Genel Energy PLC

LSE:GENL

Earnings Call Transcript 2018-Q2

[Murat Özgül, CEO]

Okay. Good morning, ladies and gentlemen. I am Murat Özgül, CEO of Genel Energy and I would like to welcome you to our 2018 Half Year’s Results Presentation.

We’ve continued our strong performance and I look forward to sharing our growth story with you today. I am joined by Esa, our Chief Financial Officer; and Bill, our Chief Operating Officer in this presentation. Other members of the Executive Committee, is in the audience today. Esa, Bill and I will take you through the presentation, after which we will open up the Q&A session.

You will see our usual disclaimer on Page 2. As a reminder, we have a clear focus for 2018 maximizing the generation of free cash flow from our producing oil assets, continuing our disciplined capital allocation and progressing material value-accretive portfolio opportunities. I'm pleased to say that we are successfully delivering all these three areas.

Our primary objective was maximizing the generation of free cash flow from all producing oil assets. Our production has been in line with the guidance and another six months of regular payments have been received. This has resulted in free cash flow generation of US$70 million, which continues to enhance our financial strength. As promised, we remain disciplined in how we spend our money. We are focused on ensuring that every dollar invested is done so to create shareholder value.

Also, $34 million of capital expenditures in the first half of the year, almost a third has been spent on Peshkabir as this promised the best near term results.

Turning ahead, Peshkabir continues to exceed our expectations with the fields currently producing 35,000 barrels of oil per day ahead of the operators 30,000 targeted. It has boosted working interest production across all assets to 35,500 barrels of oil per day. This has the potential to put upwards pressure to our production guidance. There are also more wells to come across the portfolio, which Bill will discuss later. We look forward to a busy second half of the year.

Peshkabir is not the only growth opportunity in the portfolio. We have now completed the field development plan for oil at Bina Bawi and discussions are set to begin with the KRG regarding this development. Subject to a KRG approval, we could produce light oil in around six months.

We also continue to work -- we also continue to further de-risk the gas project and updated flow estimates have made the project look even more compelling. On the other hand, Somaliland seismic analysis and interpretation is underway. Geologically it has huge potential and the political situation continues to make significant progress. Bill will provide you more details on these material prospects.

So this is what you can expect in the second half of the year, increasing production, increasing cash generation and then potentially an increase in proven and probable reserves. These are exciting times.

And now to provide more details on the financials, I will hand over to Esa.

[Esa Ikaheimonen, CFO]

Thank you, Murat. And good morning, everyone. Thanks for joining us today. Murat’s last slide is a good summary of our outlook for the second half of the year and into 2019. It hasn’t been very usual for Genel to report growth in each area of focus. So it’s rather exceptional moment actually and it makes us all very satisfied as to what has happened during the last year, 18 months.

So let me add some color on the financial side, starting with an update on our growing proceeds. Our monthly proceeds are based on production and sales from three calendar months earlier. So what you see here is obviously a significant increase since the implementation of the Receivable Settlement Agreement during the second half of last year. As you can see it makes material difference to proceeds since it became effective.

What you do not see clearly is the impact of the 20,000 barrels per day increase in Peshkabir production because of the three-month deferral between production and sales and proceeds and you will see the impact in October, and thereafter and that’s quite an important point to make. So what currently looks very steady, stable, consistent $27 million, $28 million of proceeds per month will significantly increase as a result of the incremental Peshkabir production converting into proceeds.

To give some near term guidance about the impact of the Peshkabir production, any additional 10,000 barrels a day in gross production from the Peshkabir field, equals more than $2 million in free cash flow to Genel per month or $25 million annually if you like. So if you take the recently announced Peshkabir-4 and 5 production and the current production which is about 20,000 barrels a day, you can do the math and conclude that the annual impact of those two wells only on Genel's cash flow is about $50 million. That's assuming that the same production performance and same rate of production continues. So that is a very significant booster when it comes to our future cash flow. So a little bit of guidance regarding the impact the Peshkabir has got.

Payments from KRG, like I think Murat already mentioned have been flawless and timely and this has now been the case for nearly three years. So we are exceedingly confident about KRG's ability and desire to pay the IOCs. And as a result of that, we no longer see a reason to report payments each month and will only update payments in cash as part of our normal reporting schedule from now on. So getting paid is obviously normal course of business. You would expect that to happen in any business. We expect that to happen. And therefore, we see no reason to continue monthly exceptional disclosures regarding getting paid.

The other thing we have decided and that is in close consultation with our auditors, also driven by increasing level of confidence and stability in KRI is to reduce the discount rate we use internally. And for instance, for impairment testing purposes for our producing assets the reduction is from 15% to 12.5%, now that actually doesn't have any impact on the first half statements, but you will see that disclosure at the backend of our results statement when you read through the details.

We want to be a company that is known for its focus on cash flow. So we might actually bore you to death talking about cash flow but we just see that being a fundamental part of our journey and our value proposition to our shareholders. We continue to steadily grow our free cash flow. Murat said that already, in the first half of the year, we generated well over $10 million on average each month, which equals free cash flow yield of about 14%. That is a very solid yield. It's not astronomical but it's probably more than solid recognizing that we grow the company at the same time and we are promising for more as we generate rather competitive free cash flow yield.

After the reporting period in July, this month, the free cash flow has continued to grow. And as I said earlier, we will look forward to reporting further increases as and when the Peshkabir production grows and leads into increase in proceeds and cash flow. As I said that would start kicking-in in October and thereafter increasingly.

Again, throughout the year, we continue to invest quite heavily but at the same time we continue also to generate significant free cash flow and significant free cash flow yield. That’s an important part of our value proposition as I said.

As we can see on that piece of artwork there’s a large reduction in our net debt. We actually now expect to reach a net cash position around the end of this year at the back of the strong cash flow we’re generating. To put that into perspective, only two years earlier or end of 2016, our net debt was around a quarter of a billion dollars. So during a period of less than two years as it now seems we will have reduced that net debt level down to zero.

Now, as a result of all of this, we’re increasingly asked questions about the luxury problem of how we should spend the money, so we will get to that shortly. Stronger balance sheet allows us to optimize funding and accelerate growth. Again, we are continuously seeking to grow the company adding to its portfolio and further increasing our production and cash flow.

Solid and profitable opportunity portfolio allows us to select the best investments, are currently focused on the areas of great -- greatest value creation. And if you look at this diagram here at the middle part of it, one of the key messages is that we continue to spend a vast majority of our expenditure on the cost recoverable production as opposed to investing in uncertain long dated future production. That simply maximizes our free cash flow and the shareholder value right now. So we've got a good organic portfolio and there’s further growth potential in it, as you’ve heard and you’ll hear Bill adding to that.

As Murat said, Peshkabir has been the focus of drilling in the first half of the year. However, activity is resuming at Taq Taq and Tawke as well in the coming months, all offering material profitable near term growth. There’re actually very few growth opportunities as good as Peshkabir where a $1 invested can return $8 or more. So it’s not difficult to justify investing in this field at such a rate of return, particularly when it's fully funded by the assets as of itself all along.

Genel’s revenue by the way from Peshkabir -- and this is significantly boosted by the Receivable Settlement Agreement, is currently around or even above $40, the working interest barrel of production, that’s pretty exceptional. So the $75, minus discount, Genel actually takes in excess of $40 per barrel -- the working interest barrel. So, another is a benchmark for you to do some modeling as to how Peshkabir production converts to cash flow.

We obviously focus on accelerating more production from Peshkabir. It’s needless to say, and we keep saying this all the time, in very close alignment with the operator who is DNO. But we also now look to maximise the cash generation from Taq Taq and Tawke, we haven’t forgotten those two fields, they’re there and they’re actually are performing well and they’re generating very significant cash flow, both of them. But we have been very focused on Peshkabir during the first half of the year.

Our focus is a bit more balanced towards the end of the year. And thereafter, we turn our attention to unlocking the material value from elsewhere in the portfolio. And regarding this last point, we expect to make near-term progress in talks with the KRG regarding the Bina Bawi oil, again Murat touched upon this, we’ll be able to talk more about that from -- particularly from the technical opportunity point of view. But this is an opportunity that we are very keen to allocate CapEx to.

The potential rewards are very significant but we only do that when we have concluded our negotiations with KRG. So we’re not going to throw any significant amount of money at Bina Bawi oil before we’ve got a commercial agreement in place with KRG that allows us to unlock that value and that allows us to execute the project and deliver these barrels that are available to us near-term.

When it comes to Somaliland, our capital allocation will depend on the results of the ongoing seismic analysis. And again, we will not proceed with the well without a visible route to monetization, certainly not at the current level of equity. The same is also true for Morocco.

Before I conclude my section with an updated outlook, let me summarize our capital allocation priorities, a lot of questions have been asked about how do we reinvest our cash flow and what are our capital allocation priorities? The sort of headline statement is that we continue to maintain a very disciplined approach to allocating capital and hope you've heard that already when I’ve spoken about Somaliland and spoken about Bina Bawi well. But the first priority is and continues to be that we’ll allocate capital to our existing portfolio opportunities, which I demonstrated were profitable. So again Peshkabir topping the list, but Tawke, Taq Taq actually our profitable growth opportunities near term as well and lastly in our control to deliver value through, and this category includes Bina Bawi oil. So it's definitely a priority for capital allocation.

The second priority has to do with M&A opportunities. So we do want to accelerate growth. Our strategy is very clear. We want to do M&A but we want to be very disciplined in terms of what sort of M&A we do. And we analyze our potential M&A opportunities for further growth. And we prefer acquisitions that will generate material cash flow in short to medium-term and we have well defined criteria that has been approved by the Board and to some extent reported through our annual report as well.

Equal to that M&A opportunity, we are also committed to developing Bina Bawi and Miran gas but we only allocate -- again in line with our disciplined capital allocation philosophy, only allocate material CapEx when we see clear progress on midstream.

When it comes to our balance sheet, we will ensure that we have appropriate level of liquidity to invest both organically and in M&A, and grow the company in a consistent and steady manner. Balance sheet management is very important part of that sort of strategic roadmap. We can and we will have leverage as and when it delivers clear shareholder value, but we will avoid significantly re-leveraging our balance sheet.

And finally regarding dividends, sustainable material and competitive dividend remains a medium-term aspiration. That’s even a target. But we want to grow and diversify our portfolio first. The time is not right for dividend yet.

Finally, our financial outlook. I hope you agree that Genel is delivering increasingly strong financial performance and results, it’s a matter of fact the whole organization quite exceptionally not just the management is very joined up and focused on delivering financially.

As already mentioned, we expect to be in a net cash position by around the end of the year with cash flow further rising ahead of 2019. Our capital expenditure range has been tightened as you can see on that slide. The limited visibility on the midstream progress, I am talking about gas now, Miran and Bina Bawi, that limited midstream progress means that we do not expect to carryout an extended well test at the gas fields this year. However, I'd like to emphasize our confidence that we have a valuable gas asset, and that the upstream has been even further de-risked during the first half of the year and that upstream resource or Genel are not impediments to the development of the gas project.

So we’re ready to go. We just need to see some further progress on midstream. Elsewhere, cost recoverable spending at Tawke and Taq Taq is set to be towards the top end of the range -- the guidance range, with increased and optimized activity. So, you’ll see us drilling a lot of wells during the second half of the year. Bill will talk more about that.

So to give you more information on the operational performance, the program and the opportunities and the clear upside potential, I’ll now hand over to my very special friend Bill Higgs.

[Bill Higgs, COO]

Thank you, Esa. And good morning, everyone. I would start by taking a look at the Tawke PSC production. So overall production within the PSC averaged 105,800 barrels of oil per day. As we know Tawke is a mature field, and as such, requires investment to replace production decline. And so, the majority of the work focused on Peshkabir in the first half of the year we have seen natural decline at the Tawke field. However, Tawke production has been in line with our expectations and the results of -- which has been predominantly workovers on existing wells has yielded lower decline, particularly in the last four months of the year as you can see in the graph on the screen.

The -- as you can also see the performance of Peshkabir has materially boosted current production and we expect overall Tawke licensed production to -- in the second half to exceed our previous expectations.

Taking a look at Tawke field, we’re going to be resuming drilling in the second half of the year as forecasted in half year results. We’re going to drill up to four wells, two of those in the Jeribe reservoir and two in the Cretaceous, the map at the bottom is the Cretaceous and shows the locations of possible wells which would be drilled closed to the T-48 which was bought on production earlier this year very successfully. So we’re going to revaluate the underlay areas around T-48 with two Cretaceous wells later this year and expect of those four wells, three of them will be contributing to production by the end of the year and those will continue to therefore help to arrest decline within the assets.

Moving onto Peshkabir, drilling activity has been enormously successful. We are only two wells into our six well drilling program, P-4 is producing at a stable rate of 12,000 barrels of oil per day, P-5 which is the most westward evaluation of the Peshkabir field to-date and it was the reason why we had -- originally had Peshkabir-5 list in our original production forecast for 2018. That has also been brought on production -- stable production around 8,000 barrels a day. So very, very happy with the performance that we have to-date.

We also have two wells that are currently at target depth and set to begin testing which is P-6 and P-7 and two remaining wells to be drilled through the year. There's potentially plenty more to come from Peshkabir as we move through the second half of the year.

Working with DNO, the operator, we are investing into surface facilities to ensure that the processing and export capacity is available to us to meet the production from these wonderful wells. Currently we’ve a pipeline that has a circa 15,000 barrels a day of capacity and the rest of the production is being trucked the short distance to the [Fishkhabour] facility. The initial Central Processing Facility which is being bought across from Taq Taq is being commissioned and we will add another pipeline to this facility. So that we will have around 35,000 to 40,000 barrels a day of incremental capacity from the CPF when it’s up and running later this year. And together with the existing infrastructure there should be sufficient capacity to enable us to evaluate production performance and decide on next steps for this exciting opportunity.

As well as being very positive from a near-term’s production point of view, the success with P-4 and P-5 is also set to have a significant impact on proven and probable reserves at the field. The initial production wells are towards the east of the structure with P-4 and P-5 in areas designated as possible reserves in the 2017 year-end reserves booking. They’re outside that [wider lips] which was the 2P area as defined under the -- on the basis of that year end reserves booking. As both wells have been successfully -- both have been successful and they provide an opportunity for the material proportion of the 217 million barrels of possible reserves in our reserves booking to potentially be converted into proven and probable.

A longer term production history on both wells is required before such conversion can take place. In addition, a successful P-9 well will also extend the 2P reserves to the east and the P-6 well is targeting the oil water contract which will mean that the whole structure will have been evaluated by the end of the year. We currently expect the update on the quantum of this change to be part of our annual year-end reserves process.

Moving on to Taq Taq, the production performance this year has been very encouraging as we can see from the chart, with no drilling activity in the first half of the year, stable production is enormously pleasing and the team has done an excellent job in delivering these results through well intervention and production optimization. As well as a positive output, we’re also pleased to report another period of incident free operations and have now gone more than a 1,000 days without a loss time incident at our Taq Taq operations. The production and operational performance gives us a solid base from which to resume drilling in the second half of the year.

Taking a look at the drilling program. The great results from TT-29w last year proved that deeper free water level on the flanks of the field has caused us to step back and take a look -- fresh look at the asset. The revised field development plan is now complete and provides us with a chance to grow production at Taq Taq which is a very pleasing thing to say given the history of the asset in recent years.

As I’ve mentioned to the full year results, the far focus for development of the Taq Taq was drilling on the crest of the structure and you can see all the blue dots on the chart on the right-hand side. But opportunities remain on the flanks and this is where the next five well program is going to be concentrated.

The first of the new wells at TT-32 would be drilled to the north of TT-29, and it will further replace that northern flank and then we’ll turn our attention to the western and southern flanks with the drilling of TT-25 track and TT-33 there in the bottom. The remainder of the program -- and for that matter the drilling -- subsequent drilling program at Taq Taq field will be shaped by the results of these first three wells. Taq Taq continues to generate free cash flow and the new program aims at continued -- to continue this outcome for many years to come. There’s still plenty of life and exciting opportunities for this.

Moving on to new opportunities, let’s take a look at some of the things that are in the portfolio. First of all, which is the Bina Bawi oilfield. We’ve previously stated that light oil is potentially of material value to Genel, as we have the opportunity to recover a portion of the significant costs spent on the license to-date. These are 34 million barrels of -- that can result in another step change in cash flow generation.

Barrels of oil produced at Bina Bawi if exported under the same commercial terms that we currently have are worth considerably more even than Peshkabir. This is a great opportunity for us. It is also not one that is technically challenging, first oil can be achieved around six months after FID and before doing this, however, we need to come to an agreement with MNR to decouple the timing of oil development from that of the gas project and also allow us to move forward with the investment decision.

The field development plan will be submitted imminently and the talks will then follow. Taking a look at our field development plan, the field development plan has three phases to develop, develop the three spec pools of oil in the Jurassic reservoirs at Bina Bawi. The cross-section on the bottom left hand side shows the three green pools.

Work begins with the recompletion of the existing BB-3 well, which floated around 3,500 barrels of oil per day on a long-term test. This is to be followed by the sidetrack of BB-1 into the second high angle checkpoint in the Mus reservoir. Phase 2 we’re planning to drill three wells into the upper Butmah B reservoir taking the field to a platter around 10,000 to 15,000 barrels of oil per day before phase 3 ensures that the key production zones will be intact.

We look forward to reaching agreement with KRG, how to develop this resource and how to bring an update later in the year.

Moving on to the gas potential. The map here is the gross volume of gas reservoir at Bina Bawi about the mid-cased where gas would contact. The maximum thicknesses just over 1,800 meters, that means is 1,800 meter of column height and anything that’s got color on that map means that there is gas. So there is plenty of gas at Bina Bawi.

Field development plans are also set to be submitted for the commercialization of the gas resources both here at Bina Bawi and at Miran. Work on the field continues to provide encouragement with field analysis and engineering as indicators that the previous estimates of well productivity have significantly underestimated potential.

Latest results have shown that instead of the mid-cased productivity of around 15 million standard cubic feet per day per well, we now expect more than 100 million standard cubic feet a day.

More than half in the well is needed to deliver the agreed volume under the Gas Lifting Agreement, and materially reducing the upstream capital costs. With upstream de-risk we are awaiting on progress of KRG’s efforts to deliver a midstream project before committing further expenditure as Esa already alluded to. But it’s an exciting project.

Moving on to another exciting project, Somaliland. The wonderful picture at the bottom here is one of the seismic lines that we’ve recently acquired and there are very few chances to be first into such a compelling opportunity, analyzing all 3,500 line kilometers of 2D seismic data in such a perspective area is one of those things that can get you out of bed early in the morning.

It’s still early days and analyzing will take much of the rest of the year to complete but the initial prelims are encouraging. We can see the seismic lines, the representation of the Mesozoic basins that’s similar to Yemen and that we expect -- also expect it to final the licenses.

Around the end of the year we hope to have a rich prospect inventory and we will develop the optimal strategy to maximize the future value of this asset. Our expectation is that they will take the form of [fund down] and that will happen nearly in 2019 and with the view drill around the end of next year, but let’s not get ahead of ourselves too much.

Moving on to Morocco seismic is now the acquisition of new 3D seismic survey is underway, started last week, and we should not forget that this area has proven hydrocarbons. As we progress the seismic it should take about 100 days to complete. We look to find a funding partner for the next stage where the drill or drop decision to be made prior to 2020 which is when the license expires.

So there is lot of -- to look forward to a lot of work to be done.

And with that, I will now hand back to Murat.

[Murat Özgül, CEO]

Thank you, Bill. As you have heard we have a very busy second half of the year with 11 wells set to be drilled. Of those, eight have the potential to be completed and therefore adding to our cash generative production by the year end.

We will also continue to progress with work on our exploration assets. Although as already stated, this work is largely covered by the restricted cash, but our focus remains unchanged. We will continue to focus on maximizing cash generation from our producing assets, allocating capital to those areas from which we can generate value for shareholders and progressing opportunities in the portfolio.

Drilling in the second half of the year has potential to provide a significant increase in our production and another material increase to our free cash flow. We are not stopping there and are focused on progressing tremendous opportunities in our portfolio.

We also continue to appraise opportunities outside our portfolio looking to further increase our cash generation potential.

And with that, I would like to hand over to audience for the questions. Thank you.

[Stephane Foucaud, First Energy]

Hi, this is Stephane Foucaud from First Energy. Three questions. First on Bina Bawi oil. Could you comment around [Ethiopian] gas project and your project and what are the value forces behind the scene that might -- that might happen or not? Second, there is quite a bit of investment at Tawke -- I am not talking about Peshkabir but Tawke and Taq Taq what you’re drilling in H2, given it seems the decline is more is kind of stabilized at both field, where would you see production at both fields, Tawke and Taq Taq by the end of the year? And lastly at Peshkabir, you showed quite a few sources of upside between the oil/water contact, the east, the Triassic I think, is this upside all captured in the 3Ps or could there be upside beyond the 3P?

[Murat Özgül, CEO]

Let me answer the first question and then I will hand over to Bill to answer Taq Taq, Tawke and your Peshkabir question. So Bina Bawi oil and gas PSCs and also Gas Lifting Agreement is developed together, and oil terms in the Bina Bawi PSC is more favorable compared to any other stand up PSC in the region. So while we are talking about decoupling we’ll develop both of them. But the weighting on oils still to gas is not advantage for us or advantage for KRG. If we start early on the oil it will be a win-win case for us and KRG. So let me give you a simple example, it’s 47 API oil and if we will be flowing this one early to KRG blend it will be helping KRG blend on pricing and everything and KRG will also make revenue generation early on their revenue stream. So we’re optimistic on this one to reach an agreement with KRG to start Bina Bawi early oil development and also we will work on the gas later in the coming years especially now upstream side is de-risked; also KRG and us, the pipeline on the gas, they agreed with Rosneft to work on the field studies and then they will start to develop the KRG gas pipeline. So the main focus in the coming years is the midstream part, that’s the reason we are waiting to find the right partner to start on the midstream and full completion of the field technical study including the fixed pricing and also all the technical details together with the financing of the midstream section. But it doesn’t mean that we need to wait all these technical studies for the oil part.

So it’s logical for KRG and us to start early. And now with the prepared field development plan, we’ll propose this one, explain KRG and start to negotiate on how we can start and how we can optimize all this process for the benefit of KRG and the company. That’s the case.

[Bill Higgs, COO]

On the production you’ll have -- not being surprising for you to realize that our guidance is saying that we have a risk to the upside of outperforming our guidance at the start of the year is that most we feel confident in giving today on either the full year production and our exit rate because there are with the amount of drilling activity that we’ve got in the portfolio for the second half of the year this quarter range of outcomes both on exit rates and the add, I think the point is valid though which is that the point we’re trying to across which is both of Tawke and Taq Taq good field operations of helping to arrest decline rates not as high as they had been in the past but we’re seeing some performance from the reservoir. So therefore, any incremental adds in drilling activity that we can do -- in drilling six or seven wells on those two assets by the end of the year will mean that there will be an exit rate from those two assets going into the new year which would be -- it should be best than where we are today. What value back it will be, I think we would like to get a bit more of the work under our belts and maybe give you guidance when we get to the update in October.

As regards the reserves, the -- when the reserves booking was done for Peshkabir in year end 2017 was based on the Jurassic and Cretaceous reservoirs only. So there’s -- the reserves were booked. We’ve drilled an exploration well as part of the Peshkabir-6 well into the Triassic and that is a well that we’re waiting to test and we will be moving ahead to drive and test both the Triassic and the Jurassic there. And we had quarter arrangements certainly there but we didn’t have contingent results booked into the Jurassic or Cretaceous. So it is all contained within that possible volume. Now we’ve seen an awful lot of good performance from the asset too, so I think as we get to that year end reserves assessment it will be interesting to see where we end up.

[Malcolm Graham-Wood]

Thank you very much. Malcolm Graham-Wood, Hydrocarbon Capital. Two pretty simple questions I guess. Just wanted to give myself a reason, Bina Bawi, Bill, because obviously I think you mentioned you’d be producing light oil by the end of the year but here obviously we got FDP submitted in the third quarter, and conversion to 2P was FID, does that all that kind of in the next two months?

[Bill Higgs, COO]

I think I only promised that we’d start production six months after FID, so obviously that -- clearly we need to have the negotiation with KRG as Murat just alluded to starting that and with the submission of the field development and that’s a key trigger for getting that agreement in place. Once the field development plan is approved we’ll essentially add FID, we got a low capital cost to first oil about $20 million and it’s a recompletion of that BB-3 well to start, so FID would enable us to do reserves booking at around 34 million barrels of 2P and as is the number in our field development plan and then we’ll be on production around six months after that.

[Malcolm Graham-Wood]

And just secondly, I did hear your right saying that Somaliland and Morocco only go with the funding?

[Bill Higgs, COO]

Yes I think that’s the most likely strategy today. We’ll have -- obviously have a look at the -- particularly have a look at the portfolio for as we develop the prospect portfolio from Somaliland and we will see here, so you’d where that leads us in terms of strategy but that is the most likely outcome.

[David Round, BMO]

Hi guys, this is David Round from BMO. Can I just follow-up to Stephane’s question first on early oil at Bina Bawi and I guess just to gauge your confidence that, that costs maybe fully recoverable under an early oil scenario, I appreciate things are changing but just your best case? Secondly, if we could just get an update just in general on Kurdistan, the political landscape there, what news though should we expect out of the region? And maybe just the third one, in terms of the transition from 3P or Peshkabir, you mentioned a certain of production history was going to be needed, you also mentioned obviously at the end of the year, is H2 sufficient to see a material increase in 2P there?

[Murat Özgül, CEO]

I’ll take the first two questions and will leave the floor for the third one to Bill. First of all in Bina Bawi oil, I think we should not now at this stage talk about the full cost required to the early oil because it’s the past courses covering both oil and gas expenditures, but the real past cost distribution is very close to 50-50. But it's not -- it’s really early to say something about how we will recover, I think we will be active to develop early and make a fair cash generation through this one for the benefit of us and for the benefit of KRG, that’s the most -- then after we’ll be in the gas business and recovering whole -- the remaining part of the cost recovery, that’s I think at this stage I can say.

On the second question, I think KRG’s current situation especially financially has been really the best in the last two, three years time which you can read those from the public documents, they released recently their audit documents for 2017. So with their production, direct sales and also a good relationship between them and Baghdad, Baghdad is paying their salaries considerable portion, their economics became cash positive excluding their debt payments and you can see also from this public document they paid considerable amount to Turkish debt and also their pipeline tariffs and everything. Now the only remaining considerable debt for them to start to run from now on to consider with the positive cash generation is the trader’s debt, so it’s moving on the right direction; where it is today is really on the payments after three years, regular payment and including the RSA payments, that’s the reason we agreed with the consultation of the auditors to move this payments as a summed up turn now and it should be reported with our regular reporting mechanism, that’s the point we are really confident on the payments and the KRG economy.

[Bill Higgs, COO]

So, coming to your question on Peshkabir, clearly there will be enough data to make an assessment and so the assessment will be how much of that is distributed between proved, probable and possible, recognizing that the year-end 2017 booking was sort of more of North American style nearest neighbor approach, I think we'll see with the amount of data that we’ve got by the end of the year the fact we’ve drilled the whole structure, we’ve targeted the old contract, that will give us an opportunity to move back to much more sort of -- traditional from our point of view PRMS performance-based assessment and there will be enough production data from these wells in the next six-months to enable us to do that. And does that mean that all of the possible will get converted into proven and probable? No, it shouldn’t do. But we will still end up with a range of outcomes but those -- just by the nature by shift from nearest neighbor to performance-based approach we will see material movement and probable at Peshkabir.

[James Thompson, JPMorgan]

It’s James Thompson from JPMorgan. Just a couple of questions if I’m -- sorry. You mentioned the Bina Bawi oil turns were probably like favorable in the KRG. What is it that makes enough of it sort of high cost recovery level or something similar to that? Secondly and separately just in terms of Peshkabir, just on the well characteristics, how is it kind of different from Tawke, I know there’s relatively high gas oil ratio relatively, is there any difference -- any other differences we should be aware of? And then finally Esa one potentially for you just in terms of that M&A framework you talked about willingness to take on at least some leverage, what is -- can you kind of characterize that is it kind of 1 times EBITDA, 2 times EBITDA or is this sort of framework that we should be thinking about?

[Murat Özgül, CEO]

I’ll take the first question, second question for Bill and last question M&A for Esa, so I’ll keep it really short on the first one, you can compare simply Taq Taq versus Bina Bawi the cost recovery on Bina Bawi is 80% which was already in our presentations two years ago after the signature of the PSC and Gas Lifting Agreements. The profit area from 80 and coming to 25, Taq Taq is 40% cost recovery and starting from 35 and coming to 15, 16 range. So this is the simple comparison but it’s linked to gas development and early cash generation also. The gas part is also like this. So we can fund the revenue easily to develop this gas project and make it available for KRG as soon as possible that’s the logic behind this.

[Bill Higgs, COO]

On Peshkabir I mean I think we’ve done this especially over the years but on Tawke field and even Taq Taq field the horizontal wells have been quite prolific. Now clearly at Peshkabir those wells are performing very, very well. And so in these types of rocks it’s about the connectiveness this into the fracture network and it appears that we just have a very, very good connectiveness from the well bore into the fracture network as we drill through the core of the Peshkabir rock decline and it’s giving us substantial productivity, which is obviously great one to have.

[Esa Ikaheimonen, CFO]

Yes the M&A question, we -- as you probably know we spend quite a lot of time as a management team as well as with our Board in defining our strategy when it comes to growth and I concluded with M&A as a significant part of that as we want to accelerate growth and we want to reinvest smartly, the cash flow we generate from our existing business and we determined what we call the box which effectively is sort of deal characteristics and that sort of boundaries that we’ve got, and set up ourselves being developing that M&A and executing the M&A strategy and part of that including certain constraints like the way we wanted our balance sheet to be managed. Balance sheet policy is quite simply, when it comes to leverage is that we will not lever the balance sheet to a level more than 2 times EBITDA.

[Dan Slater, Arden Partners]

Hi there, Dan Slater from Arden Partners. So I just wanted to ask about the production numbers on Tawke main, on the slide that you put out obviously the production has gone down quite a bit over the last 12 months and obviously we’ve got Peshkabir coming in, compensating for that obviously we’re drilling wells in the second half. But I was just wondering what the impact had been to drive that down in a way that it was over that time, and are they going to be still acting, at all going forward, obviously part of it’s a lack of historic drilling but I was wondering if there’re any other sort of bits and bobs sort of what the outlook is, for those bits and bobs?

[Murat Özgül, CEO]

No, I think I mean from our point of view Tawke main field is actually -- behaving is actually as we’d expect it to, it’s -- these assets -- these types of assets the dual porosity permeability systems do tend to show more natural decline than say a high permeability sandstone system just by the nature of the interaction of the matrix to fracture network. And so it’s performing as we would expect and it’s a mature field over 200 million barrels of oil taken out of the asset and so the work that needs to be done to continue to arrest decline and grow decline is around drilling opportunities and with the front end of the year being focused on Peshkabir then we’re seeing decline which is very consistent with the performance we’ve expected for the asset.

[Thomas Martin, Numis]

And I wonder -- it’s Thomas Martin, Numis by the way, I wonder if I could just push a little bit hard maybe on the Peshkabir production side Bill, would you be willing to put a probability on your ability to sustain the first 5,000 barrels a day that you are currently producing through year end 2018 and, well not that one I always try, 2019, from the existing wells, what sort of plateau period are you thinking? 2019 might be level push?

[Murat Özgül, CEO]

I guess we’re looking at it, the operators talked about an exit rate of -- from the year, north of 45,000 barrels a day from Peshkabir, I think if the wells continue to do what we expect them to do then that’s probably a very reasonable outcome. What we’ve seen in the P-2 and P-3 wells which have been on production now for together about nine months or so, maybe a bit longer, we have seen very steady production. So they haven’t seen very must decline in total. So therefore there is I would say good probability that we would expect that the current well stock should keep it there and thereabout 35,000 barrels a day by the end of the year.

[Thomas Martin, Numis]

Have you done updated resource estimates for the deeper Triassic at Peshkabir?

[Murat Özgül, CEO]

Not yet.

[Thomas Martin, Numis]

And can you remind me in terms of matrix versus fracture contribution for Peshkabir, is it largely similar to Tawke main field or are there differences there?

[Bill Higgs, COO]

It’s probably a bit early to tell. Our assessment is that we have got contribution it’s a dual porosity permeability system so we’ve both matrix and fracture contributions but it’s pretty early in the production life of these wells to actually tell that. I mean one of the things we do see in these systems with the early production is very much dominated by the fracture network as you'd expect and it’s later on that you start to get the [inefficient] from matrix into the fracture network that you start to see the slight different performance, so it’s pretty early to tell.

[Thomas Martin, Numis]

And related to that, I am afraid this might be getting too detailed on what’s in that 3P number but does this 3P number have a matrix and fracture contribution or is it not really put together in that?

[Bill Higgs, COO]

Yes it does. The original gross volume estimate and the net volume estimate, both included matrix and fracture porosity.

[Thomas Martin, Numis]

But then well also looks like they’ve been very good versus expectations, so that will have to be incorporated into the results?

[Bill Higgs, COO]

Yes exactly.

[Thomas Martin, Numis]

Taq Taq, you’ve finished these estimate of TT-29, is there a reserves impact I mean that session is being completed post the year end reserves are they either possible year end 2018 reserves I think?

[Bill Higgs, COO]

We’ll have to move at least two more wells at TT, I would expect by the time we get to our year end reserves certification Taq Taq, we will do again in the new year, so we’ll have TT-29 production results plus there’s well results which are getting incorporated into the reserves, and second part is field performance. I think what I’d say is that the overall field performance is being good to maintain the level of production around 12,000, 13,000 barrels a day, without any increased drilling activity for the periods now we have is probably an indication that we would expect our results be positive towards the end of the year but that’s where we end up.

[Thomas Martin, Numis]

Last one Tawke, you’ve spoken around the production outlook but should we be thinking that Tawke field -- not Tawke PRC, Tawke field production is likely to be increasing, you spoke in broader terms about offsetting declines from a mature field, but it feels like you might be able to get some growth, is that too optimistic?

[Bill Higgs, COO]

I think the way I look at it is the way of starting point is it doesn’t -- if it’s from today we still got decline, that’s naturally occurring. So we expect going forward from today to arrest that and maybe even grow possibly, but then you go back to the beginning of the year then we overcome the January 1 production, I don’t think so.

[Murat Özgül, CEO]

Okay, thank you for sharing your with us -- time with us and thank you for your attendance in this over summer period. Thank you so much. Have a great day. Thank you.