member Info for PUTUP

Straycat wants to assume we don't get that... in which case FCF is at the low end of his range even if exports restart and Brent averages $75 etc.

You want to assume local sales only plus some arrears recovery.

Neither is a great scenario.

I reckon we get export restart plus some arrears recovery.

Either way, we need to be sensible regarding expectations.

If Brent were to average $75 next year, the pipeline were to open beginning of January, investment is made to maintain 48k production and prior discounts to Brent ($32.20) were to hold, I'd expect $60 million of free cash flow next year plus anything of the arrears recovered (which you want to assume is zero). That's a lot of ifs but we can be optimistic...

It also assumes we get paid for 2025 without a lag. Any payments terms creating a lag will reduce 2025 free cash flow (and consequently require more working capital) which would normalise the following year.

GKP still retains too much capital. It needs to return more to shareholders.

$65 - $32.20 is a lot better than $27. Obviously, 75 - 32.20 would be better still, but who would assume Brent remains at $75 per barrel forever when spot is below that? GKP can't influence Brent, but maybe, just maybe, they can work with SOMO to achieve a lower discount to Brent. A lot of what Broadford Bay has value in this regard (to counter such optimism) but let's see how things unfold. For now, I keep the recent historical discount when assuming pipeline reopening.

(FWIW the extra $10 is worth 30p per share if we can get it. Always good to have a sense of how much value might change for a given change in operational input. Sure as hell beats stabbing a finger in the air.)

That's an assumed average in perpetuity. I keep it about $10 below spot but try to move it less than spot (if that makes sense). Obviously a big generalisation but something to work with and reality check for value.

"Not a chart guy"

Clearly not

Waffle waffle. (They'll need receivable recovery to reach $70-$100 million of free cash flow.)

Yes, the task at hand isn't easy. But that's what we pay him for. (And doubled his cash comp.) He needs to achieve:

1. sanctity of key current contract terms

2. recovery of the receivables

3. payment surety

4. better pricing - a reduction in the discount Shaikan oil is sold at

5. growth

So far there hasn't been much progress... But he's working on it. Let's hope he brings home the bacon.

They needed to be much more precise and we should dig deeper.

And to be more precise myself, my assumption is that ALL of the receivables - not just the cost recovery component - is repaid (evenly) over two years. So $6.3 million a month. (Discounted at 20% pa yields circa 41p per share.)

Straycat you forget that current cash flows have excess cost recovery. That will end about year end. IF the KRG are still managing local sales and IF they agree that the operator can re-invoice costs already invoiced in the receivables as a means of whittling that liability down (starsalign's assumption) then the cash flow will continue for longer. (I'm using a repayment plan assumption but it essentially produces the same result.) But YOU asked to assume that the receivables aren't paid. You can't have it both ways.

Off the 130p

Not a good scenario and not one I expect

Subtract 41p for the receivables

150p is 48k bopd production, pipeline reopens early '25, current contract terms, $65 Brent in perpetuity, $32.20 discount to Brent sale price, $4.20 per barrel opex, $40 million per gross capex, $6.5 million gross Shaikan G&A, $6 million corporate G&A, 24% WI in Profit Oil, 20% discount rate, 1.32 Sterling to USD exchange rate. The receivables are an obligation of the KRG and not SOMO (an important difference) - assume repaid in equal installments monthly over 24 months.

I never said "preventing". I said "allow the KRG to manage". SOMO could intervene on and takeover local sales at any time. Sales might well continue but SOMO would get the proceeds, not the KRG, and repayment of KRG debts would have to come from other means, presumably budget allocations.

That (a local sales only scenario but with arrears recovery) would knock about 20p off my current 150p YE fair value estimate. (Assuming continuity of current contract terms and the company lifts capex in order to be able to continue 48k bopd production, albeit it's not that sensitive to the latter. There's certainly next to no growth in that scenario.)

But how long will SOMO allow the KRG to manage local sales?

An ETF on the S&P 500 would have turned 15% over the last 5 years and you only expect the same from a single stock that's going through extreme difficulty? LOL

Cat

1. An example. What return do you expect for this risk? It's been an absolute sh*t show.

2. Not per annum. Total invested capital at any one time. Come on lad. (Currently GKP have $250 million invested in low performing assets alone...)

3. Nope

No margin (other than via Profit Oil) is made on Cost Oil. So, for a given FDP (i.e. capex level) a lower rate of cost recovery means more capital is required. True "margins" don't change much (Profit Oil component less CBC less non-recoverable costs) but a higher level of capital is required (invested in the CRP) and so returns on capital fall (same return vs more capital). Either that or capital discipline enforces a reduction in the scope of the FDP = lower growth (all else being equal).

"It's debatable what discount the new (Kirkuk) blend will have to other benchmarks such as Brent"

Agreed. But it's been the benchmark wee've worked to so far. Who we have detail of a new observable benchmark we can adjust.

"but the days of wonderful dividends are long, long gone."

The big dividends weren't from operating profits. There's still potential for abnormal (not from operating profits) dividends as the arrears are recovered. After that it's a different story.

"So back to my original point, it's hard to see how worse terms can be accepted with regard to modification of the PSC? "

Likely not regarding Profit Oil. But I'm not aware that's in debate. A slow-down in Cost Recovery (without a commensurately smaller FDP) would mean more capital tied up in the CRP, all else being equal lowering returns on capital.

Watch out, numpties (silent or not) will try to put a multiple on those numbers.

FCF per month is a better metric to look at rather than revenues.

'Profit' has ALWAYS been the profit oil component less non-recoverable costs (eg corporate overhead). It's just that a ton of money was spent early on, bankruptcy followed, and then - finally - those costs began to be recovered after the write-off of the securities that provided the capital to fund them.

"Export pipeline open and $70 Brent" would be approx $52 million of free cash flow with 48k bopd production (assuming existing contract terms, $32.2 export discount to Brent, $4 per barrel opex (less than current), current Shaikan direct G&A, $30 million capex to keep production constant (likely too low an assumption), corporate cash G&A a little under $6m).

[For that to represent a 20% return on capital employed, GKP has to keep its invested capital under $260m. Capital is currently invested in cash, the CRP and receivables...]

Assuming the local prices doesn't fall further... That would be a bold assumption.

(Ignoring arrears recovery, which is best valued separately as it is a one-off, your numbers are WAY too high for next year.)

"The main stumbling block in agreeing the RSC is the time frame for recovery of invested Capital; while Baghdad recognizes that invested capital must be recovered/paid back, the current KRI PSCs are considered too generous with an overly fast payback period and that will have to change. "

It will certainly be interesting. GKP and the other IOCs have taken a bathing in the past by investing too much capital and relying on long-dated, highly uncertain and difficult production progress and payments reliability from the KRG. How much appetite for risking capital remains? I'm very much of the view that the GKP should never again invest their capital in large quantities. The good news is that a base level of current production provides a reasonable envelope for investment, even if that envelope is reduced as a result of contract changes - so long as it isn't reduced too much. The rubber will meet the road when it comes to renegotiating, if necessary, the field development plan to 'fit' within any reduced recovery envelope. The two go hand in hand. If the IOCs are forced to push back on the scope of field development (growth) plans in order to maintain capital discipline while SOMO expects more investment then tensions will resurface.

Obviously, we are all better off if all our production can be exported. Local sales via the KRG allow the KRG a more direct means of whittling down their arrears balance (eg re-billing costs), but the overall pool of field sales can be markedly higher in a full export scenario. If, as I too would expect, SOMO eventually takes over the reins of local sales then the KRG will have to repay their debts from their allocation from the budget rather than allowing re-billing of previously invoiced amounts. That is, repayment comes via a repayment plan. The good news is that the greater overall pool of field sales, even under a hybrid local/export scenario should allow faster repayment (even if Straycat is prepared to write off the arrears). (For now I model repayment over two years.)

We will have to wait to see how things unfold. A lot is at stake.