GULF KEYSTONE PETROLEUM LIMITED (GKP) Q2 2026 Earnings Call Transcript

Welcome to Gulf Keystone's 2026 half-year results presentation. I'm John Harris, the CEO, and I'm joined by Gabrielle Propanola-Grie, our CFO. Over the next few slides, we will discuss our operational financial performance in the first half of 2026 and the current outlook for the business. We will then open the line for questions. Next slide, please. This is our regular legal disclaimer, and I'll leave you to review at your leisure. Presentation slides are available to view on our website. Next slide, please. GOS Keystone delivered a resilient operational financial performance in the first half of 2026, during a period of significant regional disruption caused by the conflict between the USA and Iran. Our priority throughout has been the safety of our people. Despite the challenging circumstances, we are pleased to have extended our track record of zero lost time incidents to over three and a half years. Decisive action to reduce expenditures following the production shut-in enabled us to minimise cash outflow, maintain a robust balance sheet, and pay a $12.5 million dividend to shareholders. We are pleased to have recently restarted production and exports, with volumes continuing to ramp to prior levels. Looking ahead, we are focused on unlocking full production-sharing contract entitlement or export sales at international prices, which could bolster cash flow generation in the second half of the year and support a return to production growth in 2027. Turning now to the operational review. Next slide, please. Production in 2026, year to date, has been impacted by two precautionary shut-ins related to the regional security environment, totaling almost five months. Gross average production in the first half of 2026 was 14,600 barrels of oil per day, compared with 44,100 barrels per day in the first half of 2025, reflecting the shut-in from the 28th of February to the 23rd of June. Shikyuan Field and the team on the ground responded exceptionally well to these disruptions. Prior to the first shut-in, production had exceeded 44,000 barrels of oil per day on several days in late February thanks to the completion of several well workovers. Following the restart on the 24th of June, the field ramped up quickly to exceed 45,000 barrels of oil per day before the second shuttling on the 19th of July. On August 16th, we were able to restart production again following the extension of the tripartite interim export agreements and our view of the regional security environment. Gross volumes are currently approaching 40,000 barrels of oil per day, and well activities are underway to increase production to prior levels soon. Our focus for the remainder of 2026 is completing the ongoing ramp-up and maintaining stable export sales, subject to the stable security environment continuing. Next slide, please. Investment and activity in the first half of 2026 has focused on enhancing production and improving safety and reliability of our facilities. Almost half of the $18 million net capex in the period was spent prior to the shut-in on the 28th of February. Subsequently, we moved quickly to moderate expenditures and preserve cash. Nonetheless, we have actively continued to progress safety-critical and strategic projects during that period, in particular the installation of water handling facilities at PF2. We're making good progress and remain on track for full start-up in Q1 2027. Once operational, the project is expected to unlock 4 to 8,000 barrels of oil per day of incremental gross production above the baseline, expand total capacity to around 77,000 barrels of oil per day, and reduce reservoir risk. Looking ahead to the remainder of the year, we will continue to further progress the work programme provided production remains online. We are also positioning for a return to field development and drilling in 2027 once we have unlocked full production sharing contract entitlement for export sales at international prices. Next slide, please. Despite the disruptions of production this year, the Tripartite Interim Export Agreement signed in September 25 between the IOC's Kurdistan Regional Government and Federal government of Iraq have worked effectively. IOC remuneration has improved relative to local sales and payments have been consistent without delay following crude liftings. Realized prices in entitlement invoices have been very robust, with the Shaikan discount of Brent in the first half of the year at around $9 a barrel. The decrease in discount relative to Q4 2025 has been driven by strong demand for the Ku Kluk blend of crude marketed at Cheyhan from the Iraq-Turkey pipeline. Due to the market disruptions caused by the US-Iran conflict, some cargoes of Kurdistan crude were sold at a netback price, which included a premium to the Ku Kluk blend official selling price. We will keep a close eye on how the discount evolves going forward, but it is too early at this stage to provide long-term guidance. In June, the independent consultants review of IOC invoices and contractual costs were submitted to the government of Iraq. Gulf Keystone and other IOCs are now focused on reconciling export sales since September 25 to international prices. As you can see from the chart, we have a top-up receivable on our balance sheet of around $80 million net to Gulf Keystone. This is estimated value for the differential between cash received to date of $30 a barrel and international prices in the entitlement invoices. It remains subject to the implementation of the Independent Consultants Review. We are seeking to recover the receivable through the commencement of additional liftings in September 2026. The interim exports agreements have also been extended for six months to the end of January 2027. This was the final step, enabling the recent restart of exports and followed the one-year extension of the Iraq-Turkey pipeline agreement earlier this month. Our focus is now on replacing the interim arrangements with longer-term agreements at international prices. Next slide, please. Shaikan remains a large, long-life asset with significant growth potential. As at the end of 2025, the Jurassic Reservoir had 416 million barrels of internally estimated gross 2P reserves, implying a reserve life of 27 years of 2025 production levels. The field also contained 311 million barrels of estimated gross contingent resources, including 157 million barrels in the Triassic Reservoir, based on the latest CPR from 2022. 2. Returning to stable exports and payments at international prices would provide the foundation for renewed investment in production growth. In preparation, we are discussing a revised field development plan with the M&R and positioning for a potential return to field development and drilling in 2027. The draft field development plan targets a more than doubling of current production from the Jurassic, a test of the Triassic reservoir up to 10,000 pounds a day, and the elimination of routine gas flowing through a gas management plan. We will provide further updates as we firm up our plans. With that, I will now hand over to Gabriel for the financial review.

Thank you, John. We delivered a resilient financial performance in the per staff of 2026. By reducing expenditures, we were able to minimize the free cash outflow, protect our balance sheet, and return cash to shareholders while continuing to progress safety critical and strategic projects. Next slide, please. Adjusted EBITDA increased 26% to $52 million in H1 2026, compared with $41 million in the first half of 2025. The increase was driven primarily by considerably higher realized prices reflected in entitlement invoice for export sales and as well as lower operating costs. This more than upset the impact of lower production from the temporary shut-in of the Shikin field. Next slide, please. By taking decisive actions to reduce costs, we have been able to protect our balance sheet through the shut-in while maintaining our ability to quickly restart production at full capacity. Operating costs reduced by 25% to $20 million in the first half of the year relative to H1 2025, while other GNA expenses were 6% lower at $4.3 million. OPEX per barrel, while elevated over the entire period due to the lower production denominator, was around $4.4 per barrel prior to the February shut-in in line with prior years. GNA expenses were also down in H1, despite incurring the one-off costs related to the Oslo Duo listing. Looking ahead, we remain focused on exercising strict cost control following the recent restart of production and exports. Next slide, please. The reduction in capex and costs during the period enabled us to limit the free cash outflow to $2 million. The working capital outflow primarily reflects the difference between cash received at around $30 per barrel and the international prices reflected in the entitlement invoices. As John mentioned, the difference is accrued as a top-up receivable, which increased to around $80 million net to GKP at the end of the period. To begin recovering the receivable, we are seeking the allocation by SOMO of additional liftings of crude in September 2026, with payments expected no later than 30 days after scheduled cargos. JKB's net entitlement of Shike and Field sales was approximately 36% in the first half of the year, in line with prior periods. Future net entitlement will depend on realized prices, production levels, and the outcome of the ongoing commercial negotiations with the Ministry of Natural Resources. A return to international prices would quickly deplete the current reported cost goals, incentivizing future investments. Next slide, please. GKP's robust balance sheets and ability to moderate expenditure enable us to weather the disruptions in the first half of the year while paying a $12.5 million semiannual dividend in April. We remain committed to returning excess cash to shareholders. We are therefore pleased today to announce an interim semi-annual dividend of $10 million for payment in September 2026. The dividend decision follows a careful consideration by the board of JKP's operating environment, outlook, and cash balance. achievements. Achieving full PSE entitlement for export sales could strengthen cash flow generation in the second half of the year while the company maintains significant flexibility to reduce capex and cost if required. As John mentioned, export sales at international prices would also support a return to field development and drilling in 2027 as we firm up our plan with the Ministry of Natural Resources. Looking ahead we will remain true to our strategy balancing disciplined investment in production growth while shareholder distributions and a robust balance sheet. With that I will lend out to John for closing remarks.

Thanks Gabriel. To summarize, our performance in the first half of 2026 demonstrated the resilience of our business during challenging conditions. By acting quickly and decisively we've been able to protect our people, our assets and our balance sheet while continuing to progress strategic projects and returning cash to shareholders. Following the recent restart of production and exports we are focused on completing the current ramp up to prior levels and unlocking full production sharing contract entitlement for past and present export sales. Achieving the latter would bolster cash for Generation, supporting our decision today to announce a semi-annual dividend of $10 million and provide the foundations for return to production growth in 2027. As I conclude, I would like to say a big thank you to our staff, shareholders and wider stakeholders for your continued support. With that, I will now open the line for questions. Thank you.

Thank you. As a reminder, if you would like to ask a question over the phone, please press star 1 on your telephone keypad and you can also submit written questions via the webcast. We will take our first question from Werner Widing of Peel Hunt. Your line is open, please go ahead.

Thank you. Morning guys. Just a question on reserves. You mentioned that your estimate of 2p reserves shows 27 years of productive life based on last year's production. Well, when I look at the license expiry, including the two five-year extensions, the license expires well before this. So I'm thinking, well, I would like to kind of hear your thoughts. Do the revised discussions you're having on the new FTP with the MNR, do they factor in a development period that will allow you to produce all of those reserves? How do those two things marry together?

Werner, thank you. Thanks for your question. The simple answer is yes. Those are reserves and they are the reserves produced within the license period. Essentially, I think during the presentation, I mentioned that we were looking to ramp up production to some maybe 5,000 pounds a day, which is nearly double what we're producing now. So clearly that would shorten the 27 years life based on last year's production considerably. not quite sure it halves it but nearly basically so yes they are the reserves they are produced within the period and it does assume a production ramp up.

Okay and so with the revised FTP it's possible that we'll see an extended license period as well to kind of enable you to do that? We are not when that's not part of the field development plan and at the moment of course it might be might become part of future negotiations okay all right thank you um um maybe one for gabriel just wondering how much of the h1 um operating cost reduction reflects the temporary shut-in versus guess more sustainable structural efficiencies yeah because you were producing less exactly so i think i would say the majority is related to the um to the the fact that we were shut in so we were spending less on diesel on on chemicals uh obviously we had to implement

some some other um staff related um savings um so but as you can see in in the first half in the first two months um we were bang in line with historical historical costs and we always look for opportunities to define savings that can carry on but for for the first half specifically given the high level of production going down it's primarily related to the shutting yeah okay thank you our next question comes from theodore nilsen from sb1 market your line is open please go ahead good morning guys and thanks for taking my my questions uh a few questions for me first on

the ongoing ramp that you discussed uh um you indicated you aim to to increase production back to the pre-shutdown level of around 40,000 barrels per day. So how do you think when will we reach that level and what should we expect? And production for the second half, assuming that there won't be any more, more shutdowns. And second question is on the reserves. How do you think around any potential impact of the reserves because of the production shut down and then production restart and then shut down again? Will there be any impact at all? And final question, that is all on the receivables. I understand it's difficult to precisely answer it, but how do you think about like the repayment profile and how much do you think should be covered this year?

Thanks Ryan, okay. I think your first question was around how quickly do we get back up to previous levels? I think we said during the sort of production ramp back in June through to July which was like the 23rd is June to the middle of July so that was like three weeks we got to 45,000. We've just started on the 16th of August, we've restarted production but here we are not even 10 days into that um core tubing is in the field lifting wells um as we speak we i'd expect to be over 40 000 uh by tomorrow in terms of the production run rate and it's really about three weeks since we start so i'd expect us to be back close to 44 45 000 so that's on the production ramps on so hope answers that question he said with the production shutdown and start and shutdown again, do you expect the reserves to be affected? I mean, the numbers we're talking about, I wouldn't expect those to really materially affect the overall reserves position because we will be producing a much higher rate. And the fact that we haven't been producing, that kind of obviously plays into how we produce in the future.

But I don't expect the reserves to be affected materially by that. yeah and i think of what you've seen uh in the the activity and on the field it hasn't as we run but the the wells they've all come back and there hasn't been any issues so that's from a mechanical or subsurface perspective so that's positive and on your your point on on the receivable um basically we're really focused at the moment uh dealing with the q4 2025 that is following the submission of the independent consultants review. And we're working quite hard with the other IOCs and the MNR and so on to get some cargoes allocated from September. So we'll have to see. We also need to recognize that in the summers, the volumes, the throughput of oil going through has been kind of impaired by the security concerns. The fact that us and other fields have been limited that impairs uh i suspect a little bit at the the ability for a quick uh handover of additional cargos but now that we are back online production is ramping up um we we hope that we're going to be able to see some of those cargo coming up soon and the priority is really get get that first cargo get q4 over the line and then basically then you you start a program to deal with with the first half of this year and as john mentioned production the the first part of this year was essentially january february for the large part so we would expect it should be also uh relatively quick to get the um the top up for that period at an elevated oil price that we're seeing at the moment but let's focus on q4 that's the priority right now and we'll we'll then move ourselves to q1 after that okay uh understood and one final question if i may that there's no capex given the accelerated production in second half should we also expect you to spend more in second half than done in first half and at the moment it's a little bit too too early to to tell if it's just i don't think we could say it's going to be double um we still have um so some discretionary spend that we can put forward in order to kind of prep for next year's activities but that's also kind of tied with international pricing and the recovery of cash flows so it's that's why we didn't reinstate guidance but for example on strategic projects like the wet train and the shutdown and some of the things that we had decided to carry on regardless or not of the production shut-in those are carrying on but some well activities and and planning for for next series activities like long leads and stuff like that are more discretionary and we will navigate those as we go through the remain of this quarter and two four.

Okay, understood. Thank you. That's all for me. Thank you.

Our next question comes from Charles Sharp from Canaccord. Your line is open. Please go ahead.

Thank you very much for taking my question. A couple of questions, actually, if I may. In terms of the recovery of the Q4 true-up, do you think you need to have agreement on the full export pricing before you get that perhaps September lifting? And has that Q4 receivable for the true-up been agreed with the various authorities?

So basically, the Q4 receivable was part of the independent consultant's review. And so now that that number has been validated, it's now moving to allocation of additional cargos to turn those receivables into money. But there is also a longer term element to discuss about kind of future production, long term prices to ensure that we move away from that interim period to get future production. So we're also in parallel having conversation with the different stakeholders to put in place long term exports agreements, which would allow us to get international prices right from the beginning. But I see those as being disconnected. that you could still recover the receivables from the Q4 in advance of agreeing long-term agreements related to ongoing production.

Okay, that's great. Thank you. And one short follow-up.

You talk about maybe a return to growth next year and drilling next year. do you have in mind a possible timetable for that drilling and would that need in your mind to have agreement on the fdp or approval of the fdp um i mean charlie we're out uh we're out tendering at the moment for a rig and obviously there'll be and also some long lead items which will which will dictate the exact start date which we haven't got the answer to our expectation is it's age two next year um and yes we would we would like to have the

field development plan agreed um but we might consider drilling without it but i think our very strong preferences we're driving towards agreeing this field development plan that's great thank you thank you as a reminder if you would like to ask a question over the phone lines please press star one on your telephone keypad our next question comes from david round from stifle please go ahead morning guys um just firstly on the the draft fdp obviously that's been around a while i was interested whether it's changed much in in recent years um thinking particularly around the gas management system or or whether you've just sort of dusted off the old one and i think i mean correct me if i'm wrong i mean i the last number i saw was sort of 800 to 925 million for that next phase so does that still stand um are you able to break that down for us at all and and how are you thinking about funding it so based on the fdp in terms of development planning in terms of expanding capacity um both in the facilities and from wells perspective is similar.

We have a few more wells than we had previously towards the back end of the programme, so we'd have a continuous drilling programme. The gas management plan, we are considering a number of alternatives. One is as per the original plan, which was to re-inject all of the gas that's not needed for use in the plant. The second one is to just re-inject the acid gas into a deeper reservoir and produce the sweet gas and make that available for sales so that's that's the that's the difference and we haven't kind of uh concluded on that yet but we are sort of honing in on on those two solutions to the gas side of things i think the next question was around um on the on the cafe yeah thanks so yeah so to account for those additional wells which come later in the life of the asset as well as the gas management program.

We haven't come yet publicly for what those come in because we still need to go to the tendering of the gas project but I think the estimate that you said at the starting point on a growth basis we probably expect to see this going a little bit higher obviously because there would be more wells in the back end, and we have to see how ultimately the costs come from the gas management. The one thing worth noting is that the cost pool has been mostly depleted since, if you move back 2022, 2023, just before the shut-in of the ITP and moving to local sales. So essentially, the recycling of the CapEx is going to be a much shorter balance. And that being said, we think that the cash flow generation of the asset will be improved. But as well, we talked even back in the days to raise some debt. We know that the high yield market has been quite supportive of some players over the years. And depending exactly how the gas management program turns around, there could be some other providers of capital. but we're looking into this as we speak to make sure that we're well-funded. And our pace of investment ties with the robust balance sheet and ensuring that our shareholders are seeing some distribution as we pace the investment over time. So, well, once we get the FTP over the line, we'll be in a much better place to come with the full story to investors.

Okay, great. And can I just sneak in a follow up, please, just on the discounts, the numbers you show on slide seven, are they a discount for the Kurdistan blend or are they sort of specific Shaikan discounts? And can I ask just what you're assuming going forward in your own estimates?

Yeah. So to clarify, this is really related to Shaikan. So it takes into account the quality as well as the transportation, the length of the pipeline we use. As John said, it's a little bit too early to call that 9% will be forever. But I suspect it's going to be a low double digits, I think, going forward. And we are looking forward to see how that's going to evolve. but if you look back compared to the 23 25 or even 27 dollars per barrel that we saw before this is a net net material improvement from from where we are so we're really pleased to have those those agreements in place with this reduced discount okay great very clear thanks thank you that appears to be all the questions from the phone line so i'd like to now hand over for webquest questions thanks danielle um thanks everyone for submitting your questions so first

question from uh investors is what's management doing to unlock the value of the assets as the stock is undervalued and has underperformed over the last few years against industry peers john may i can pass that to you okay great thank you um well i i would say we've outperformed many of our international peers over the past three years on a total shareholder return basis, counting for dividends.

I recognise that nonetheless, I agree that there's been an impact on our share price this year due to the deterioration of the regional security environment and our prudent response to shutting production, while many other peers have benefited from ongoing sales of, of course, international prices at the inflated international oil price. Now that we're back into production and seeking to get back to international prices, with targeted recovery of the top-up receivable for the actual production we had produced during this period, we expect our performance to very much recover. This would enable us to drive production growth from the Shai Canfield, which we believe would unlock significant value for shareholders.

Thanks, John. So second question on, there's actually been a few questions on the overdue receivables between 2022 to 2023. What's the update on those receivables? Is there a resolution forthcoming anytime soon?

Thanks, Aaron. So the recovery of those historical receivables, including 23 and 22, is part of the ongoing discussion with the MNR as part of the other outstanding shock and commercial matters. The talks are progressing and regarding the timing and the form of the potential settlements of all the historical receivable. But what I'm happy to point is that, as you can see in our account in Nord 12, we are actually effectively continuing to recover the cost or portion of some of those 2022 and 2023 arrears. So that balance has been going down since the back end of last year. So it's positive and de-risks that position.

Great. So next question is just on M&A. Do you envisage opportunities to merge or diversify the asset base and therefore enhance revenue streams in the next 12 months? John, would you like to take that? Thank you.

Yeah, our primary focus remains unlocking the full production sharing contract entitlement from export sales and returning to disciplined investment in production growth from the Shikam field. But, of course, we also look at opportunities to grow production and diversify a portfolio inorganically. that would be value-accretive and consistent with our current financial profile.

Great. A few here on the top-up. I think Gabriel's covered that quite extensively, but there's one here just regarding the September liftings that we talked about. Are you now supposed to receive international oil prices for those liftings, or is it still the interim deal with local prices that potentially lays a top-up?

Yeah, so the way it works is that there's a dollar amount of receivables owed to the IOCs. And basically, they take the international pricing that you kind of divide that amount. At that point in time, it determines the number of barrels. So then the IOCs are allocated some barrels. We sell those barrels. And as this is converted back to cash, we're able to deplete our receivables. So the short answer is yes, it would be on international pricing.

Great. Next question is just on the CPR. The last CPR was from 2022. When will there be a new CPR?

John? Yeah, I mean, with us progressing to a full development plan, agreed with the Ministry of Natural Resources, we would move quite swiftly to also reinvigorate the last CPR. But I mean, one thing I would say is the field has continued to perform as expected. It's continued to produce as we thought it would. It's been very, very reliable from that perspective. That's why it's quite easy to say our reserves haven't changed significantly, albeit obviously we're still looking at doing a major development to liberate those reserves. But it is behaving predictably. So it gives us confidence to state the numbers, having not done a CPR since 22. Thanks.

Great. And just for you, John, again, can you elaborate on how the security situation has changed in such a way that you've decided to restart production?

Yeah, very much so. We continue to look at what's been going on, obviously, between the US and Iran. And we've kind of continued to see that there was a buildup in military hardware by the U.S. kind of up until about 10 days, two weeks ago. And then the U.S. has kind of backed off going full tilt militarily and continued with its rhetoric about going full tilt, but it hasn't done it. Plus connected with the kind of the conversations around having sufficient Patriot missiles and other interceptors of drones and ballistic missiles, having a reduced number of those in the region and therefore wanting to potentially go move to a negotiated solution. And then obviously you'll have heard recently, yesterday, the Secretary of State of the US has come out and said that they're going to go full tilt on trying to bring Iran to the negotiating table through economic hardship means. So from our perspective, we've seen obviously the militia who are the Shia militia sponsored by Iran have been largely responsible for most of the ordnance fired into Afghanistan. Certainly someone's come from Iran, but the vast majority has been fired by the militia. And we've seen the militia basically in negotiations with the Iraqi government about political power, but also kind of getting to a place where they have backed off military activity as well, whilst people are talking about the U.S. leaving Iraq and also connected with the new prime minister of Iraq saying that he's expecting the militia to disarm, albeit there are rumblings about the timing of that and how that's going to be affected. So our overall assessment is that we've seen less... less hostilities towards Kurdistan, less hostilities towards IOCs, not for a considerable period of time, actually. And therefore, that's led us to go back to being able to produce. But we're going to continue to monitor the situation. And of course, it also may deteriorate again, in which case we might have to shut in. But our hope is that we can continue to produce.

Great. Thank you, John. I don't have any further questions from the webcast, So I will hand back to the operator to close the call.

Thank you. That concludes today's presentation and Q&A. You may now disconnect.