Member Info for PUTUP

Now do it at the Contractor level.

If you look at my numbers for December 24 (when I have production at 50k and $80 Brent as you do, CRP normalised) the required payment to the Contractor is $14 a barrel - even with ONLY maintenance levels of capex for the field.

"I am proplexed that you think it takes a whole 8 months to ramp up production from 30 kbopd to 50 kbopd"

Never before has the field and operations been so starved of investment and personnel. Maybe I'm being conservative. If they do ramp up faster then the CRP will normalise even sooner...

(Frankly, a return to export by the end of March is looking aggressive...)

This is why 20% CBC is withheld from payments to GKP but GKP books a further cost in its accounts as a non-cash payable.

From the notes to the latest accounts, under Summary of Significant Accounting Policies - Sales Revenue:

"During past PSC negotiations with the Ministry of Natural Resources ("MNR"), it was tentatively agreed that the Shaikan Contractor would provide the KRG a 20% carried working interest in the PSC. This would result in a reduction of GKP's working interest from 80% to 61.5%. To compensate for such decrease, capacity building payments expense would be reduced to 20% of profit petroleum. While the PSC has not been formally amended, it was agreed that GKP would invoice the KRG for oil sales based on the proposed revised terms from October 2017. The financial statements reflect the proposed revised working interest of 61.5%. Relative to the PSC terms, the proposed revised invoicing terms result in a decrease in both revenue and cost of sales and on a net basis are slightly positive for the Company.

As part of earlier PSC negotiations, on 16 March 2016, GKP signed a bilateral agreement with the MNR (the "Bilateral Agreement"). The Bilateral Agreement included a reduction in the Group's capacity building payment from 40% to 30% of profit petroleum. Subsequent to signing the Bilateral Agreement, further negotiations resulted in the capacity building payment rate being reduced from 30% to 20%, which has formed the basis for all oil sales invoices to date as noted above. Since PSC negotiations have not been finalised, GKP has included a non-cash payable for the difference between the capacity building rate of 20% and 30%, which is recognised in cost of sales and other payables.

The Company is in dialogue with the MNR to confirm whether to proceed with a formal amendment to the PSC to reflect current invoice terms."

I think there's still an enormous amount of wood to be chopped between the IOCs and SOMO - UNLESS ("praise be to God") they keep the same contract terms. Alter the contract and you have to renegotiate the Field Development Plan. There's never one without the other. One defines how costs will be incurred and the other defines how costs will be recovered. Hopefully, SOMO recognises why historical costs per barrel have been high but looks forward and sees these falling with sensible investment alongside volume growth. The cost recovery envelope defines how much can be invested assuming the Contractor isn't prepared to incur costs (capex and opex) beyond that which they can recover. It defines completely Straycat's 'self-funding dream.' I had long been arguing that the base of production was sufficient (when coupled with reasonable sales prices) to self-fund the future FDP, allowing capital from the realised CRP to be returned to shareholders. That, however, was dependent on the current contract terms. A lower cap on cost recovery (again assuming capital discipline on the operator which we should all demand) means lower (or even no) growth. With luck, commonsense will prevail.

Place your bets and good luck.

ValueS

"I used 25% as the contractor share of PO and did not deduct any CBC. I.e the first table demonstrates the monthly payment after CRP normalisation. "

The R Factor is still likely around 1.19 now. So that's a 27.2% share in Profit Oil of which the contractor has 80% i.e. 21.8% now and falling.

Here's something to compare your numbers against. I'm still modeling the current contract terms. My assumptions for Brent and production volumes. Full export for all of April onwards (looking doubtful but whatever). Shaikan sold at Brent less $32 ('original' discount of $23 plus the average disclosed KBT discount of $10). Any and all assumptions to be refined when we have clarity but of which we currently have next to zero. (Anyone can create their own model with adjusted assumptions.)

Month Brent # of days Prod bopd Monthly Prod

Apr 80.0000 30 30,000 900,000

May 80.0000 31 35,000 1,085,000

Jun 80.0000 30 35,000 1,050,000

Jul 80.0000 31 40,000 1,240,000

Aug 80.0000 31 40,000 1,240,000

Sep 80.0000 30 42,500 1,275,000

Oct 80.0000 31 45,000 1,395,000

Nov 80.0000 30 47,500 1,425,000

Dec 80.0000 31 50,000 1,550,000

So slower ramp than I think you've assumed. Nonetheless, these imply the CRP is normalised during September. Leading to the following Contractor (gross no CBC deduction) receipts:

Month Costs Rec $ Profit Oil $ Total $

Apr 15.5 5.0 20.5

May 18.7 6.1 24.8

Jun 18.1 5.9 24.0

Jul 21.3 7.0 28.3

Aug 21.3 7.0 28.3

Sep 12.3 9.2 21.6

Oct 8.7 11.2 19.8

Nov 8.7 11.4 20.2

Dec 9.1 12.5 21.6

So you see the sharp drop-off in cost recovery once the historical balance is fully recovered. For 2024 recoverable costs I'm modeling (for now) $44 million of capex (like you, expecting the current guidance to have to be raised when exports restart), $3.20 per barrel of opex and $3 million of direct Shaikan G&A. All gross (for the Contractor).

Note the Profit Oil numbers are overstated as I haven't bothered to model (yet) the impact of receipts on the R Factor (ie the share of profit oil will be lower). I will do so when we have some clarity.

On a per barrel basis, the above figures are:

Month Cost Rec PO Total

Apr 17.21 5.61 22.81

May 17.21 5.61 22.81

Jun 17.21 5.61 22.81

Jul 17.21 5.61 22.81

Aug 17.21 5.61 22.81

Sep 9.67 7.24 16.91

Oct 6.20 8.00 14.20

Nov 6.14 8.01 14.15

Dec 5.90 8.06 13.96

tbc

"Your initial investments were at around 80-85p but you've added since. "

Yeah my current average is 90p, ignoring dividends. I made a very silly purchase at 132p when I bought back all that I had sold above £3 and later above £2 when Genel announced the impact of the move to KBT.

"The question is; why are you still around if you don't believe in the basic premise for the investment?"

I have a premise I believe in (and have stated here). I just reject much of the BS and misinformation that gets spouted here. I'm also not blind to the risks - and this stock is much, much more risky than when I first bought in.

"Is it more or less than £10k/10k shares?"

I stand corrected. On the 5th of Feb I asked. You responded with "20" and not 10. My bad. Neither here nor there anyway. The next day you responded with a set of three possibilities one of which was that you lied. Now, do you have integrity or not? It's ok, we can all just wonder.

"If capex is restricted to $4m pm (GKP contribution), and for $3.2/bbl opex plus a small amount for recoverable G&A, then c. 17.5% of gross sales after 10% royalty should be sufficient to recover the monthly costs. Assuming the pipeline opens in early April and the production rate quickly ramped up to an average of 50 kbopd by mid June 24, such that the normalisation occurs by the end of August 24. Here is a table of GKP monthly payments for September 24 to January 25 might be: "

Under what terms? If the current contract terms held, the recovery of the CRP would be faster than you've projected in your first table. By Aug/Sep the contractor will then only be able to invoice for current months costs. They will never be able to invoice for more costs than they've incurred.

You then (for your second table), as you know, need to think about how the company grows - or even drills to maintain a constant volume. How much capex can be accommodated under your assumptions without rebuilding a massive IOU in the form of the CRP? All of this needs to be sorted out now. Straycat keeps banging on about the self funding dream (scroll back a long long ways and you'll find that he took quite some convincing from me that the company could self-fund development - if the existing contract terms held) but fails to admit that this is EXACTLY what's at stake with any contract (and budget) discussions.

For the sake of clarity I will reiterate two things: I think, by definition my opinion, (1) there's no way Iraq moves to a flat rate per barrel for the IOCs but rather retains the concept of cost recovery and a remuneration fee and (2) an upper cap on payments at $12 per barrel (ie the two components in my point 1 are capped for any given period at $12 per barrel) doesn't provide much, if any at all, room for field investment. Everything is at stake.

"You have absolutely no idea what my investment in GKP amounts to. "

I asked and that's how you answered. Or did you lie?

"First of all we don’t know what the re-negotiated contractual terms will be, so speculation is absolutely pointless. "

Exactly

"I think you’re a risk averse wimp who’s licking his wounds and wishing he was somewhere else, somewhere safer. Well you’re not.

This is a risky grown-up share and the stakes are high.

Stop whining and get on board. "

Says the man with just 10k. LOL. Peanuts.

I'm not whining. I just tell it like it is. Far too many delusions here. Stock is cheap for good reason and could just as likely go lower than higher until real news comes. Place your bets (and hopefully bigger ones than Straycat).

This is what's underlying the already invoiced arrears for Oct 22 to Mar 23 (+/-)

Costs per barrel PO per barrel Total

Oct 21.0 6.9 28

Nov 19.9 6.6 26

Dec 16.5 5.5 22

Jan 17.7 5.9 24

Feb 19.2 6.4 26

Mar 20.4 6.7 27

Clearly the KRG doesn't have the money to pay these except out of future budget allocations (absent, perhaps, a freeing up of exchange controls to allow them access to the money they have on deposit in Lebanon). How much is left over from your $12 assumption (even assuming it is correct) to pay these arrears once they've paid for the current month?

Again I think it's optimistic that SOMO will step into those liabilities. They'll pay the KRG and the KRG will have to find a way to pay the IOCs. Even so, either way the KRG still has to be able to afford to pay. And why the budget allocation is important and it's important that it reflects the liabilities due. Those arrears numbers more like $27 a barrel.

Good luck thinking $12 is good and good luck thinking SOMO will pay a flat amount per barrel regardless of costs.

As to the $151m that's very big question and one of the most important to the near term performance of the stock. The KRG owes and it's still more likely than not that SOMO will say the KRG needs to pay out of the proceeds it has already reaped or from its share of allocations from future sales. While not a zero possibility, I think it wishful thinking to bank on SOMO stepping in to take over those liabilities. We can wish upon a star though...

Then the stock is likely a Sell at 90p on those conditions...

"According to the latest RNS, the realised price for Shaikan crude was $27/bbl. GKP gets 36% of gross sales according to the 'current' PSC setup, that is just $9.72/bbl for both cost recovery + profit oil streams. Therefore, GKP ( and I) should be happy (chuffed) with a $12 offer from anyone. "

It gets 36% only because we are still recovering historical costs and had it been sold down the pipeline at Brent less $32 according to the current contract the cost recovery plus profits oil component would have greatly exceeded $12.

Let's work a hypothetical example. December 2024, historical costs have been fully recovered, Brent is at $80 for the month and Shaikan oil is sold down the open pipeline at Brent - $32 (a big discount, as it once was). We are back doing 50k bopd. (1.55 million barrels for the month.) Lifting costs (opex) have normalised to the previous $3.20 a barrel. This figure excludes capex. We've had to reinvest a little to get production back to previous levels but annual Gross capex remains very low at a mere $44 million per annum. (Arguably such a figure is likely too low to return to 50k.) Under the current contract, contractor profit oil per barrel would otherwise have risen to a little over $8 per barrel. (It's risen because historical costs have been recovered and more production shifts from cost recovery to profit oil.) It doesn't take much of an education to see how something has to give if the maximum amount payable to the contractor is $12 per barrel. Even under this VERY constrained investment scenario, likely below maintenance levels, the current contract would pay $14 gross per barrel to the contractor. Now how do you invest for growth?

(Remember GKP has an additional cost deducted from receipts - the Capacity Building Charge).

Only an idiot would focus on the book value of fixed assets on the balance sheet. Sensible investors recognise that the contractor implements an agreed field development plan on behalf of the resource owner, incurs the capex and opex associated with this plan, is reimbursed by the resource owner for said costs ($ for $, over time according to an agreed formula), doesn't have a claim to the fixed assets once they've been reimbursed (and never has a claim over the resource in the ground), and does all this for a thin $ value per barrel (according to an agreed formula).

If Iraq throttles the cost recovery more than it already is then that leads to two things, neither of which are good. (A) Slower recovery of historical costs (cash flows pushed into the future). (B) Potentially slower field development because contractors should never again incur capex and opex beyond the rate at which it can be recovered. In short, Straycat's "self-funding dream" is much smaller in scope. Each of these lower GKP's potential valuation.

"the accounting method" that will ultimately have to be reconciled is the following. The company has capitalized capital expenditure as fixed assets and only spread those through the P&L via depreciation. Ordinarily this would be fine. But the depreciation policy used doesn't reflect the fact once the contractor is reimbursed for capital expenditures ownership of those assets is no longer the contractor but rather Iraq. A more accurate accounting policy would be to charge the P&L 'depreciation' proportional to the fixed asset cost recovery in the 'revenue' line item. That would write down fixed assets to an amount less than the CRP balance (given the CRP balance is unrecovered capex PLUS direct opex). Luckily, only idiots would look at the fixed asset balance in the company's accounts for any form of valuation reference and hence the anomaly created by the current accounting method doesn't matter too much.

To recover those costs in very short order.

Why do you think there's been a need for a Field Development Plan? Because Iraq ultimately reimburses operators for the costs (capex plus direct opex/G&A) extracting the natural resource. The Contractor carries out the plan, incurs the direct costs and is reimbursed the direct costs. $ for $. Cost reimbursement is the minimum of costs incurred in the billing period and a formulaic cap. On top of this they are paid a small remuneration fee per barrel (called Profit Oil in our current contract).

GKP spent a ton of money on recoverable costs early on and, finally, has steadily been recovering them. They can't invoice more than they've spent.

What do you think the restructuring play was here in 2016? The company was bankrupt and the equity was largely wiped out. (A token slither was given to existing shareholders to smooth the restructuring approval.) Yet the restructurers knew there was still the potential to recover this large off-balance sheet asset called the CRP which resulted from pre-restructuring expenditure paid for by previous providers of capital. That is why free cash flow generation has been high - merely from the recovery 'now' of previous expenditure. $ for $. The time lag has made this less obvious. Dividends have been high because this capital recovered isn't needed in the business anymore. It's not profit but simply reimbursement for previous expenditure. Also, it's almost over (even if we keep our current contract).

" It appears in Iraq if you spend £1 then you get £1 back."

You guys can't possibly be that stupid...

"Cost recovery is just an accounting method. "

Not even close... It's very real, affects free cash flow and the cost recovery pool is an off-balance sheet asset of the company (it is owed to the company).

In all Iraqi contracts there are two components to payments: cost recovery and the "profit oil" or "remuneration fee" component. No margin is made on cost recovery and, of course, this component varies with costs subject to a maximum that can be recovered in any month. The profit oil/remuneration fee component is calculated according to various formulae depending on the contract.

GKP's last 'normal' payment was for September 22 production. (Payments since have been made in accordance with the current contract but this was the last where the amounts were disclosed.) With that payment the Contractor received a bit less than $27 per barrel produced. Roughly that was made up of $20.30 per barrel of cost recovery and $6.70 per barrel of profit oil (aka remuneration fee). Recoverable costs incurred during that production month were a LOT lower than $20.30 per barrel. The reason why cost oil/recovery per barrel is so high is because the contractor hasn't yet fully recovered money they previously spent. $27 per barrel was the maximum that could be recovered in that month. "Profits"and more importantly free cash flow come from the $6.70 per barrel. From its share GKP pays a capacity building charge and must also cover any expenses it cannot recover via cost oil (eg corporate overhead).

No margin is made on recoverable costs. We incur a $ and at some point recover a $. Any and all profit and ultimate free cash flow generation is from the profit oil/remuneration fee.

It would be very foolish that a reference to $12 would be the new remuneration fee. They only paid $6.70 per barrel back in September 22 and that figure has fallen further since.

If the maximum the Contractor (GKP/MOL) could be paid in any given month was $12 per barrel (cost recovery and profit oil - even if the cap were just on cost recovery) then it would take much longer indeed for us to recover very real, previously spent $. There's still about $213 million owed to the Contractor for previous (recoverable) expenditures. $153 million in the receivables and another $60 million that hasn't been invoiced. 80% of this is owed to GKP. Again, most of that is in the receivable amount: about $121 million of the $151 million owed to GKP is cost recovery. The current balance of the CRP is roughly $60 million, again 80% owed to GKP.

There's no way in hell Iraq will pay a flat $ amount per barrel regardless of costs. When direct costs per barrel fall the payment per barrel to the Contractor will fall. Conversely, the Contractor should have the discipline to never again agree to a level of expenditure that would exceed their ability to recover those costs in very sh

You guys (and particularly Kheldar) keep thinking GKP is going to get reimbursed more than it's spending. That's a massive mistake.

There's a lot of cost recovery in the receivables, because the company was still (and still is) recovering expenditure made in the months and years prior to this invoice dates. The same applies to current invoices although $27-30 a barrel doesn't provide much if any headroom for historical cost recovery. But, remember NO margin is made on cost recovery. The company spends a dollar and recovers a dollar some months later.

Once the Cost Recovery Pool has been recovered such that there's just the current month's costs that are recoverable (this will happen about 4-6 months after restart) its current month's dollars recovered = Curren month's dollars spent. (To repeat the obvious.) They're not going to get paid $12 per barrel, for example, when they've only spent, say, $6 per barrel. And the company certainly should never spend more than that which is recoverable in any 3-6 month period else the CRP, that off-balance sheet asset, will grow again.