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Edited Transcript of GENL.L earnings conference call or presentation 6-Aug-19 8:30am GMT

Half Year 2019 Genel Energy PLC Earnings Presentation

London Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Genel Energy PLC earnings conference call or presentation Tuesday, August 6, 2019 at 8:30:00am GMT

TEXT version of Transcript


Corporate Participants


* Esa T. Ikaheimonen

Genel Energy plc - CFO & Director

* Mike Adams

Genel Energy plc - Technical Director & PDMR

* William George Higgs

Genel Energy plc - CEO & Director


Conference Call Participants


* Daniel Slater

Arden Partners plc., Research Division - Research Analyst

* David Matthew Round

BMO Capital Markets Equity Research - Oil and Gas Research Analyst

* Joe Sutcliffe

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Malcolm Graham-Wood

Hydrocarbon Capital - Founding Partner

* Thomas Henry Martin

Numis Securities Limited, Research Division - Analyst




William George Higgs, Genel Energy plc - CEO & Director [1]


Good morning, ladies and gentlemen. I am Bill Higgs, and I'm delighted to welcome you to my first results announcement as CEO of Genel Energy.

The company has come a long way in the nearly 2 years that I've been at Genel, and there's plenty more that I plan to achieve in the years ahead.

Today, I'm joined by Esa, our Chief Financial Officer; and Mike, who we recently promoted to Technical Director. They will help me describe the performance of -- for the year so far and the plans we have for further accelerating the performance of the company going forward.

Other members of the Executive Committee are also here in the audience. Esa, Mike and I will take you through the presentation, after which we'll be happy to answer any questions.

I'm sure you'll all be familiar with our strategy, which is to focus on creating shareholder value. We have a high-margin production that we aim to grow through efficient and rapid development. The cash this generates can be quickly recycled into other growth opportunities, with more than enough left over to fund the material and progressive dividend. It's a simple strategy, but one that we feel gives us a compelling competitive advantage, not least from the speed with which we are able to generate capital returns for the investment. And it's also one that's delivering results.

Production increased by 17% in the period and generated free cash flow of $76 million. Despite the fact that oil price have fallen year-on-year, and we doubled our expenditure on both on-production and preproduction assets. The return we get on this expenditure allows us to recycle the cash to those areas that promise the most value creation. As we spend more on these assets, we still have more than enough to look for further opportunities and to pay a material dividend. We have added to the $0.10 per share paid in June and announced an interim dividend of $0.05 per share alongside these results.

So how do we continue to deliver the success? I make no apology for our extreme focus on cash generation. It is key to all business decisions. I want to ensure that each dollar is spent and pays for itself plus more and that it does it quickly. As a consequence, we focus our asset development activity on optimizing value and balancing the deployment of capital with a stage de-risking of each asset.

We also seek to mitigate downside risk so that the downside scenarios will not hurt us and without reducing exposure to the upside, the objective being to produce for a broad portfolio of high-margin barrels with a pipeline of high-quality discovered resources competing for our capital. I'm building on a culture of technical and commercial inquisitiveness, combined with pride and delivery. To support this, I've amended the management structure to have the right people on the bus and in the right seats. Separating preproduction and on-production assets enables Mike and his team to focus on value creation opportunities using both technical and commercial innovation, while the COO organization can focus on reliable delivery, motivated by high performance and innovation in operations. VK has been integral in the exceptional safety record that we've shown in recent years, and his addition to the executive committee reflects our ongoing focus in this area, the broader conversation on risk and indeed on ESG, more of which later.

The best outcomes occur from all of us collaborating towards a common goal. We have aligned technical, financial and commercial departments, and we now have a model that works with creativity to identify and deliver on opportunities, both inside and outside the company. As you can see from the examples in the presentation, this is not a new model for Genel as we have a proven track record of thinking and acting this way. It is a set of values and behaviors that I strongly believe can be leveraged still further.

The opportunity for us to demonstrate this capability has been enhanced by deals like the Receivable Settlement Agreement, the appraise, develop, produce strategy for Peshkabir and the landmark deal with Chevron at Sarta. But as you can see from some of the other examples, it's just core to the way we do what we do, a focus on intelligent value creation while managing downside risk. You should expect to see this hallmark in everything we do and the actions we take.

Let's take a look at the operations. We're not taking our eye off the engine room, high cash generative production. Tawke is a mature field, but work done there is aiming to maintain production against the backdrop of natural decline, while Peshkabir's rapid growth has led to a significant year-on-year increase in the assets. Success on the flanks of Taq Taq has also led to year-on-year increase in production.

Understanding the onset of water production on the flank wells is important for risk management as we move forward. The strategy is delivering the economic results, and we are hopeful of maintaining this production for the rest of the year. As we can see on the chart at the bottom right, though, is the Tawke PSC, where the receivable settlement agreement is still there left to run for 3 more years, that is driving our material free cash flow. It will continue to do so over the coming years, allowing us to take advantage of the opportunities in our portfolio.

We have built a portfolio of opportunities that offers real upside. First up is Sarta, which should be in production when I stand here in a year from now. And the development plan, as you will have gathered by now, is focused on cash generation. There is real value in Sarta, no upfront costs, limited cashout. The reservoir targeted for the initial development has potentially as big as Peshkabir. And the overall upside potential that's potentially as big as the biggest fields in Kurdistan. Qara Dagh then offers high-impact appraisal, seeking to demonstrate commercial production rates from the same reservoirs at Taq Taq.

And then the potentially transformational gas assets are still part of our future. I know there are many investors frustrated with the lack of progress on Bina Bawi. I can assure you that we are working hard and in good faith to get this moving, and we are frustratingly close to a solution. This is where things currently stand. We have been recently very active and very frequently in discussions with MNR. We first focused on a scaled-down plant planned for Phase 1, and we're now agreed on an integrated oil and gas development at circa 250 million standard cubic feet a day of raw gas. Genel and MNR initially 50-50 owners of the midstream plant and the fast track of Bina Bawi oil to assist in funding project development costs.

In July, we were asked by the Minister to submit a formal commercial proposal. That commercial proposal was sent just as the new parliament was formed. As to be expected for a project at this stage of its maturity, there are significant uncertainties, primarily ones being the capital cost for the midstream and the upstream, as well as the security and obligations of the downstream destination of gas. These uncertainties can only be better understood by moving the project into the defined phase and undertaking feed. Completion of the legal documentation to memorialize the proposal would permit commencement of both feed for the midstream, EPCIC and importantly, the rapid development to bring oil on production.

We would expect oil to quickly repay the cost of the defined phase, including feed and any further appraisal activity. I believe we've made good progress in the past 6 months, with an agreed smaller scale phase project having a materially improved chance of success. Further progress will require the full commitment of KRG and for our part, we continue to engage with KRG in good faith.

We have conceded some amendments to the existing BSC terms and have now sent the commercial proposal that we believe to be fair. We believe we're close in getting to a detailed drafting, which will then permit the project definition work to begin. Our current estimate is that the integrated Phase 1 has the material value for both KRG and Genel and after first gas generates significant cash flow, the potential to be another asset that delivers the Genel business model.

I'll now hand over to Esa to talk in more detail about our financial performance.


Esa T. Ikaheimonen, Genel Energy plc - CFO & Director [2]


Thank you, Bill, and good morning to you all. Bill already outlined our production and cash generation story. So it is my job to first add a little more color on that cash generation from our producing assets.

I would say that we are in a fortunate position where we can make our capital allocation decisions with high confidence. This is obviously because of the combination of the high level and the high resilience of Genel's cash generation. This is against any movement in oil price, production levels or even CapEx, as I'll explain a bit later.

But let's start with the results. The free cash flow at the asset level in the first half is very good, $118 million or more than $17 per working interest barrel. At the corporate level, free cash generated during the period was $76 million, indeed, an increase on last year, despite a 10% drop in oil price and about $30 million year-on-year increase in CapEx.

Our outlook for full year cash flow remains in excess of $100 million, which corresponds to free cash flow of something like $0.35 per share and a yield of around 20% to 25% on our recent market capitalization. I mentioned the resilience of our cash flow already. I might actually mention it a couple of times later as well. This slide and the next gives some insight into the cash flow we generate from our assets. Tawke PSC, as Bill mentioned, is our main cash generator. So it makes sense to use Tawke to illustrate the way the PSC works.

The impact of additional costs on free cash flow is materially reduced because of how the relevant PSC mechanisms work, and this is especially when you are not massively ramping up production and when all historic costs have been recovered, which is the case with Genel. If you look at the chart in the top right-hand corner, it's showing our cost recovery capacity. In the middle, you can see that 41% of revenue can be used to recover costs. We only used 16% during the first half of the year.

So we can nearly triple our spend before hitting the cost recovery capacity of the license. Most of the cost is effectively repaid to us as cost oil coming out of the government take, which you can also see on that graph, with the balance of around 20% or so only coming out of reduced contractor profit oil.

To put it very simply. We have a very large cost recovery potential, even at a very high level of CapEx, we get our money back very quickly. Furthermore, our cash flow is not very sensitive to oil price or production performance. On the production side, all else equal, a 10% fall in annualized production would still leave us generating over a $100 million of cash this year.

About oil price then, with high-quality oil, low OpEx and transportation costs, we still make money at very low oil prices. At the asset level, we can make money at $20 per barrel. Or at corporate level, with guidance CapEx, we breakeven at about $30 per barrel. And at $50 per barrel, we can invest $50 million per annum on growth and sustain our minimum $40 million dividend and still generate free cash flow.

This cash generation and the speed at which investments pay back allow us significant optionality in how we choose to allocate our free cash and liquidity. The first priority is the assets that provide the best return, and this is clearly our production assets. We received payback through cost within 3 months and then benefit from any incremental production, multiplying this payback.

For this reason, we spent $49 million in the first half of the year on Tawke at Peshkabir and Taq Taq combined. This investment is free cash flow positive already in 2019. As explained with the previous slide with falling quick cost recovery, our PSC mechanics mean that the net cost of this investment is only around 20% of the spend. And that is the reduction in otherwise available profit oil. So net spend this summer around $10 million, so for $49 million gross, $10 million net as a result of the PSC mechanisms.

Then when we look at the contribution to our cash flow from these new wells that we've drilled in the first of the year. And that's represented only by the margin from these new wells, we estimate about $23 million of free cash flow from this investment in 2019 alone. So you can see that the math actually worked very favorably and new investments generate positive free cash flow very quickly. Additionally, with the CapEx we have cost recovered fully this year, we will also have built pipelines, processing and water handling capacity to increase production, operational efficiency longer term and not just wells.

The second very attractive capital allocation priority is very clearly Sarta, and Mike will provide you with more detail on this. But from a financial point of view, Sarta is expected to be cash generative from first oil already next year, and we expect it to have entirely paid back all capital invested by 2022.

This is a perfect example of what Genel actually wants to do going forward as well. Sarta is generating material free cash flow and return after 2022, and that's also a perfect match with the receivable settlement agreement losing most of its effect at about the same time.

If Sarta hasn't paid back all capital by 2022, it's good news because it means we have had major success and we've taken expansion FID with more investment and profitable growth, creating more value long term.

So in that scenario, we are on track to deliver another Peshkabir and more from Sarta. You will hear from Mike that we are super focused on getting those barrels to the market as quickly as possible with as little CapEx as anyone can. Then there are those assets in our portfolio on which we have decided to minimize spend until conditions support further activity, while retaining full upside.

These are very exciting assets, but we also have committed to a disciplined allocation of capital, reflected in our approach regarding the minimized spend on Bina Bawi, Miran, Somaliland and Morocco, and we will continue to minimize spend on these assets until we can see a robust development plan that brings the confidence necessary to allocate material CapEx.

For Bina Bawi, this means, for instance, that we need to know that early money spend on midstream feed can be cost recovered through Bina Bawi oil and that we have a high confidence solution for midstream funding for gas before FID, and Bill touched upon that already earlier. For Qara Dagh, this means fully utilizing all existing learning inside and outside Kurdistan, an experience to prove commerciality of the resource and monetize as quickly as possible. And for Somaliland and Morocco, it means farmouts to reduce risk for Genel and our costs of the required further work. I must emphasize again that our disciplined approach to allocating capital to these opportunities does not at all mean that we would not think very positively about the potential value we can create. We simply want to be smart about the way we develop and fund them.

Last and by no means least, another definite priority when it comes to our capital allocation is the dividend, which we commenced at $0.15 per share per annum, representing already an attractive yield of the block, but which still leaves us with material surplus cash and a fair amount of room for increasing the dividend over time. As to CapEx, we have decided to further increase activity later this year with our partners and expect, therefore, the CapEx for the full year will be at the top end of our guidance range of $150 million to $170 million.

And then on the balance sheet. Our recent performance and our approach to capital allocation has put us in this position of financial strength. We run a significantly free cash flow positive and resilient business. We pay a material dividend. We are in a position to invest in organic and inorganic growth as and when the opportunity comes along. We have a business that combines growth and yield in a very attractive and robust manner.

As I speak, we have $390 million of unrestricted cash. So we are increasingly net cash positive, and we also have a material and growing incremental debt capacity. Our producing assets have a super short cash repayment cycle and a lot of cost recovery buffer. This means we can reinvest all surplus cash to growth and dividend. But when we reinvest in growth, we will continue to maintain our existing approach and to be focused on near- and medium-term cash flow and seeking and developing new opportunities.

Regarding our balance sheet, it will evolve as a result of our success in identifying and executing growth deals. We like low leverage, but are prepared to raise affordable debt against profitable and cash-generative assets and businesses.

Finally, a little bit about our M&A strategy. Bill already said that we review all our opportunities based on capital efficiency, downside risk mitigation exposure to high-margin upside, and that's exactly how we look at M&A.

Key elements of our M&A strategy are unchanged. We are focused on cash, not geography. Should Sarta, for instance, and the opportunity to join forces with Chevron have been elsewhere in the world, we definitely would have added it to the portfolio with the same terms and economics. We are focused on identifying opportunities with discovered resource and material production in the next 2 to 3 years, and we are not looking to invest in long cycle exploration. Unless some of that comes along in an otherwise production and/or development bias package as a side product, if you like.

Any M&A opportunity needs to represent a credible cash positive story in not-too-distant future, and we also need to see opportunities for Genel to apply and leverage our capabilities and learning. We're not a financial investor.

In summary, we have a very strong organic portfolio that is sufficient to transform Genel to a major player. But we also want to further expand the portfolio so that we have more than Sarta, Qara Dagh and Bina Bawi to replace and grow cash flow when the overhead royalty ends in 2022.

With that, I'll hand over to Mike to provide some more color on our recent successes in rebuilding Genel's portfolio.


Mike Adams, Genel Energy plc - Technical Director & PDMR [3]


Thank you, Esa. So first cab off the rank and with respect to our M&A strategy and really leveraging our unparalleled knowledge of the KRI operating environment and the geology is Sarta and Qara Dagh as the title says, an ideal strategic fit. That is it provides short to midterm cash generative production; early field life production to replace mature field production; mitigation of downside risk through our phase to produce while we appraise philosophy, which, of course, has proved so successful at Peshkabir, now the second biggest producing field in the KRI. So understand the size of the price before overcommitting capital expenditure, something that we and other operators have embraced through lessons learned.

So protecting the downside case is an important fundamental to us. Significant upside potential. So the growth potential, small but beautiful is good, but bigger is clearly better. And all at a derisked entry price, so no upfront consideration, predominantly a cost recoverable carry, i.e., we get it back through cost oil once production starts, plus, it only really becomes material in a material development, which is a clearly happy world to be in.

As always, all of our projects need to be underpinned by a robust technical story. So what was it about Sarta that attracted us? Well, in a nutshell, discovered resources through the full KRI stratigraphy, with circa 500 million barrels of P50 gross unrisked resources estimated and 150 million barrels of unrisked growth mid-case resources associated with the Jurassic Mus-Adaiyah reservoir alone. And it's the 34 million barrels of 2P gross reserves associated with that Mus-Adaiyah reservoir being targeted by Phase 1a, a low-cost pilot development due on stream by mid-2020, initially through 2 existing wells, Sarta 2 and Sarta 3, both of which flowed around 7,500 barrels per day on test with crude processed in a CPF subsequently trucked the 100 kilometers to Khurmala. Armed with pilot production data, plus the results of a 2- to 3-well appraisal development well campaign in 2021, we will be well placed to make subsequent investment decisions on expansion, so following that same mantra of make cash, invest cash in growth, make even more cash.

So how is the work towards Phase 1a going? In short, rather well underway and on schedule. Civils commenced in May, so circa 4 months of progress illustrated bottom left to bottom right on the image there in preparation for OiLSERV to mobilize the site to build the 20,000 barrel per day capacity facility, which they will subsequently operate and maintain for the JV under lease. And July 2020 is the target date for facility commissioning and production startup, so the magical first oil.

And this is what that journey to first oil looks like from an action tracker perspective, a number of boxes ticked already, bridging engineering and priority civil works. The lease, operate, maintain CPF contract with OiLSERV is well set to be signed this month, August. Next step will be initiation of the facility and flow line construction, contracting for a 1,000-horsepower rig to work over the S2 well, then we're on the home straight, commission the facility and confirm our operational readiness ahead of production startup.

Moving on now to Qara Dagh, a slightly different beast to Sarta. Still at the appraisal end of the discovered resource spectrum, but nonetheless, well placed to be monetized quickly post appraisal success through our same early production philosophy.

The Qara Dagh structure was first tested by a vertical exploration well back in 2011, but suffered from being drilled off structure based on an incorrect geological model and reservoir damaging drilling issues. But despite the problems did at the end of a long campaign test sweet, light oil from fractured Cretaceous carbonates.

So armed with that historical context, we will drill a second well on the structure in Q2 2020 in a crestal location with an appropriate trajectory to maximize the contact with those productive fractures and armed with the drilling learnings and techniques for the basin, which have really greatly evolved in the almost decade elapsed since the original well was drilled.

So where are we in the progress towards drilling the QD-2 well next year? Again, we've wasted no time at all in getting our arms around the project, and we've been making really good progress. The surface well location has been selected. You can see here, it's centered on a naturally flat and clear area in the Central Valley of the Qara Dagh Mountain, as you can see from the satellite image, which really limits the amount of civil work required, so environmentally, light touch. Ahead of breaking ground with civils, our environmental social health impact assessment baseline has been completed, and the report is ready for submission to the MNR. Tenders for civil works have been submitted and are currently being evaluated.

So what next? Well, the next big milestone on that QD-2 well delivery path is to secure a rig, which is well under way. Then armed with the environmental approvals, we start to move through the civils activity in readiness to mobilize the rig to site and spud the QD-2 well. Again, as we speak to you over the coming months, expect to see green for go lighting up the milestone tracker outlined here, culminating in that Q2 2020 spud.

Always good, of course, to start with the end in mind. In this case, we're drilling the QD-2 well to prove commerciality of oil to surface. And in so doing, step through the stage-gate to early production.

Okay. Moving on now to the exploration end of our pre-production portfolio. The aspiration for our legacy African exploration assets remains long-term reserves replacement at the lowest possible capital outlay.

We've now completed the interpretation of a very large 2018 vintage 2D seismic survey, with a current focus on the eastern blocks, SL10B13. What does our interpretation tell us? Well, it confirms our long-standing view of the hydrocarbon potential. And particularly, the important analogy with the prolific Yemini rift basins. A prospect on lead inventory has been matured, featuring multiple stacked targets generally well placed to access predicted hydrocarbon charge.

But we're not going to get ahead of ourselves. We'll stay true to our technical, commercial balance for this exploration end of the portfolio, which means that drilling that well that unlocks this tremendous potential should be with a partner, not conservative, just a pragmatic approach for a frontier, albeit some very exciting opportunity.

And then finally, turning our attention now to the opposite corner of Africa and the Sidi Moussa block in Morocco. So the Sidi Moussa 1 well drilled by Genel back in 2014 was, other than the what I call the old lady of the basin, Cap Juby, the only other well in the basin to recover oil to surface, so derisking the block sufficiently for us to continue to see a path to monetization. But again, at the lowest possible capital outlay. We achieved this by acquiring a multi-azimuth broadband 3D seismic survey last year in lieu of a well commitment. So the most cost effective and least financially exposed, but also most technically appropriate work program to unlock the potential of the block. Processing of that data, which is the only remaining work obligation, continues ahead of a forward plan to utilize this new and improved imaging to attract a partner before making any decision on future drilling of a well on the Nour Deep prospect. So like Somaliland, Morocco illustrates that our exploration is all about upside exposure, but not at the expense of financial exposure. Again, it's option value.

Back to you, Bill.


William George Higgs, Genel Energy plc - CEO & Director [4]


Thanks, Mike. Thank you, Mike. While we have a laser-like focus on cash generation, our primary concern remains, of course, the safety of our employees and those that work in our business, our value to the communities in which we work and minimizing the impact of the regions in which we operate.

We're very proud of our health and safety record, and it's now 4 years since our last lost time incident in Genel operated sites, so a total of 10 million manhours.

I'm cognizant of our role in the global environment. Our oil has made a tremendous difference socially in KRI, providing revenue, power and jobs. Our social initiatives have also had a real difference. And we've initiated a new -- we have a new initiatives under way in Qara Dagh that will -- we believe continuing to engage with the communities in that area.

Of course, ESG is becoming an increasing investor focus. And there's work for us to do to better report the many good things that we do, do as well as solidifying our actions in a formal ESG strategy. More to come on this topic, but I believe that there's intrinsic value in an oil and gas producer that operates ethically in the delivery of nonrenewable energy, which will remain a key part of the energy mix going forward.

Before we go to questions, I'd like to remind people of the key growth drivers over the next 12 months. We continue to generate material amounts of cash from our producing assets and our guidance remains unchanged. We are progressing Sarta and expect to have that contributing to our production story a year from now. We will spud QD-2 in the first half of next year and be on the path to demonstrating commercial flow rates.

Negotiations on Bina Bawi continue, and a successful conclusion will unlock significant value for Genel. Discussions will begin shortly with potential partners on Somaliland, and we continue, as Esa mentioned, to be actively pursue M&A.

We have plenty to achieve and are just getting started on delivering on our promise of being a world-class generator of shareholder value.

So now over to you for questions.


Questions and Answers


David Matthew Round, BMO Capital Markets Equity Research - Oil and Gas Research Analyst [1]


It's David Round from BMO. Can I start with Bina Bawi, and you mentioned some amendments to fiscal terms there. Would you mind just going over the concessions that KRG will be making in order to move that project forward? Is it just a scale down project. If it is, I know it's early stages, but can you say anything about CapEx at this stage? What proportion you expect to be externally financed? And what proportion will be covered by early oil. Sorry, I know that's got multiple parts. Just a very simple question, confidence today on that project versus previous years. And then maybe just finally, obviously, there have been some changes to the Oil Ministry. Just interested in your views, does that change anything for you?


William George Higgs, Genel Energy plc - CEO & Director [2]


Okay. I'll start, and then see if Esa has anything else to add to that. In a broader sense, I think the simple way to look at it, David, is that the PSC has some preferential terms to incentivize the development of gas, and those terms are also applied to oil in the asset. And so what we're looking to do is to leverage those preferential terms for oil as a funding mechanism for ourselves and the Ministry in the development of the midstream project, of which, of course, is the critical path to getting this funded. It is, as you also mentioned, too early to really talk sensibly about what the cost of that midstream project is. We do really need to go into [feed] to get that level of definition. But I think it's important to say that what we're very much aligned around is recognizing that it is the whole value chain that needs to work for investors to enable the project to go forward and the Ministry are clearly up to speed on that.

The scale of the project is really about making it investable, can we demonstrate that we can deliver gas into the market at an economic rate of value. And we believe that undertaking a smaller project to demonstrate that will be, again, a big -- 250 million standard cubic feet a day is still quite a large investment. But that small project will demonstrate, and then it will enable us to have this sort of cookie-cutter approach to expanding through trains of subsequent development, which is the right way to go with projects of this scale. Anything you want to add on the fiscal?


Esa T. Ikaheimonen, Genel Energy plc - CFO & Director [3]


Well, on concessions, I think one of the key ones is obviously the fact that the regulator being KRG actually becomes a co-investor in the midstream. It's the 50-50 split of the equity that we've agreed. So that, that I think is a rather major development actually and demonstrates that the Ministry are interested in exploring new ways of developing the industry. That to me is quite a big one. In terms of the funding, I think, Bill already mentioned that it's a little bit early to say how much of the funding can come from early oil because we don't know how much funding is needed because of the CapEx uncertainty. But if you think about a sort of current best guestimate to CapEx, very significant part of the midstream funding would come from the early oil, which is a key funding mechanism for that piece and kind of underpinning the 50-50 split in equity.

In terms of the debt, I think at the moment, we've matured this project and demonstrated the sort of viability of it and gotten a bit further down the track. I see no reason why such an infrastructure project wouldn't attract more than 50% debt to it. And I think that 50% is probably a pretty conservative guestimate. Furthermore, we are not going to hold on to 50% of midstream equity forever. So we've been looking to farm that equity piece down to 10% to 20% max. Whether that happens during the first phase or whether we basically just get diluted as a result of adding new trains and new trains of capacity to midstream remains to be seen, but that's kind of the sort of direction of travel, if you like.


William George Higgs, Genel Energy plc - CEO & Director [4]


And on the government changes, obviously, we'll be working closely with the new government. It only just established itself. We see this as a great opportunity for the Prime Minister and to -- who's clearly wants to understand the hydrocarbon business in KRI. And the fact that Dr. [Ashlee] is still there an adviser to him in his new role, I think, helps to create that link that we need to get him up to speed as quickly as possible with the opportunity that Bina Bawi brings for getting the gas business further developed.


Joe Sutcliffe, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [5]


Joe Sutcliffe from Stifel. Couple of questions, if I may. First, on your more longer-term free cash flow allocation. If you could talk a bit more about that. So how are you looking to distribute that towards shareholder returns into the dividend growth and maybe further buybacks and dependent upon Bina Bawi and around, how are you looking to allocate your more longer-term organic investment? And how you see inorganic investment coming into the frame there?

And secondly, on your increase in receivables. We've touched upon the reshuffle in the administration. I just wondered if there was a delay at all on your April production and the $40 million increase in net cash, some more color on that would be great.


William George Higgs, Genel Energy plc - CEO & Director [6]


I'll hand this over to you, Esa.


Esa T. Ikaheimonen, Genel Energy plc - CFO & Director [7]


Yes. Let me start with payments. We're currently current with payments. So we've been paid for April as appropriate. So the payment issues as similar to what has been the case for the last 4 years. So there was a short-term temporary hiccup associated to as the operator also admitted to operator banking arrangements. And currently, we are fully current with payments, including the April payment.

In terms of the allocation of our capital, we call it balanced. Philosophy is balanced for a reason. So we try and balance between returning capital to shareholders and accelerating growth. There are some positives associated to that, that allow us to do that. And I was trying to explain those a little bit, the sort of robustness of that cash flow and the way the PSC mechanisms help right now. So we are in that fortunate position where we can actually do both. We can grow the company at an accelerated pace, and we can return meaningful amounts of capital to our shareholders, feeling comfortable about that combination. So that's a good thing.

In terms of returning capital to shareholders, dividend is clearly the vehicle. And so buyback is a bit more opportunistic, and it's a much smaller scale at this moment in time. We considered both earlier this year before we announce the dividend policy and clearly concluded that dividend fits our company better than a large-scale buyback program.

So we're talking about a program that is still ongoing. We've got a fair amount of that Board authorization left to buy more shares if we wanted to, going forward. But we'll remain opportunistic, and we buy shares as and when we feel it's compelling enough to basically to complement the dividend story. But dividend is the dominant vehicle to return capital to our shareholders. The priorities are balanced, but unchanged. We certainly want to grow the company, and we are very, very much driven and focused towards that.

So if you like, that still perhaps slightly the preferred allocation methodology, organic, inorganic. We are very value-driven in making those choices. The good thing about our existing portfolio is that our organic portfolio actually represent value creation opportunities that are very, very hard to find elsewhere. It's a fortunate place to be because we can allocate a very large amounts of capital, particularly if we assume that Sarta or if we will see that Sarta and Qara Dagh, for instance, become successful and we make a breakthrough commercial arrangement with the government on Bina Bawi. We've got a wonderful portfolio to invest in. And as a matter of fact, actually having a fair amount of firepower to invest in those and accelerate them to become major production or cash generators makes perfect sense because the value is better than what we find elsewhere.

But it doesn't mean that we wouldn't do M&A. We will complement organic within inorganic as and when the opportunity comes. But a little bit less desperate to do M&A, I guess, currently than we were maybe a year ago before Sarta and Qara Dagh and when Bina Bawi was more uncertain than it is today.


William George Higgs, Genel Energy plc - CEO & Director [8]


And I think the key thing there is as Esa says is that we can accelerate the growth of Genel because of the existing strength of the balance sheet and because of our philosophy to how we look to grow. We do have a rich portfolio, but we're not committing -- overcommitting capital to develop that portfolio. We were very much focused on making sure that we manage the capital deployment in a disciplined way, and we look for any new opportunities that come in the portfolio to have exactly the same shape.

Any other questions?


Thomas Henry Martin, Numis Securities Limited, Research Division - Analyst [9]


Thomas Martin, Numis. Could ask, first of all, maybe for Mike. And on the Qara Dagh well, can you just remind us of what the key risks associated with that well are? And can I come back to the Bina Bawi midstream financing sort of area and just ask, in your discussions with the KRG, have you had commitment or indications that the KRG is willing to invest significant amount of equity for its share of the midstream? Or is their desire to fund it through proceeds from the oil portion? I guess they get extra proceeds because they get a tax stake as well as the rest of it.


Mike Adams, Genel Energy plc - Technical Director & PDMR [10]


So Qara Dagh, I probably wouldn't call it risk, I'd call uncertainty. But I think the key uncertainty that we're trying to address with that well is probably around reservoir effectiveness. So reservoir deliverability. So it's actually a very good link back into the primary objective of the well, if you like, which is to prove up commercial flow rates to serve this. So I would say that's the key uncertainty associated with that. Our sort of targets for that well, if we were able to convert the kind of 100 to 200 barrels per day of QD-1 into a kind of 1,000 to 2,000 barrels per day world on Qara Dagh 2, we know we're kind of at the races and we start have the makings of a project. But I would also say, it's also -- we shouldn't lose track with the fact that, that one is appraising the volume as well. So we should let the well do its job and appraised for the size of the price as well.


William George Higgs, Genel Energy plc - CEO & Director [11]


And Thomas, on Bina Bawi, it's -- I think it's one of the good things about where we've got to on this idea of an integrated oil and gas Phase 1 development because very much, it does fit our business model is the idea of using the returns from the Bina Bawi oil development as a source of funding. And probably more importantly, as a source of security, and that, that is aligned -- we're both aligned on that. So it becomes something that both MNR or KRG and Genel can be aligned on the benefits that we jointly get from that early production. That's very helpful, obviously, in getting approval to move that forward. But it will still require our expectations, notwithstanding the fact we've actually got to go and do a fair amount of engineering before we figure out what this plant is going to get cost. But our expectations are that it still would require a capital contribution directly from KRG, and they've given us that indication they're willing to do so.


Thomas Henry Martin, Numis Securities Limited, Research Division - Analyst [12]


Okay. Just double check one bit with Mike. Do you have visibility with regards to the fracture network at the Qara Dagh 2 location from seismic? Is that something you think you can see pre-drilling?


Mike Adams, Genel Energy plc - Technical Director & PDMR [13]


Yes, not really from seismic more from our regional understanding, understanding the stress fields. So really, that Qara Dagh 2 well, one of the key things that's trying to do is to drill a trajectory, which is appropriate to intersect in those productive fractures. The Qara Dagh 1 well was a vertical well. Clearly not the best for intersecting what will be vertical and subvertical fracture. So we're looking to intersect the reservoir and those fractures at a kind of 40 to 50 degrees angle, which we believe will be optimal and get ourselves every chance of getting that deliverability.


Daniel Slater, Arden Partners plc., Research Division - Research Analyst [14]


Dan Slater from Arden. Just a couple of questions. One, on Sarta. Obviously, we're starting with a small project, 30 million barrels cash generated, et cetera. But we're talking about much larger resource numbers going forward. And so when are we going to get a bit more detail on how we're going to access first of all, I suppose, that 450 million in the Jurassic and then perhaps proving up some of the rest of it to get to 500 million barrels? So when are we going to get details around those potential work programs? And the other one, just on the gas project side, I entirely get why you're focusing on the Bina Bawi and the oil, et cetera. It all makes very, very good sense. I'm just wondering if we should be thinking anything at all about Miran or is that liable to sort of wander off into the distance, perhaps?


William George Higgs, Genel Energy plc - CEO & Director [15]


Mike, do you want to take the Sarta?


Mike Adams, Genel Energy plc - Technical Director & PDMR [16]


Yes. Sarta, I'll probably start by answering in quite a sort of general way, which is that the way we need to look at this project is very much focused on that phased approach. So I've got this little acronym, which is PAD. So Pilot, which is 2020, which is the first oil; Appraise in 2021, which is perhaps 2 to 3 appraisal wells and then Develop in 2022 and beyond, which is really when we have gone past the point at the end of 2021, seeing from the dynamic data we've gathered in that appraisal program what the expansion program out should look like. So that expansion program into 2022 and beyond is targeting exactly the 150 million barrels case that you're talking about there. And we just need to be a little bit flexible and agile so that we react to the dynamic data that we're gathering as part of the pilot.

Ultimately, it's that pilot dynamic data, which is going to tell us what the and what the optimal production rates are for those wells. And then really dictate what that of the A, of the Appraisal of the acronym there looks like, so whether the next one is a development well, whether it's an appraisal well. If it's an appraisal well, it could be probably 1 of 2 different flavors. It could be appraising for the vertical extent in the context or it could be more of an appraisal which is addressing the area and extent of the accumulation. So it's really all about taking that phased approach, reacting to the data that we see and then stepping out towards what we hope in shallow will be a very nice success case and chasing the remainder of those resources.


William George Higgs, Genel Energy plc - CEO & Director [17]


On the question on Miran, I think the way that we look at it is, as I mentioned, the first phase of development of Bina Bawi is the right place of start, as you say. It will demonstrate that we can economically deliver these gas molecules into the market. Once you can demonstrate that the approach of trains of subsequent development absolutely applies directly into Miran as well. So our view is we can crack the nut and attract capital investment capital into the midstream, which is the place that needs to happen. If we can do that through the first phase, then we can start looking at the second phase of Bina Bawi and then the first phase at Miran. And the 2 projects will then expand accordingly.


Malcolm Graham-Wood, Hydrocarbon Capital - Founding Partner [18]


Malcolm Graham-Wood with Hydrocarbon Capital. You mentioned a couple of times in the presentation and in the RNS that free cash flow was 20% of market cap. Now whether that was slightly tongue in cheek or whether you felt that that was a number that you could do something about at the flick a dial somewhere or how you can change that particular dial on your numbers.


William George Higgs, Genel Energy plc - CEO & Director [19]


I'll maybe give a flippant response and then hand it over to Esa. Obviously, there is one parameter we do change, which is the amount of free cash flow we generate. So we are expecting it to change. Certainly, in the amount of free cash flow we're going to have in the company. Hopefully, that the yield doesn't go up as a consequence of that. That one we'd like to see going in another direction, but Esa?


Esa T. Ikaheimonen, Genel Energy plc - CFO & Director [20]


I can't really add anything to that. That's it.


William George Higgs, Genel Energy plc - CEO & Director [21]


That's it. No more questions? Great. Thank you very much. Thanks for coming.