Genel Energy PLC

LSE:GENL

Earnings Call Transcript 2017-Q4

[Murat Özgül, CEO]

Good morning, ladies and gentlemen. I am Murat Özgül, CEO of Genel Energy and I would like to welcome you to our 2017 full-year results presentation. It has been a fantastic year for Genel, and there are significant opportunities ahead. Today, I'm joined by Esa, our Chief Financial Officer and Bill, our Chief Operating Officer. Our Chairman, Steve and members other members of the executive committee and senior management are also here in the audience. Esa, Bill and I will take you through the presentation after which we will open up for Q&A.

You may see our usual disclaimer on Page 2. As a reminder, we've begun 2017 with a clear focus, maximizing the generation of free cash flow from our oil assets was the first area. Accelerating the recovery of the receivable for unpaid oil sales was the second component. And crystalizing value from Bina Bawi and Miran was our final focus area. I'm pleased to say that our delivery on the first two was outstanding. Regarding Bina Bawi and Miran, we have made significant progress and have successfully repositioned the business, and we’re now in a better position to maximize the value. We will explain this in detail later in the presentation.

Our primary objective was maximizing the generation of free cash flow from our oil assets. Free cash flow, of course, is driven by proceeds and that were regular and consistent payments from the KRG. In 2017, we had another 12 months of this and we have now been paid for 30 consecutive months, despite very difficult times for the Kurdistan regional government.

The KRG has been consistent ensuring the importance of payments for IOCs and it’s as demonstrated, its ability to make these payments. Following receivables settlement agreement as you can see from the impact in the fourth quarter, these payments are also increasing. Rising payments have continued into 2018 and we have now been paid in full 2017 sales. As you may see from our today’s announcement, the total, the standard payments net to Genel is totaled around $28 million. That’s the highest monthly net revenue for Genel in 2017 sales.

So, our primary aim of maximizing free cash flow was very successfully delivered. We generated $142 million in the year, a figure that actually equates over a quarter of our market cap. This was the result of solid asset performance and our disciplined approach to capital allocation, which was focused on our producing assets.

Operationally, the Tawke field was robust, decline at Taq Taq was slowed and field production stabilized in the second half, and the Peshkabir field began production. Its past 12 months has been very impressive. Peshkabir production is also high value as it’s under the Tawke PSC, revenues from Peshkabir are included under the receivable settlement agreement, which was signed in August and began to continue to cash flows in the fourth quarter of the year. This was a truly transformational deal for the company.

There is [stable certainty] agreement has a significant difference to our cash flow generation. And we will continue to make material impact going forward. It will have been benefited cash from 2017 by more than $100 million if the RSA has been in place for the whole years and it's the pricier deal for the company

On the balance sheet level, $425 million of value was recognized in July. At that time, this was roughly the same as our market cap.

The signing of RSA success for the focus our second area of focus, which was accelerating the recovery of receivable for [indiscernible] RSAs. The RSA cancelled post-overdue debts with securities transitional government, in exchange for increased future cash from the Tawke PSC. It was a German disagreement for Genel and with this transition of the regional government. It incentivized investments and currently adds around $10 million to our monthly cash flow.

The RSA has made a significant contribution to what is now on a sustainable model for material ongoing cash generation. And we have already demonstrated our capital discipline in how we allocate this cash. We invest money to create most value for our shareholders, at present the best way to create value is to spend money on our producing assets.

In 2017, almost 3 quarters of our total spend was therefore made on the Tawke and Taq Taq PSCs. With material and sustainable cash flow, and appropriate balance sheet following the refinancing, we are in a position to take advantage of a number of opportunities to create shareholder value. Some of these opportunities can be found within our portfolio and offers near term cash generation potential. The most immediate opportunity is at Peshkabir operator expects production from the field to double to 30,000 barrels of oil per day by December and then continue to increase throughout the year. Light oil at [indiscernible] which is in close proximity to Taq Taq and will require limited expenditure to bring production by online and also has significant potential for Genel.

The gas assets at [indiscernible] remain a transformational opportunity for the company. In 2017, we have made progress on these PSC amendments and gas lifting agreements were finalized. The off-stream part of the development is now largely de-risked.

Our financial resources mean that we have significant optionality regarding the gas projects and are able to progress this in the best way to maximize the shareholder value. Our African portfolio then offers a longer-term reserves replacement opportunity. The geology for Somaliland continues to look very promising and we were the first to shoot seismic in our 25 years across our huge licensed positions. We will remain prudent in terms of expenditures but it has exciting potential.

We are also in the position now where we can look to utilize our financial strength to selectively look for value creating additions by our portfolio.

And now provide more details on financial, I will hand over to Esa

[Esa Ikaheimonen, CFO]

Thank you, Murat. And good morning everyone. It’s a pleasure to be here especially given the fact that there’s a real excitement in Genel, as well as because of the fact that we’ve got a really solid financial performance report, and there’s more to come and we see a strong performance continuing into 2018. Genel is actually in a good shape.

So, what are the financial highlights then? First are proceeds, our operations continued without any unusual interruptions, we got paid flawlessly by the KRG throughout the year. On expenditures you can see from the graph, we spent majority of our money in cost recoverable activity, but we also reduced our non-recoverable spend on G&A and interest, and as a result of all of this we generated a lot of free cash flow as Murat already said, $142 million before or about a $100 million after interest expenses that is nearly 30% free cash flow yield on the 2017 average share price by the way.

We then transformed our balance sheet with the surplus liquidity we had built up as you can see on the right. And furthermore, our remaining liquidity is still very healthy providing us with opportunities going forward. We were biased towards investing in production and near-term cash flow but at the same time we continue to develop our next game changers as we go.

The $27 million of other CapEx we spent to derisk and progress Miran Bina Bawi as well as to develop the groundbreaking Somaliland opportunity given the long-term significance of these assets as well as the success in derisking and developing these projects it was money very well spent and we will continue to balance our spending on near term cash generating opportunities with investment in our medium or longer-term future. Bill will give more color on these exciting opportunities in a moment.

Murat has already talked about cash flow, let me focus here on revenue. This piece of artwork illustrates the monthly revenue development during the year. And the effect of the RSA. It should also help you to forecast 2018, as well as the following five years during which the RSA remains in full force. Key message clearly is that the RSA adds about 10 million or even more of revenue, as well as cash flow with a slight delay, per month. The other key message is, when you look at the lines on the chart Genel receives a very significant portion of the total export revenue which is now around $26 to $27 per barrel versus about $10 per barrel on average in 2016 or about $13 per barrel during the early part of 2017. And even when we normalize this oil price the difference is very large.

Now you’ve noted that we’d like to talk about the RSA, and why not, it does change the outlook for Genel, so one more time, let me explain how the RSA works. Without going into too many details going forward number one, Genel receives an incremental override payment of 4.5% of Tawke across PSC revenues for a period of 5 years.

And as a reminder this is also payable on the Peshkabir revenues. The capacity building payment on our share of the Tawke profit oil are eliminated over the entire life of field and as a result it materially enhances Tawke PSC earnings and cash flows as you can see from the graphs showing the impact on a proxy basis for 2017.

So, with the graph on the right it shows that if it has been placed or with the whole of 2017 it would have let to a benefit of something like 107 million for Genel and that goes straight through the Genel's bottom line. After the balance sheet valuation that Murat was referring to you already we recognized the discounted 425 million assets on our balance sheet in July and you will also see a significant one-off gain on our income statement representing the net increase in value of the intangible asset.

Looking forward with further upside in Peshkabir production we expect to generate even more cash from this deal, and as Murat said if we would redo the discounted valuation based on today's information it will be more than $500 million as opposed to the 425 but we have currently on our balance sheet in other words the value is roughly as much as our entire market cap today. So, Murat said the 425 closely equals our market cap in July and August when that balance sheet valuation was made well things have moved on our share price is higher but so is the value of the RZA deals so it's still roughly matches our entire market cap so the rest of the business is great. The [indiscernible] the annual impact so if we would do the annual illustration on the right based on today's information we would expect the number to be higher than the 107 million illustrated here.

Moving on to expenditure we have a high percentage of portfolio, which gives us optionality between allocating capital to maximize value. Last year we focused on producing assets and very positive results. Peshkabir especially offers a rare opportunity each dollar we spent we get back nearly immediately, and then we get the same back maybe 6 or 7 times over in MPV now that is a rather exceptional and it's difficult to find many more attractive areas to spend in the entire E&P universe.

The KRI future cost recovery spend on the pie chart shows that we continue to spend prudently and steadily to progress and de-risk Miran Bina Bawi. This CPRs increased raw gas resources by 4 TCF whilst further crystallizing the value of the near-term oil opportunity in these fields. I'm particularly referring to the high value Miran Bina Bawi oil and there is more to follow and I hand over to Bill.

Then I would like to mentioned a couple of commercial highlights in addition to the obvious RSA achievement. And the commercial progress made with gas and as an evidence of being smart about CapEx, we agreed with the Moroccan government to place our well commitment with the seismic commitment. And this is not only a lot more cost-effective way but it is also technically the best way to progress the license, in other words we are saving money whilst doing a better job.

Adding to our commercial successes last year we moved first into Somaliland with seismic crew and equipment, others are now following us, Bill will tell you. But in doing so, we achieved commercial terms that the followers are unlikely to achieve. With all this said about being smart about CapEx, our capital allocation in 2017 was after all dominated by deleveraging.

So last year, we’ve made two large and successful steps to transform our balance sheet which is particularly satisfying to any CFO. First step was in April when we brought back about a quarter of $1 billion of our outstanding 2019 bonds at a meaningful discount. The second one was the refinancing of the remaining debt in December, further reducing the bond debt to $300 million and extending the maturity until end of 2022. This is reduced our annual interest cost by about 40% and removed the refinancing risk, while leaving covenants largely unchanged. The new bond has also traded favorably and during the last couple of months reflecting our increasing credit spending and it now trades at about 8.5%.

In terms of our relative debt level a fundamental change has taken place. Our net debt at the end of the year was less than 20% of the book value of our producing assets or less than 10% of the book value of our total assets. And furthermore, the recent CPRs confirmed to 2P reserves and 2C resources was materially higher than what we carry on our balance sheet, adding further robustness to our capital structure.

Things were given better today. Our net debt continues to reduce at a similar pace as last year. The refinancing on the RSA have also simplified our balance sheet. Previously, the receivable was very hard to value. It is now being converted into a contractual cash flow that has already been paid for six months and that will carry the same risk profile as all other Tawke cash flows. No more risks nor less risk than other proceeds from the field, so no reason to apply a different discount factor.

In summary, we’ve removed the refinancing risk with crystallized liquidity runway and we've converted highly uncertain receivable into a contracted cash flow during last year, all of which gives us the financial basis to focus on developing our portfolio going forward.

This leads me to my final page of my presentation before I hand over to Bill. After successful 2017, you will not be surprised to see that our financial priorities remain pretty much unchanged. We'll continue to maintain what now is a strong balance sheet. This will be a continuously primary consideration as we allocate capital and look for new opportunities to create value both inside and outside the existing portfolio. Any growth investment will have to meet our strict financial requirements with the ability to act to near-term cash flow. And as you can see from our guidance, CapEx is still biased, cost-recoverable production, i.e., our cash generative assets.

We're not in the business of minimizing CapEx. So, should we eventually come near the top-end of our CapEx guidance this would be good news. As it would mean that we have achieved drilling success, delivered increased production, generated more cash and obviously also gotten paid by KOG on a consistent basis otherwise we will spend less.

So, to give you more information on our portfolio opportunities and the results of our disciplined capital allocation for more operational perspective, I will now hand over to Bill.

[Bill Higgs, COO]

Thank you, Esa and good morning everybody. I'm going to spend a little bit of time giving you an overview of the operational performance in 2017 and the opportunities for value creation in 2018. As Esa noted, we spend money on those assets where we can create the most value. And the biggest bang for the buck today is in the Tawke PSC.

The Tawke PSC is the world class asset and the early results from Peshkabir are very encouraging. Production in 2017 as shown on the chart was robust with the addition of Peshkabir volumes ensuring that the asset averaged almost 110,000 barrels of oil per day and delivered 10 million barrels of net oil till now.

2P reserves were audited to 504 million barrels which included a debt downwards technical revision of the Tawke field of almost 37 million barrels which was offset by positive new development additions at Peshkabir with more than 44 million barrels. Production has continued to be strong through 2018.

Taking a look at Peshkabir in a little more detail. As DNO have stated there is more to come. The success of Peshkabir 2 and 3 both in terms of productivity and reserves having been drilled through and into and declined have demonstrated significant upside in the field that can be exploited quickly. The operator expects field production to reach 30,000 barrels a day by the summer with fixed wells to be drilled along the access of the field as illustrated on the map below. This means the structure will be fully appraised by the end of the year. Peshkabir 4 and 5 are currently being drilled.

The operators are also evaluating the use of associated gas at the Peshkabir field for an enhanced oil recovery projects at Tawke. This can have positive additions in both reserves and production.

Moving on to Tax Act. The field also generated cash in 2017, and we are committed to continue to do so going forward. The news is more positive for the field in recent years especially with the results of TT29W. Reserves saw a small positive technical revision of the 2P level, and the stronger positive revision of 1P.

Production stabilized in the second half of the year through a more active intervention program and the addition of well stock late in the year. And as you can see from the chart, December production was in line with that in July. We're still analyzing the results of TT29 and drilling will begin again in the second half of the year. As such, there will be some natural field decline in the first half of the year, but there are opportunities available to us to sustain production.

As always, any activities carried out with the firm focus on operational delivery and flawless HSD [ph] performance. We have now had more than 2 years of loss time incident free operations at Taq Taq and are working hard to continue that performance for the year.

Taking a look at TT29 in a bit more detail. The well was drilled on the Northern Flank and showed a very encouraging almost contract of 145 meters deeper than the free water level estimated in the predrill program. These results indicate that much of the remaining opportunity at Taq Taq is likely on the plains of the field. The map on the right-hand side illustrates the thickness of the remaining gross volume above the current free water level. The colors superimposed on the structural consoles of the Taq Taq had declined.

Crystal production has resulted in the encroachment of the free water level hence the cold colors around the wells in the center of the map. The hot donuts around the flanks represents the opportunity which we are currently evaluating how best to access with the new drilling program that will begin in latter half of this year. As we’ve already mentioned, work in 2018 will concentrate on the field with a potential to create the most shareholder value at Peshkabir. Tawke would not be far behind with four wells targeting additional production in [indiscernible] reservoirs.

Overall, we’re set to drill 13 wells in 2018 as we continue to maximize our cash generative production. While this will form the majority of our spending there’re also material value creation opportunities in the portfolio that we are able to progress with limited capital deployment. These are mainly focused on the optimization of reservoir management such as the enhanced oil recovery project at Tawke and a residual oil saturation recovery project at Taq Taq, both of which have the potential to add incremental barrels of reserves in production.

Moving on to take a look at the opportunities in the portfolio, we are pleased by the progress that was made in 2017. Our Bina Bawi and Miran the size of the gas prices reemphasized for the CPRs announced in January this year, 15 Tcf of raw gas at the 2C level, and that was a 45% increase. And even the 1C level of 6.6 Tcf is substantially higher than the gas volumes agreed under the gas lifting agreements. There’s also circa 140 million barrels of associated condensate that is the property of the upstream business.

The independent oil fields in the PSC were also assessed with the rise of the light oil in Bina Bawi providing opportunity which we’ll discuss later. But first of all, the gas. The finalization of the PSC amendments and the Gas Lifting Agreements last year gave the project a bedrock with the CPRs and the extensions of the conditions precedent further solidifying the base. I hope it doesn’t seem like an overstatement when I say that this gas development is almost unique and being an upstream project without volume or price risk, the chart on the right-hand side is a tornado chart, that illustrates uncertainty in net present value caused by the elements in the chart.

With no price or volume risk the remaining uncertainties for the upstream projects are predictable and controllable for the first production. Work in 2018 will help us characterize those uncertainties namely surface facilities, drilling CapEx, well deliverability in design and operating costs. As part of that later this year we expect to undertake an extended well test on Bina Bawi-4 which will provide valuable data on well deliverability and gas composition. These results will be combined with the work done by Baker Hughes to deliver an optimized field development plan.

As I just said our financial position gives us real optionality, able to progress to the projects in the best way possible to maximize value. We’re in hurry to farm-out and we are able to take the project forward to a 100% ownership if we wish, making relatively small investments on what is already a materially derisked upstream project, the business we control. This is a low-cost option with potentially significant upside. As we take a look at Bina Bawi oil, the oil resources at Bina Bawi and Miran can create real value for Genel. Especially the light oil resource at Bina Bawi.

As a reminder the oil reservoirs not associated with the deeper large gas fields sitting above the gas in Jurassic reservoirs that can be easily developed separately. The wealth is also being processed, the Bina Bawi 3 well was floated more than 3500 barrels of oil per day of clean oil in an 8-day test.

All that we therefore need to have to resume production is a relatively quick and cheat recompletion before expansion of the development drilling with around five wells. We all have the clear export route as you can see on the map the proposed early production facility being less than 30 kilometers from Taq Taq and due to the cost recovery, the agreed term delivered strong revenues. There will be more on this opportunity as we progress our discussions with KRG through the year.

As well as the excitement of our near-term opportunities there are also longer-term projects with the potential to add significant reserves. We were very pleased with the trouble-free acquisitions of the 2D seismic over our massive acreage position in Somaliland, in fact it was the largest on shore 2D seismic program carried out in Africa in 2017, the acquisition of 3,154-line kilometers of data.

It was also as Murat said, the first time the seismic was shorter over 25 years in Somaliland and other than that following up in [Indiscernible]. We shot more than two thirds of the size into our eastern bloc with a proactive infill program where the job looked most promising. Processing these is now underway. Encouragingly external factors are making an oil development look even more enticing. Not least the significant investment being made by BP world in the [Indiscernible] report at nearly twice the annual fiscal budget of Somaliland, which you can see from the map is not far from our block and will find a clear root to the market. But before we get ahead of ourselves we have some prospect thing to do and then we will look at the optimal strategy to maximize future value.

And this is disciplined capital allocation and maximization of value that’s leading the way on Moroccan license, the commitment to drill a well was replaced by an obligation to carry out the 3D seismic survey across the license. The expenditure of circa $15 million is already fully accrued on the balance sheet and the majority is covered by our restricted cash. As Esa mentioned this is the sensible way for the parties to move forward and as you can also see from the map E&I have recently found into an area surrounding our block which is a reminder that this area has real potential.

It all adds up to a very good balance for the portfolio. The focus of outspending on cash generation with the promise of more to come and then some major developments and exploration opportunities providing options for reserves replacement and some exciting high impact exploration.

And with that I will hand back to Murat.

[Murat Özgül, CEO]

Thank you. As we move in 2018, Genel is well positioned to continue in the creation of shareholder value. We have now solidified this and placed the creation of value at the heart of our updated strategy. Our strategy would be also our core strength. We have a robust and cash generative asset portfolio and we will continue to maximize the value of this portfolio in the KRI, while maintaining a strong balance sheet. Maintenance of this strong balance sheet is essential to our growth plans. This will be key to our decision making as we progress opportunities in the portfolio and look to make value accretive additions to our portfolio.

Our strategy for the growth is governed by clear investment criteria and our commitment to value created capital allocation. We will concentrate on assets that provides the highest returns with near-term cash generation with lower risk.

However, our focus for 2018 remains clear. We have a sustainable business model and we expect to continue the generation of material free cash flow. Last year we delivered on what we said and we will aim to do the same this year. We will maximize the generation of free cash flow. We allocate capital in a disciplined way and we will continue to focus this on our producing assets. We will also make progress on the material opportunities in the portfolio, which has discussed can be done with limited capital expenditure in 2018. In the near-term, the focus is on both the oil and gas potential at Bina Bawi and Miran, while there is a considerable long-term potential in our exploration portfolio.

And with that I would like to hand it over to audience for the questions.

[David Round, BMO]

Good morning, guys. This is David Round from BMO. I’ve got a few questions. The first one, I guess on the Miran and Bina Bawi, you talked about the upstream there, can we get a bit of an update on the midstream? Also, I’m interested, you obviously got the expansion for the conditions precedent, I guess, I'm just interested in your views there, was that an easy discussion to have, is that something that you expect that, I hope you don't need it but will roll, say it happens again next year that you haven’t satisfied those yet? Could also maybe just get your views on Tawke, the decline rates there, because okay, that look pretty typical, but you have done some work on the field, probably you could…

[Murat Özgül, CEO]

Thank you. I'll take the first question and I’ll leave the Tawke answer to Bill. So, I think we should look at Miran and Bina Bawi, first of all with the whole value change. The upstream part with the CPRs we delivered is showing us, we have more than enough gas what we commented on the gas lifting agreement. So that’s really good news for everybody in this project. It’s unlocking the first value chain of the cycle with very confidence.

And as Bill mentioned, the second big uncertainty in the normal projects was the price, which is not valid for our project, price is also defined in this upstream part. So, uncertainties on the upstream part is done and we also completed the CPs in relation to the upstream part. As you also see in the last quarter of 2017, Kurdistan Regional Government signed an agreement with Rosneft on the pipeline for gas pipeline also.

So, the only remaining part as you mentioned is the midstream. We are working together with Kurdistan Regional Government. We already completed the spreadsheet [ph] for this one. We also received some early cost for the [indiscernible] process and we are discussing with a number of parties for this one. Some of them are really powerful companies, big companies that they can deliver them midstream. So, the CPs, remaining part is mainly related to midstream. And if you look at the time table, midstream roughly is around 3 years, but upstream we can deliver the first gases in two years' time.

So, we are hopeful on the midstream. I cannot give you the company names over that which Kurdistan regional government is talking, but we will see the developments in throughout 2018 on the midstream which will unlock the value for whole value chain on the gas.

[Bill Higgs, COO]

On Tawke as you say the field is a well-developed field and there is consequence there. It's a matter of how much work you do to offset natural additional declines which are nothing unexpected. I will leave the operator to talk in more detail about that. But I think the key thing is that it's about be emphasizing it, it's about deployment of capital against the assets that create the most value and the bang for buck today is shifting work especially there hence the early program in the year will be focused on that drilling campaign through Peshkabir.

[David Round, BMO]

Sustainability of the receivable payments if you can comment on that, have you got any views on the budget and how long do you think you will receive or continue to receive the payments.

[Bill Higgs, COO]

Throughout this 2.5 years, 30 months, KRG paid constantly monthly payments. The last six months including the receivable set on the agreement payment. And if you go through all this 2.5 years they faced lots of difficulties, especially the last six months after the referendum process, they faced a lot of financial problems, but they put the IOC payments on the top priority to continue to produce and generate value. So, I think that payment itself is an evidence how they are putting the importance plus how they have the ability to pay. So, we are evaluating normal payments from now on.

[Esa Ikaheimonen, CFO]

Can I just add to that one quick thing? Because you asked specifically about the RSA payments whether that was intentional or not I don't know but you did. These are no different that's what I was trying argue during my presentation as well. They are no different to any other IOC payments. They're now part of KRG's contractual obligation and you've seen the track record and their ability and desire to honor those obligations. Hence my point about these being part and parcel of Tawke revenue and IOC payments from KRG no different.

[Thomas Martin, Numis]

Thomas Martin from Numis. Can I ask four questions please? First of all, kind of broader one capital allocation. You've spoken about the opportunity to reinvest in the portfolio and you've mentioned a bit about possible acquisitions. Could you talk about how you decide upon these opportunities how you weigh them. Is it just financial metrics or is there something else that perhaps overlying on a strategic basis, your value is fairly concentrate within Tokyo at present? And if you talk on a financial metrics basis presumably it's quite difficult to find opportunities that compete with Tawke with the RSA, I mean it's going to be difficult.

Secondly on the Bina Bawi oil side of things. Have any discussions on the PSC structures that would enable you to grow just the oil started with KRG's as the discussions started.

And then two more questions, on the gas base at Bina Bawi do the results of that also feed into your facility cost assessment and what would you be looking for there, can you remind me, I forget this, liquid content or [indiscernible] or is there anything there in terms of the gas composition?

Finally, Morocco, we are pleased to hear, what are you looking for with the seismic program, what is that targeting?

[Murat Özgül, CEO]

Let me handle the four questions like that, let me start with Bina Bawi oil, the eligibility information and then leave the floor for the capital allocation to Esa. And I will talk after that the gas facility related question and we’ll leave for Morocco to Bill.

So, on Bina Bawi oil it’s valid for Miran oil also, on PSC terms it’s structured oil and gas developed together, that’s the reason it’s different than normal oil terms and more favorable on the oil parts, also Bina Bawi oil, Miran oil compared to Taq Taq project any oil PSC in the region. That’s giving also gas to leverage early generation of cash flow, while it doesn’t mean this we’ll start earlier than gas field already initiated to answer your questions with the KRG discussions, but anyhow this is representing a big value for Genel whenever we start to develop and as cash flow wise it will also fund the gas development effect throughout the project, that’s the key item. On Capital allocation?

[Esa Ikaheimonen, CFO]

Yes, we can have a long conversation about capital allocation or a short one, I think we only got time for a short one, so our operating cash flow is very healthy right now. So the immediate obvious priorities are the producing assets and generating more cash flow, generating more cash flow near terms means that we are debt-free relatively quickly, which means that we’ve got incremental capacity to be a little bit more forward leaning in developing and enlarging our portfolio, and clearly the opportunities already at least partially in our control are among the first priorities, Bina Bawi earlier accelerated oil definitely, continuous development of what is increasingly a key option if not a free option to maintain the upstream position on the gas side.

And assuming our free cash flow generation continues as a result of all of these activities as it seems we do have a fair amount of incremental capacity and that’s when the future expansion and potential M&A activities kick in KRI or outside.

So, that’s in a nutshell the philosophy, producing assets, deleveraging first, but continuously investing also into the future game changers starting from our existing portfolio but then increasingly looking for new assets as well. In order to strengthen our existing portfolio, enhance it for longer-term, more sustainable cash generation.

[Murat Özgül, CEO]

Let me answer the gas facility. So we did the proceed studies with our consultants, we have still work to do to real feed analysis, if you look at our CapEx program it’s including the long term testing in the Bina Bawi-2, fine tune our results on the gas composition which will be helpful to form full feed analysis, so the cost which we gave out earlier as it is now as public presentations was representing four or five big bidders at initial bidding range per this feed, so it's including some level of uncertainty in it but we are roughly around 3 billion U.S. dollars range plus or minus something on the [Michelin] facility with high H2S and handling all this south push in it the size is around 10 bcm sales gas capacity which is representing approximately 14 bcm gas capacity.

Before moving on to Morocco, so in Somaliland let me say only one thing on Somaliland before, what I'm feeling is related to Somaliland I think on slide 15, while we were on Kurdistan region so I really -- this is exciting and I really hopeful in the long-term value will be heading on the Somaliland so let me give Bill the answers.

[Bill Higgs, COO]

I'll just pick up on a couple of points also on the Bina Bawi well test before we go there. I think two important points but firstly from an upstream perspective in terms of upstream methodology, we are at the threshold levels of gas chemistry that really don’t change the capital cost upstream, again that's the reason why we have those narrow range of outcomes from an upstream perspective. it is all about optimizing the midstream project and it is particularly around the gas recovery and Sulphur recovery units in the scale of both and it will be required.

And I think more importantly from an upstream perspective it is the well deliverability fees which obviously if we can design high deliverability wells means that we can further reduce our capital cost to first gas which is a big focus for us.

Picking up on the seismic question, so in Morocco a lot of the seismic that we currently have in house as of 2001 survey that was reprocessed by us, it was focused on just in your short acquisition length, the survey that was focused on the shallower stratigraphy, we agreed with the Moroccan government to go and shoot some multi [indiscernible] 3D seismic which will give us the ability to better image the deeper and more sticky the Jurassic intervals and that survey will start later in the year.

[Thomas Martin, Numis]

And just to clarify my understanding on the oil side of that, should we be thinking that the primary focus is as per your existing PSC into safety development with I think you said and the oil being fells at funding the gas and it's a separate just standalone oil development not what we should be thinking off today as your primary plan.

[Murat Özgül, CEO]

[indiscernible] absorption as I said the already started the discussion with Kurdistan regional government. If we take the Bina Bawi oil, it's 47 API and it will be early developed it will add also value to Kurdistan blend on the pipeline. so, it maybe early as that one option or it may be start with the [indiscernible] create an early cash flow gas development. So, in any how the value is really tangible for the company.

[Unidentified Analyst]

Just if I may a couple of questions on the geology. Peshkabir, the operator booked 75 million barrels of 2P reserves, do they together contingent resources [indiscernible] as possible which suggests the uncertainty relates to the geology rather than the commercial development. So, I was wondering as you move west which well should we watch for additions to the 2P number. I presume P4 is within the realms of the probable reserves and if you go further less or west, sorry, will you be adding reserves?

And then with respect to the Miran gas reserves or resources. There's quite a lot of gas between the 1C to 2C to 3C which suggests that there’s a bit of uncertainty there as well and I was wondering whether you were looking to address that any time soon?

[Bill Higgs, COO]

Yeah, thanks. The first question on Peshkabir, the audit was conducted by the operator, by the government, as you quite rightly say it’s a style of reporting that allocates the resources or the reserves in the whole field and weights that towards a P3 category in using a style depending on how close you are with the current wells and the further you get away from the current wells, the Miran they move towards P3 category.

Obviously as we sort of said I think the key thing here is that we’re going to be drilling six wells across the anti-climb [ph] and by the end of this year, we'll be in a position where we’ll fully upraise the asset. The early production data is telling us that we’ve got quite a well-connected volume, but there is still remaining uncertainty in what's in the core of those anti-climb [ph]. So, I think it’s appropriate to have a distribution that is weighted towards the possible size.

In terms of Miran, you’re right. There's quite a big distribution between the 1C and 3C at Miran. At the right time it will be appropriate to further upraise the Miran field to make sure that we can achieve the delivery that we expect. But that is not today, we don't need to do that today, given the time line as Murat has already alluded to, we have plenty of time available to us to evaluate that assessment.

[Murat Özgül, CEO]

Okay. I think that concludes our Q&A session. Thank you all for coming and sharing your time with us. Thank you.