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REG - Gulf Keystone Petrol - 2022 Half Year Results Announcement

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RNS Number : 8474X  Gulf Keystone Petroleum Ltd.  01 September 2022

 

 

1 September 2022

 

 

Gulf Keystone Petroleum Ltd. (LSE: GKP)

("Gulf Keystone", "GKP", "the Group" or "the Company")

 

2022 Half Year Results Announcement

 

Gulf Keystone, a leading independent operator and producer in the Kurdistan
Region of Iraq, today announces its results for the half year ended 30 June
2022.

 

Jon Harris, Gulf Keystone's Chief Executive Officer, said:

"With the strengthening oil price and increased production, we have delivered
strong profitability and cash flow generation in the first half of the year.
As we progress towards approval of the Field Development Plan, we have
continued to develop the Shaikan Field and recently resumed drilling with the
spud of SH-16. We have paid a record $190 million of dividends in 2022 and are
pleased today to announce an incremental interim dividend of $25 million,
increasing total dividends declared this year to $215 million. While
delivering a sector leading dividend yield, we have also maintained a strong
balance sheet, redeeming our $100 million bond leaving the Company debt free.

Looking ahead to the rest of the year, we are focused on progressing towards
FDP approval and achieving our production and opex guidance as we continue to
optimise production from the field while maintaining a rigorous focus on
costs. We have raised our 2022 capex guidance to $110-$120 million as we have
added the drilling of SH-16 and are progressing initial procurement activities
for the installation of water handling facilities, which will enable us to
unlock additional production from our wells in the future.

We remain focused on balancing investment in growth with shareholder returns.
Continued robust cash generation provides flexibility to consider funding
future capital expenditures and further distributions to shareholders, while
preserving adequate liquidity."

 

Highlights to 30 June 2022 and post reporting period

 

Operational

 

·      Strong safety performance, with no Lost Time Incident ("LTI")
recorded for 315 days

·      2022 year to date gross average production increased by 3.6% to
c.45,000 bopd as compared to the FY 2021 average of 43,440 bopd

·      Continued to progress delivery of our 2022 work programme:

o  SH-15 drilled and brought online in April 2022 in record time

o  SH-16 (formerly SH-M) and SH-N well pad completed in preparation for
resumption of drilling

o  Well workovers and interventions completed on two wells to optimise
production rates

o  Progressing preparatory work for the expansion of the production
facilities, including procurement activities for the installation of water
handling capacity

·      Resumed drilling activities late August with the spud of SH-16:

o  Targeting production start-up into PF-2 towards the end of the year

 

Financial

 

·      Free cash flow more than doubled to $177.3 million (H1 2021:
$66.7 million), driven by the strengthening oil price and continued production
growth, enabling the Company to deliver against its strategic commitment of
balancing investment in growth with shareholder returns

·      Dividends declared of $215 million in 2022, providing
shareholders with a sector-leading dividend yield of 36% based on GKP's
closing price on 30 August 2022

·      Significant increase in Adjusted EBITDA and profitability in H1
2022:

o  Adjusted EBITDA up 122% to $208.6 million (H1 2021: $93.8 million)

o  Profit after tax up 151% to $162.8 million (H1 2021: $64.8 million)

o  Realised price up 93% to $84.3/bbl (H1 2021: $43.7/bbl)

o  Gross average production increased 3% to 44,941 bopd (H1 2021: 43,516
bopd)

o  Revenue up 102% to $263.6 million (H1 2021: $130.7 million)

o  Gross Opex per barrel of $2.9/bbl (H1 2021: $2.4/bbl), at low end of 2022
guidance of $2.9-$3.3/bbl

·      Net capex of $41.8 million (H1 2021: $14.1 million), primarily
related to the drilling of SH-15, well interventions and workovers, well pad
construction, procurement of flowlines and plant expansion activities

·      $354.4 million net to GKP received year to date from the
Kurdistan Regional Government ("KRG") for crude oil sales and revenue arrears,
with the arrears balance related to the November 2019 to February 2020
invoices fully recovered

·      $100 million outstanding bond redeemed in August, leaving the
Company debt-free and eliminating annual interest costs of $10 million

·      Robust balance sheet maintained with cash balance of $112.0
million at 31 August 2022

 

Outlook

 

·    2022 gross average production guidance reiterated at 44,000-47,000
bopd

o  Continuing to optimise production through prudent management of existing
well stock, delivery of well workover and intervention programme and addition
of SH-16

·      Gross Opex guidance of $2.9-$3.3/bbl remains unchanged

·      Increasing 2022 net capex guidance from $85-$95 million to
$110-$120 million

o  Primarily driven by the drilling of SH-16 and initial procurement
activities related to the installation of water handling capacity

·      While timing of Field Development Plan ("FDP") approval remains
uncertain, we continue to engage with the Ministry of Natural Resources
("MNR") towards project sanction and are progressing the tendering process for
the Gas Management contract. We are also monitoring the potential impact of
global supply chain pressures and logistical challenges on the costs and
schedule of the FDP

·      We continue to monitor the long running dispute between the
Federal Iraqi Government and the KRG on the management of oil and gas assets
in Kurdistan. Our operations currently remain unaffected

 

Shareholder distributions

 

·      The Company has announced an ordinary dividend policy of at least
$25 million per year and, with free cash flow, is committed to maximising
distributions taking into account various factors, including investment levels
required to achieve production targets, deliver profitable growth and satisfy
PSC obligations, and preserve adequate liquidity to manage geopolitical, KRG
payment and market uncertainties

·      Today we are declaring an interim dividend of $25 million,
increasing total dividends declared in 2022 to $215 million:

o  $25 million interim dividend is equivalent to 11.561 US cents per Common
Share of the Company and is expected to be paid on 7 October 2022, based on a
record date of 23 September 2022 and ex-dividend date of 22 September 2022

·      Assuming timely payment of invoices and continuing strong oil
prices, we expect continued robust cash flow generation, which would provide
flexibility to consider funding future capital expenditures and further
distributions to shareholders, while preserving adequate liquidity

·      With continued progress towards implementing the FDP, the Company
expects to firm up the future estimated timing and levels of investment and
review the dividend policy

 

Investor & analyst presentation

 

Gulf Keystone's management team will be presenting the Company's 2022 Half
Year Results at 10:00am (BST) today via live audio webcast:

 

https://stream.brrmedia.co.uk/broadcast/62f6364cb629a70556524626
(https://stream.brrmedia.co.uk/broadcast/62f6364cb629a70556524626)

 

 

The information contained within this announcement is deemed by the Company to
constitute inside information as stipulated under the Market Abuse Regulation
(EU) no. 596/2014 (as it forms part of domestic law by virtue of the European
Union (Withdrawal) Act 2018).

 

 

Enquiries:

 

 Gulf Keystone:                           +44 (0) 20 7514 1400
 Aaron Clark, Head of Investor Relations  aclark@gulfkeystone.com (mailto:aclark@gulfkeystone.com)

 FTI Consulting                           +44 (0) 20 3727 1000
 Ben Brewerton                            GKP@fticonsulting.com (mailto:GKP@fticonsulting.com)

 Nick Hennis

 

or visit: www.gulfkeystone.com (http://www.gulfkeystone.com)

 

Notes to Editors:

 

Gulf Keystone Petroleum Ltd. (LSE: GKP) is a leading independent operator and
producer in the Kurdistan Region of Iraq. Further information on Gulf Keystone
is available on its website www.gulfkeystone.com
(http://www.gulfkeystone.com/)

 

Disclaimer

 

This announcement contains certain forward-looking statements that are subject
to the risks and uncertainties associated with the oil & gas exploration
and production business. These statements are made by the Company and its
Directors in good faith based on the information available to them up to the
time of their approval of this announcement but such statements should be
treated with caution due to inherent risks and uncertainties, including both
economic and business factors and/or factors beyond the Company's control or
within the Company's control where, for example, the Company decides on a
change of plan or strategy. This announcement has been prepared solely to
provide additional information to shareholders to assess the Group's
strategies and the potential for those strategies to succeed. This
announcement should not be relied on by any other party or for any other
purpose.

 

 

CEO review

 

In the first six months of the year, we delivered record production and free
cash flow, demonstrating the leverage the low cost Shaikan Field has to
increases in the oil price. We are focused on delivering our strategy,
balancing investment in the field while rewarding our shareholders. This year,
we have delivered a sector-leading dividend yield. We continue to make good
progress towards FDP approval and have significant financial flexibility after
the recent repayment of our $100 million bond leaving us debt-free.

 

As ever, safety has been the bedrock of our performance and I'm very pleased
to report we have been operating for 315 LTI-free days, even as we continue to
increase activity.

 

We also remain focused on delivering our broader sustainability strategy
priorities. We are progressing the Gas Management Plan tendering process,
which underpins our target of more than halving our emissions intensity by
2025. We are investing heavily in local employment and suppliers. We have also
completed a number of impactful local community projects this year, notably
developing and funding a hydroponic fodder facility to support local
agriculture, developing local skills and providing equipment to enable
business start-ups with our NGO partners. In addition, we are preparing to
 provide enhanced grain seed to over 500 local farmers to improve crop
yields.

 

Gross average production in 2022 has averaged c.45,000 bopd, an increase
compared to 2021 gross average production of 43,440 bopd. Current investment
activity is focused on drilling, optimising production and preparing for
future production growth with water handling capability.

 

SH-15 was drilled in record time and brought online in April. To date, the
well workover and intervention programme has optimised production from two
wells. We are also progressing preparatory activities for the expansion of the
production facilities, including initial procurement activities for water
handling facilities, and we recently completed the construction of the well
pad that will be used to drill both SH-16 (formerly SH-M) and SH-N. SH-16 was
spudded in August and will, on completion, be tied into PF-2.

 

As per previous announcements, we continue to monitor the long running dispute
between the Federal Iraqi Government and the KRG on the management of oil and
gas assets in Kurdistan, including any potential restrictions placed on
service contractors by the Iraqi Ministry of Oil and exports of crude oil. Our
operations currently remain unaffected and we continue to work closely with
the KRG, our advisers and other stakeholders to protect the Company's
interests.

 

Looking ahead to the remainder of 2022, we are on track to meet our gross
average production guidance of 44,000 - 47,000 bopd and our gross Opex
guidance of $2.9-$3.3/bbl. We are also increasing our net Capex guidance from
$85-$95 million to $110-$120 million, primarily reflecting the addition of
SH-16 and initial procurement activities related to the installation of water
handling capacity.

 

We continue to maintain an active dialogue with the MNR and, while timing
remains uncertain, we are progressing towards approval of the FDP. With
continued progress towards implementing the FDP, the we expect to firm up the
future estimated timing and levels of investment and review our dividend
policy, which we understand is critical to our shareholders. In the meantime,
with timely payments and continuing strong cash flow we will continue to
consider funding future capex and additional distributions, while preserving
adequate liquidity.

 

I would like to thank our teams in Kurdistan and the UK for their continued
commitment to GKP and hard work in the year to date. We are excited about the
future and the whole organisation is focused on the sustainable development of
the Shaikan Field for the benefit of all stakeholders.

Jon Harris

Chief Executive Officer

 

 

Operational Review

I'm delighted to have joined Gulf Keystone as Chief Operating Officer. In my
first four months at the Company, I have been impressed by the ability and
ambition of our teams in Kurdistan and the UK and the opportunity we have to
drive growth and value from the Shaikan Field for the benefit of our
stakeholders. I am excited about the path ahead.

 

Our operational activity in the first half of the year has focused on safely
drilling and ramping up new wells, optimising production through the delivery
of the well workover and intervention programme and preparing our field
infrastructure for future production growth. As operational activity continues
to increase, we remain focused on our strong safety performance. To date, we
have achieved 315 days without an LTI.

 

Gross average year to date production from the Shaikan Field has been c.45,000
bopd, slightly higher than gross average production of 43,440 bopd in 2021.
Production has been supported by the ramp up of new wells, notably SH-13 and
SH-14 in January and recently SH-15, offsetting natural field decline. In
addition, output has been constrained ahead of the planned installation of
water handling as we prudently manage wells to avoid traces of water.

 

After completion of the pad that will be used to drill both SH-16 and SH-N, we
were pleased to spud SH-16 late August and are targeting production start-up
of the well towards the end of the year into PF-2.

 

We are also progressing preparatory activities for the expansion of the
production facilities, including the installation of water handling. While the
timing of installation remains uncertain, given we are in the initial stages
of procurement and due to ongoing equipment lead time pressures in a supply
constrained market, we expect that the installation of water handling
facilities will enable increased production from existing wells.

 

This activity is enabling us to maintain momentum as we work towards approval
of the FDP. We are working closely with the MNR to optimise the FDP and we
submitted a revised plan in June. Simultaneously, we have been progressing the
tender process for the Gas Management Plan. We are closely monitoring the
market environment and potential impact of global supply chain pressures and
logistical challenges on the FDP's costs and schedule.

 

Looking ahead to the rest of the year, we remain focused on delivering our
gross average production guidance of 44,000-47,000 bopd as we continue to
optimise production from our existing wells and drill SH-16.

John Hulme

Chief Operating Officer

 

Financial Review

Key financial highlights

 

                                                     Six months ended  Six months ended  Year ended 31 December 2021

                                                     30 June 2022      30 June 2021
 Gross average production(1)                 bopd    44,941            43,516            43,440
 Dated Brent(2)                             $/bbl    107.6             64.9              70.8
 Realised price(1,3)                         $/bbl   84.3              43.7              49.7
 Revenue                                     $m      263.6             130.7             301.4
 Operating costs                             $m      18.9              15.0              34.4
 Gross operating costs per barrel(1)         $/bbl   2.9               2.4               2.7
 Other general and administrative expenses   $m      6.1               5.4               13.6
 - Incurred in relation to Shaikan Field     $m      2.1               2.1               4.1
 - Corporate G&A                             $m      4.0               3.3               9.5
 Share option expense                       $m       11.5              6.5               8.5
 Adjusted EBITDA(1)                          $m      208.6             93.8              222.7
 Profit after tax                            $m      162.8             64.8              164.6
 Basic earnings per share                    cents   75.9              30.5              77.1
 Revenue and arrears receipts(1)             $m      272.4             106.4             221.7
 Net capital expenditure(1)                 $m       41.8              14.1              50.8
 Free cash flow(1)                          $m       177.3             66.7              122.2
 Dividends(4)                               $m       189.8             50.0              100.0
 Cash and cash equivalents                  $m       231.8             189.5             169.9
 Face amount of the Notes                   $m       100.0             100.0             100.0
 Net cash(1)                                $m       131.8             89.5              69.9

 

(1.      ) Gross average production, realised price, gross operating
costs per barrel, Adjusted EBITDA, net capital expenditure, revenue receipts,
free cash flow and net cash are either non-financial or non-IFRS measures and,
where necessary, are explained in the non-IFRS measures section.

(2.      ) Weighted average GKP sales volume price.

(3.      ) Realised price excludes pipeline tariff adjustments in
relation to prior periods.

(4.      ) Includes both paid and declared dividends at period end. All
declared dividends at period end have since been paid.

 

In the first six months of 2022, the increase in oil price and continued
production growth more than doubled profit after tax and almost tripled free
cash flow. The Company's strong financial performance enabled further
investment in the Shaikan Field and the declaration of $190 million of
dividends, a sector leading dividend yield. In August 2022, Gulf Keystone
repaid its outstanding $100 million bond leaving the Company debt-free with
significant financial flexibility. Also, today we are pleased to announce an
additional $25 million interim dividend.

 

Adjusted EBITDA

 

Adjusted EBITDA grew 122% in H1 2022 to $208.6 million (H1 2021: $93.8
million), driven by a 66% increase in the oil price and higher production.

 

Gross average production was 44,941 bopd in H1 2022, up 3% from 43,516 bopd in
H1 2021. With the Company's leverage to the strengthening of Dated Brent from
an average of $64.9/bbl in H1 2021 to $107.6/bbl in H1 2022, the realised
price per barrel almost doubled to $84.3/bbl. The increase in the realised
priced was slightly offset by an increase in the average discount to Brent
from $21.2/bbl in H1 2021 to $23.3/bbl in H1 2022, due to adjustments to
pipeline tariffs proposed by the KRG, which are now linked in part to Dated
Brent.

 

The stronger oil price and increased production resulted in a doubling of
revenue in H1 2022 to $263.6 million (H1 2021: $130.7 million), which was
partially offset by a corresponding doubling in capacity building payments to
$20.5 million (H1 2021: $10.3 million), a component of the KRG's entitlement
from the Shaikan Field.

 

Gulf Keystone remains committed to maintaining a low-cost structure. In line
with the Company's 2022 guidance range of $2.9-$3.3/bbl, gross operating costs
per barrel were $2.9/bbl in H1 2022 (H1 2021: $2.4/bbl). The increase in
operating costs in H1 2022 to $18.9 million (H1 2021: $15.0 million) is
primarily due to planned maintenance activities, additional staff to manage
increased production activity and higher fuel costs.

 

Other general and administrative expenses (G&A), comprising Shaikan Field
and corporate support costs, were higher in H1 2022 at $6.1 million (H1 2021:
$5.4 million), reflecting increased staffing levels to manage increasing
activity levels. Share option expense in the period increased by $5.0 million,
principally due to the final contractual exercise of share option entitlements
by former Directors under the Value Creation Plan ("VCP").

 

Profit after tax

 

Profit after tax in H1 2022 increased to $162.8 million (H1 2021: $64.8
million) driven by the increase in Adjusted EBITDA, slightly offset by a
higher depreciation, depletion and amortisation ("DD&A") expense
of $39.5 million (H1 2021: $28.2 million) due to increased production,
accelerated cost recovery as result of recent high oil prices, and updated
future capital cost estimates.

 

Cash flow

 

Cash increased in the period from $169.9 million at 31 December 2021 to $231.8
million at 30 June 2022.

 

The Company generated cash from operating activities of $222.3 million in H1
2022, up from $77.8 million in H1 2021 principally due to the increase in
Adjusted EBITDA.

 

In H1 2022, Gulf Keystone received revenue receipts from the KRG of $272.4
million net to GKP for crude oil sales related to the September 2021 to March
2022 invoices and repayment of arrears outstanding from November 2019 to
February 2020 invoices, which were fully recovered with payment of the March
2022 invoice. In the second half of 2022, the Company has so far received a
further $82.0 million net to GKP for crude oil sales related to the payment of
the April and May 2022 invoices.

 

In the first half of the year, the Company invested net capital expenditure of
$41.8 million (H1 2021: $14.1 million), primarily related to drilling and
completing SH-15, well and workover activity, wellsite preparation and plant
expansion.

 

Free cash flow generation was $177.3 million in H1 2022, almost triple the
prior year (H1 2021: $66.7 million), enabling the Company to continue to
deliver against its commitment to balance investment in growth with returns to
shareholders. Year to date the Company has paid $190 million of dividends and
today we have declared an additional interim dividend of $25 million,
resulting in total declared dividends of $215 million which equates to a
sector leading yield of 36% based on the closing share price on 30 August
2022.

 

In early August 2022, the Company redeemed the $100 million of notes
outstanding leaving the Company debt free with significant financial capacity.
The Company has a robust balance sheet with cash and cash equivalents of
$112.0 million at 31 August 2022.

 

As at 30 June 2022, there were $260 million gross of unrecovered costs,
subject to potential cost audit by the KRG. The R-factor, calculated as
cumulative gross revenue receipts of $1,838 million divided by cumulative
gross costs of $1,629 million, was 1.13. The unrecovered cost pool and
R-factor are used to calculate monthly cost oil and profit oil entitlements,
respectively, owed to the Company from crude oil sales.

 

Gulf Keystone performed a cash flow and liquidity analysis based on which the
Directors have a reasonable expectation that the Company has adequate
resources to continue to operate for the foreseeable future. Therefore, the
going concern basis of accounting is used to prepare the financial statements.

 

Outlook

We are now planning to invest net capital expenditure of $110-$120 million in
2022. The increase from previous guidance of $85-$95 million is primarily
driven by the drilling of SH-16 and early procurement activities related to
the installation of water handling capacity.

 

We remain on track to deliver gross Opex guidance of $2.9-$3.3/bbl.

 

While timing of FDP approval remains uncertain, we continue to progress
towards project sanction and award of the Gas Management Plan contract,
against the backdrop of global supply chain cost pressures and logistical
challenges. With continued progress, the Company expects to firm up future
estimated capital expenditure and, in turn, review financing requirements and
dividend policy.

 

Assuming timely payment of invoices and continuing strong oil prices, we
expect continued strong cash flow generation, which would provide flexibility
to consider funding future capital expenditure and further distributions to
shareholders, while preserving adequate liquidity.

 

 

Ian Weatherdon

Chief Financial Officer

 

 

Non-IFRS measures

 

The Group uses certain measures to assess the financial performance of its
business. Some of these measures are termed "non-IFRS measures" because they
exclude amounts that are included in, or include amounts that are excluded
from, the most directly comparable measure calculated and presented in
accordance with IFRS, or are calculated using financial measures that are not
calculated in accordance with IFRS. These non-IFRS measures include financial
measures such as operating costs and non-financial measures such as gross
average production.

 

The Group uses such measures to measure and monitor operating performance and
liquidity, in presentations to the Board and as a basis for strategic planning
and forecasting. The directors believe that these and similar measures are
used widely by certain investors, securities analysts and other interested
parties as supplemental measures of performance and liquidity.

 

The non-IFRS measures may not be comparable to other similarly titled measures
used by other companies and have limitations as analytical tools and should
not be considered in isolation or as a substitute for analysis of the Group's
operating results as reported under IFRS. An explanation of the relevance of
each of the financial non-IFRS measures and a description of how they are
calculated is set out below. Additionally, a reconciliation of the financial
non-IFRS measures to the most directly comparable measures calculated and
presented in accordance with IFRS and a discussion of their limitations is set
out below, where applicable. The Group does not regard these non-IFRS measures
as a substitute for, or superior to, the equivalent measures calculated and
presented in accordance with IFRS or those calculated using financial measures
that are calculated in accordance with IFRS.

 

Gross operating costs per barrel

 

Gross operating costs are divided by gross production to arrive at gross
operating costs per bbl.

 

                                               Six months     Six months     Year ended

                                               ended          ended          31 December

                                               30 June 2022   30 June 2021   2021
 Gross production (MMstb)                      8.1            7.9            15.9
 Gross operating costs ($ million)(1)          23.6           19.1           43.0
 Gross operating costs per barrel ($ per bbl)  2.9            2.4            2.7

 

(1)Gross operating costs equate to operating costs (see note 5) adjusted for
the Group's 80% working interest in the Shaikan Field.

 

Adjusted EBITDA

 

Adjusted EBITDA is a useful indicator of the Group's profitability, which
excludes the impact of costs attributable to income tax (expense)/credit,
finance costs, finance revenue, depreciation and amortisation and impairment
of receivables.

 

                                       Six months     Six months     Year ended

                                       ended          ended          31 December

                                       30 June 2022   30 June 2021   2021
                                       $ million      $ million      $ million

 Profit after tax                      162.8          64.8           164.6
 Finance costs                         5.6            5.7            11.4
 Finance revenue                       (0.1)          (0.4)          (0.4)
 Tax expense/(credit)                  (0.2)          (0.0)          (0.9)
 Depreciation of oil & gas assets      39.5           28.2           54.1
 Other depreciation and amortisation   0.5            0.5            1.0
 Impairment of receivables             0.4            (5.0)          (7.1)
 Adjusted EBITDA                       208.6          93.8           222.7

 

 

Net capital expenditure

 

Net capital expenditure is the value of the Group's additions to oil and gas
assets excluding the change in value of the decommissioning asset and
movements in drilling and other equipment.

                                                                            Six months     Six months     Year ended

                                                                            ended          ended          31 December

                                                                            30 June 2022   30 June 2021   2021
                                                                            $ million      $ million      $ million
 Additions to oil & gas assets (note 11)                                    41.8           14.1           46.2
 Decrease of drilling and other equipment classified as oil and gas assets  -              -              4.6
 Net capital expenditure                                                    41.8           14.1           50.8

 

Net cash

 

Net cash is a useful indicator of the Group's indebtedness and financial
flexibility because it indicates the level of cash and cash equivalents less
cash borrowings within the Group's business. Net cash is defined as cash and
cash equivalents less current and non-current borrowings and non-cash
adjustments. Non-cash adjustments include unamortised arrangement fees and
other adjustments.

                              Six months     Six months     Year ended

                              ended          ended          31 December

                              30 June 2022   30 June 2021   2021
                              $ million      $ million      $ million
 Cash and cash equivalents    231.8          189.5          169.9
 Outstanding Notes (note 14)  (99.4)         (98.9)         (99.1)
 Unamortised issue costs      (0.6)          (1.1)          (0.9)
 Net cash                     131.8          89.5           69.9

 

Free cash flow

 

Free cash flow represents the Group's cash flows, before any dividends or
share buy-backs.

                                               Six months     Six months     Year ended

                                               ended          ended          31 December

                                               30 June 2022   30 June 2021   2021
                                               $ million      $ million      $ million
 Net cash generated from operating activities  222.3           78 .0         178.6
 Net cash used in investing activities         (44.7)         (11.0)         (55.7)
 Payment of leases                             (0.3)          (0.4)          (0.7)
 Free cash flow                                177.3          66.7           122.2

Principal risks & uncertainties

 

The Board determines and reviews the key risks for the Group on a regular
basis. The principal risks, and how the Group seeks to mitigate them, for the
second half of the year are consistent with those detailed in the management
of principal risks and uncertainties section of the 2021 Annual Report and
Accounts. The principal risks are listed below:

 

 Strategic                                                      Operational                             Financial
 Political, social and economic instability                     Health, Safety and Environment ("HSE")  Liquidity and funding capability
 Disputes regarding title or exploration and production rights  Gas flaring                             Oil revenue payment mechanism
 Business conduct and anti-corruption                           Security                                Commodity prices
 Export route availability                                      Field delivery
 Economic sanctions impacting the Group                         Reserves
 Stakeholder misalignment
 Climate change and sustainability
 Global pandemic (e.g. COVID-19)
 Cyber security

 

The Company previously reported that the Iraqi Federal Supreme Court ("FSC")
in February 2022 had ruled that the Kurdistan Oil and Gas Law ("KROGL") was
unconstitutional and that the Iraqi Ministry of Oil had commenced proceedings
in the Baghdad Commercial Court against International Oil Companies ("IOCs"),
including Gulf Keystone, operating in the Kurdistan Region of Iraq ("KRI")
seeking to nullify the Production Sharing Contracts ("PSCs") issued under the
KROGL. The Company understands that the Baghdad Commercial Court has yet to
reach any determination on the case involving Gulf Keystone, and that the MNR
has sought to join the case as a third party. The Company further understands
that the Iraqi Ministry of Oil has sought to inhibit service contractors from
operating in both Federal Iraq and the KRI, advising that it will move to
"blacklist" any such contractor from Federal Iraq which seeks to operate in
both jurisdictions.

 

The dispute between the KRG and the Federal Iraqi Government on the management
of oil and gas reserves in the KRI has been the subject of a long running
dispute between them. The KRG has made repeated declarations that the KROGL is
validly constituted and that the PSCs issued continue to be valid and have
full effect. Furthermore, the KRG has initiated its own legal proceedings
against the Federal Iraqi Government in the Erbil Courts and there have been a
number of rulings which have affirmed the validity of the PSCs. Media reports
indicate that high level political discussions are ongoing between the KRG and
the Federal Iraqi Government with a view to resolving the matter.

 

The Company's operations in the Shaikan Field are currently unaffected but the
matter is being closely monitored, including any potential impact on the
restrictions placed on the export of crude oil, service contractors or any
other parties by the Iraqi Ministry of Oil. At this stage it is not reasonably
possible to predict the outcome of judicial proceedings or the ongoing
discussions between the KRG and the Federal Government of Iraq, nor is it
possible to predict any potential future impact on operations or the financial
performance of the Company pending resolution of the matter.

 

The Company is also aware of the ongoing arbitration case between the Federal
Government of Iraq and the Turkish Government on the management of the Iraq to
Turkey pipeline.

 

The Company's oil revenues are calculated according to an agreed formula with
the Kurdistan Regional Government.  It is possible that factors including,
but not limited to, crude quality, geopolitical events, global supply, and
production levels could impact, positively or negatively, the formula used in
making this calculation.

 

The Company monitors the effect of any economic sanctions imposed and the
potential impact, if any, these may have on the Company and its operations.
The Company believes it is not currently materially affected by any economic
sanctions but will continue to review this on an ongoing basis.

 

Responsibility statement

 

The Directors confirm that to the best of their knowledge:

 

a)   the condensed set of financial statements has been prepared in
accordance with UK-adopted IAS 34 'Interim Financial Reporting';

 

b)   the interim management report includes a fair review of the information
required by DTR 4.2.7R (indication of important events and their impact during
the first six months and description of principal risks and uncertainties for
the remaining six months of the year); and

 

c)   the interim management report includes a fair review of the information
required by DTR 4.2.8R (disclosure of related parties' transactions and
changes therein).

 

By order of the Board

 

Jon Harris

Chief Executive Officer

31 August 2022

 

INDEPENDENT REVIEW REPORT TO GULF KEYSTONE PETROLEUM LIMITED

Conclusion

We have been engaged by the Company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30
June 2022 which comprises the condensed consolidated income statement, the
condensed consolidated statement of comprehensive income, the condensed
consolidated balance sheet, the condensed consolidated statement of changes in
equity, the condensed consolidated cash flow statement and related notes 1 to
18.

Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 June 2022 is not prepared, in all
material respects, in accordance with United Kingdom adopted International
Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of
the United Kingdom's Financial Conduct Authority.

Basis for Conclusion

We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410 "Review of Interim Financial Information Performed by
the Independent Auditor of the Entity" issued by the Financial Reporting
Council for use in the United Kingdom (ISRE (UK) 2410). A review of interim
financial information consists of making inquiries, primarily of persons
responsible for financial and accounting matters, and applying analytical and
other review procedures. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would become aware
of all significant matters that might be identified in an audit. Accordingly,
we do not express an audit opinion.

As disclosed in note 2, the annual financial statements of the Group are
prepared in accordance with United Kingdom adopted international accounting
standards. The condensed set of financial statements included in this
half-yearly financial report has been prepared in accordance with United
Kingdom adopted International Accounting Standard 34, "Interim Financial
Reporting".

Conclusion Relating to Going Concern

Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for Conclusion section of this report,
nothing has come to our attention to suggest that the Directors have
inappropriately adopted the going concern basis of accounting or that the
Directors have identified material uncertainties relating to going concern
that are not appropriately disclosed.

This Conclusion is based on the review procedures performed in accordance with
ISRE (UK) 2410; however future events or conditions may cause the entity to
cease to continue as a going concern.

Responsibilities of the Directors

The Directors are responsible for preparing the half-yearly financial report
in accordance with the Disclosure Guidance and Transparency Rules of the
United Kingdom's Financial Conduct Authority.

In preparing the half-yearly financial report, the Directors are responsible
for assessing the Group's ability to continue as a going concern, disclosing
as applicable, matters related to going concern and using the going concern
basis of accounting unless the Directors either intend to liquidate the
Company or to cease operations, or have no realistic alternative but to do so.

Auditor's Responsibilities for the review of the financial information

In reviewing the half-yearly financial report, we are responsible for
expressing to the Company a conclusion on the condensed set of financial
statements in the half-yearly financial report. Our Conclusion, including our
Conclusion Relating to Going Concern, are based on procedures that are less
extensive than audit procedures, as described in the Basis for Conclusion
paragraph of this report.

Use of our report

This report is made solely to the Company in accordance with ISRE (UK) 2410.
Our work has been undertaken so that we might state to the Company those
matters we are required to state to it in an independent review report and for
no other purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company, for our review work,
for this report, or for the conclusions we have formed.

Deloitte LLP

Statutory Auditor

London, United Kingdom

31 August 2022

Condensed consolidated income statement

For the six months ended 30 June 2022

 

                                                    Notes  Six months     Six months     Year ended

                                                           ended          ended          31 December

                                                           30 June 2022   30 June 2021   2021

                                                           Unaudited      Unaudited      Audited
                                                           $'000          $'000          $'000

 Revenue                                            4      263,603        130,713        301,389
 Cost of sales                                      5      (79,129)       (53,516)       (111,721)
 Impairment (charge)/reversal on trade receivables  12     (427)          5,034          7,065
 Gross profit                                              184,047        82,231         196,733

 Other general and administrative expenses                 (6,112)        (5,411)        (13,643)
 Share option related expense                       6      (11,463)       (6,533)        (8,490)
 Profit from operations                                    166,472        70,287         174,600

 Finance revenue                                           55             400            419
 Finance costs                                             (5,649)        (5,674)        (11,353)
 Foreign exchange gains/(losses)                           1,729          (235)          57
 Profit before tax                                         162,607        64,778         163,723

 Tax credit/(expense)                               7      207            (24)           874
 Profit after tax                                          162,814        64,754         164,597

 Profit per share (cents)
 Basic                                              8      75.89          30.52          77.14
 Diluted                                            8      72.85          28.87          73.04

 

 

 

Condensed consolidated statement of comprehensive income

For the six months ended 30 June 2022

 

                                                                             Six months     Six months     Year ended

                                                                             ended          ended          31 December

                                                                             30 June 2022   30 June 2021   2021

                                                                             Unaudited      Unaudited      Audited
                                                                             $'000          $'000          $'000

 Profit for the period                                                       162,814        64,754         164,597
 Items that may be reclassified subsequently to profit or loss:
 Fair value losses arising in the period                                     -              (2,013)        (2,021)
 Cumulative losses arising on hedging instruments reclassified to revenue    -              2,710          3,753
 Exchange differences on translation of foreign operations                   (2,113)        279            (254)
 Total comprehensive income for the period                                   160,701        65,730         166,075

 

 

Condensed consolidated balance sheet

As at 30 June 2022

 

                                           30 June     30 June                   31 December

                                   Notes   2022        2021                      2021

                                           Unaudited   Unaudited (Restated(1))   Audited

                                           $'000       $'000                     $'000
 Non-current assets
 Intangible assets                 10      4,979       2,234                     3,583
 Property, plant and equipment     11      407,635     393,681                   404,205
 Trade receivables                 12      -           12,641                    -
 Deferred tax asset                        1,465       500                       1,385
                                           414,079     409,056                   409,173

 Current assets
 Inventories                               5,423       4,780                     6,018
 Trade and other receivables       12      163,551     111,628                   179,200
 Derivative financial instruments          -           8                         -
 Cash and cash equivalents                 231,796     189,543                   169,866
                                           400,770     305,959                   355,084
 Total assets                              814,849     715,015                   764,257

 Current liabilities
 Trade and other payables          13      (101,821)   (81,518)                  (98,800)
 Dividends payable                         (75,000)    (25,000)                  -
                                           (176,821)   (106,518)                 (98,800)

 Non-current liabilities
 Trade and other payables          13      (475)       (1,022)                   (789)
 Other borrowings                  14      (99,387)    (98,872)                  (99,123)
 Provisions                                (45,746)    (38,839)                  (43,841)
                                           (145,608)   (138,733)                 (143,753)
 Total liabilities                         (322,429)   (245,251)                 (242,553)

 Net assets                                492,420     469,764                   521,704

 Equity
 Share capital                     15      216,248     213,731                   213,731
 Share premium account             15      553,083     792,914                   742,914
 Cost of hedging reserve                   -           (1,035)                   -
 Exchange translation reserve              (4,881)     (2,235)                   (2,768)
 Accumulated losses                        (272,030)   (533,611)                 (432,173)
 Total equity                              492,420     469,764                   521,704

 

(1)The comparative consolidated balance sheet at 30 June 2021 has been
restated to reflect a reclassification of inventory items that are to be used
in the development of the Shaikan Field to property, plant and equipment. See
note 17 for details regarding the restatement.

Condensed consolidated statement of changes in equity

For the six months ended 30 June 2022

 

                                                           Share      Share premium  Treasury  Cost of hedging reserve  Exchange      Accumulated  Total

                                                           capital    account        shares                             translation   losses       equity

                                                                                                                        reserve
                                                           $'000      $'000          $'000     $'000                    $'000         $'000        $'000
 Balance at 1 January 2021 (audited)                       211,371    842,914        (2,592)   (1,732)                  (2,514)       (593,422)    454,025

 Net profit for the period                                 -          -              -         -                        -             64,754       64,754
 Cash flow hedge - fair value movements                    -          -              -         697                      -             -            697
 Exchange difference of translation of foreign operations  -          -              -         -                        279           -            279
 Total comprehensive income for the period                 -          -              -         697                      279           64,754       65,730
 Dividends                                                 -          (50,000)       -         -                        -             -            (50,000)
 Share issues                                              2,360      -              -         -                        -             (2,360)      -
 Employee share schemes                                    -          -              -         -                        -             9            9
 Share options exercised                                   -          -              2,592     -                        -             (2,592)      -
 Balance at 30 June 2021 (unaudited)                       213,731    792,914        -         (1,035)                  (2,235)       (533,611)    469,764

 Net profit for the period                                  -          -              -         -                        -             99,843       99,843
 Cash flow hedge - fair value movements                     -          -              -         1,035                    -             -            1,035
 Exchange difference of translation of foreign operations   -          -              -         -                       (533)          -           (533)
 Total comprehensive income/(loss) for the period           -          -              -         1,035                   (533)          99,843       100,345
 Dividends                                                  -         (50,000)        -         -                        -             -           (50,000)
 Employee share schemes                                     -          -              -         -                        -             1,595        1,595
 Balance at 31 December 2021 (audited)                      213,731    742,914        -         -                       (2,768)       (432,173)     521,704

 Net profit for the period                                 -          -              -         -                        -             162,814      162,814
 Exchange difference of translation of foreign operations  -          -              -         -                        (2,113)       -            (2,113)
 Total comprehensive (loss)/income for the period          -          -              -         -                        (2,113)       162,814      160,701
 Dividends                                                 -          (189,831)      -         -                        -             -            (189,831)
 Share issues                                              2,517      -              -         -                        -             (2,517)      -
 Employee share schemes                                    -          -              -         -                        -             (154)        (154)
 Balance at 30 June 2022 (unaudited)                       216,248    553,083        -         -                        (4,881)       (272,030)    492,420

Condensed consolidated cash flow statement

for the six months ended 30 June 2022

 

                                                                                 Note  Six months     Six months     Year ended

                                                                                       ended          ended          31 December 2021

                                                                                       30 June 2022   30 June 2021   Audited

                                                                                       Unaudited      Unaudited
                                                                                       $'000          $'000          $'000
 Operating activities
 Cash generated in operations                                                    9     227,271        83,487         189,155
 Interest received                                                                     55             400            419
 Interest paid                                                                         (5,000)        (5,000)        (10,000)
 Payment of put option premium                                                         -              (1,043)        (1,043)
 Net cash generated in operating activities                                            222,326        77,844         178,531

 Investing activities
 Purchase of intangible assets                                                         (1,411)        (1,245)        (2,725)
 Purchase of property, plant and equipment                                             (43,367)       (9,454)        (52,959)
 Net cash used in investing activities                                                 (44,778)       (10,699)       (55,684)

 Financing activities
 Payment of dividends                                                                  (114,831)      (25,000)       (100,000)
 Payment of leases                                                                     (255)          (431)          (688)
 Net cash used in financing activities                                                 (115,086)      (25,431)       (100,688)

 Net increase in cash and cash equivalents                                             62,462         41,714         22,159
 Cash and cash equivalents at beginning of period                                      169,866        147,826        147,826
 Effect of foreign exchange rate changes                                               (532)          3              (119)
 Cash and cash equivalents at end of the period being bank balances and cash on        231,796        189,543        169,866
 hand

 

 

1. General information

The Company is incorporated in Bermuda (registered address: Cedar House, 3rd
Floor, 41 Cedar Avenue, Hamilton 12, Bermuda). The Company's common shares are
listed on the Official List of the United Kingdom Listing Authority and are
traded on the London Stock Exchange's Main Market for listed securities. The
Company serves as the holding company for the Group, which is engaged in oil
and gas exploration, development and production, operating in the Kurdistan
Region of Iraq.

 

2. Summary of significant accounting policies

The Annual Report and Accounts of the Group are prepared in accordance with
United Kingdom adopted International Accounting Standards. The condensed set
of financial statements included in this half yearly financial report have
been prepared in accordance with United Kingdom adopted International
Accounting Standard 34 'Interim Financial Reporting' and the Disclosure and
Transparency Rules (DTR) of the Financial Conduct Authority (FCA) in the
United Kingdom as applicable to interim financial reporting.

The condensed set of financial statements included in this half yearly
financial report have been prepared on a going concern basis as the Directors
consider that the Group has adequate resources to continue operating for the
foreseeable future.

The accounting policies adopted in the 2022 half-yearly financial report are
the same as those adopted in the 2021 Annual Report and Accounts, other than
the implementation of new IFRS reporting standards.

The financial information for the year ended 31 December 2021 does not
constitute the Group's financial statements for that year but is derived from
those Accounts. The auditor's report on these Accounts was unqualified and did
not include a reference to any matters to which the auditor drew attention by
way of emphasis of matter.

Adoption of new and revised accounting standards

As of 1 January 2022, a number of accounting standard amendments and
interpretations became effective. The adoption of these amendments and
interpretations has not had a material impact on the financial statements of
the Group for the six months ended 30 June 2022.

Going concern

The Group's business activities, together with the factors likely to affect
its future development, performance and position are set out in the CEO
Statement, Operational Review and Financial Review, which includes the
financial position of the Group at the period end and its cash flows and
liquidity position.

As at 31 August 2022, the Group had $112.0 million of cash and no debt, having
redeemed the $100 million bond on 2 August 2022. The Group continues to
closely monitor and manage its liquidity. Cash forecasts are regularly
produced, and sensitivities run for different scenarios including, but not
limited to, commodity prices, different production rates from the Shaikan
block, cost contingencies, disruptions to revenue receipts, and the impact of
climate change and geopolitical risks on the group's operations, etc. In the
current period, these have included both the Iraqi Supreme Court ruling on 15
February 2022 and export route availability as a result of the evolving
sanctions situation due to the Russian invasion of Ukraine. Further details of
the Iraqi Supreme Court ruling and the sanctions situation are provided in the
section on principal risks and uncertainties. The Group's forecasts, taking
into account applicable risks and the stress test scenarios, show that it has
sufficient financial resources for the 12 months from the date of approval of
the 2022 half year financial statements.

Based on the analysis performed, the Directors have a reasonable expectation
that the Group has adequate resources to continue to operate for the
foreseeable future. Thus, the going concern basis of accounting is used to
prepare the 2022 half year financial statements.

Critical accounting judgements and key sources of estimation uncertainty

In the application of the Group's accounting policies, the Directors are
required to make judgements, estimates and assumptions about the carrying
amounts of assets and liabilities that are not readily apparent from other
sources. The estimates and associated assumptions are based on historical
experience and other factors that are considered to be relevant. Actual
results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period or in the period
of revision and future periods if the revision affects both current and future
periods.

Critical accounting judgements and key sources of estimation uncertainty
remain consistent with those disclosed in the 2021 Annual Report and Accounts.

 

Critical accounting judgement
Revenue

The recognition of revenue is considered to be a key accounting judgement. The
Group began commercial production from the Shaikan Field in July 2013 and
historically made sales to both the domestic and export markets. However, as
the payment mechanism for sales to the export market continues to develop
within the Kurdistan Region of Iraq, the Group considers revenue can only be
reliably measured when the cash receipt is assured. The assessment of whether
cash receipts are assured is based on management's evaluation of the
reliability of the Kurdistan Regional Government (the "KRG") payments to the
IOCs operating in the Kurdistan Region of Iraq. The Group also recognised
payables to the KRG that were offset against amounts receivable from the KRG
for previously unrecognised revenue in line with the terms of the Shaikan
Production Sharing Contract (the "PSC").

The judgement is not to recognise revenue in excess of the sum of the cash
receipt that is assured and the amount of payables to the MNR that can be
offset against amounts due for previously unrecognised revenue in line with
the terms of the Shaikan PSC, even though the Group may be entitled to
additional revenue under the terms of the Shaikan PSC. Any future agreements
between the Company and the KRG might change the amounts of revenue
recognised.

Key sources of estimation uncertainty

The key assumptions concerning the future, and other key sources of estimation
uncertainty that may have a significant risk of causing a material adjustment
to the carrying amounts of assets and liabilities, are discussed below.

Carrying value of producing assets

In line with the Group's accounting policy on impairment, management performs
an impairment review of the Group's oil and gas assets at least annually with
reference to indicators as set out in IAS 36. The Group assesses its group of
assets, called a cash-generating unit ("CGU"), for impairment, if events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Where indicators are present, management calculates the
recoverable amount using key estimates such as future oil prices, estimated
production volumes, the cost of development and production, post-tax discount
rates that reflect the current market assessment of the time value of money
and risks specific to the asset, commercial reserves and inflation. The key
assumptions are subject to change based on market trends and economic
conditions. Where the CGU's recoverable amount is lower than the carrying
amount, the CGU is considered impaired and is written down to its recoverable
amount. The Group's sole CGU as at 30 June 2022 was the Shaikan Field with a
carrying value of $405.9 million.

The Group performed an impairment trigger assessment and concluded that the
Iraqi Supreme Court ruling in February 2022 was a potential impairment
trigger. Accordingly, a full impairment evaluation was completed, and it was
concluded that no impairment write-down was required.

The key areas of estimation in assessing the potential impairment indicators
are as follows:

-     Commodity prices are based on latest internal forecasts, benchmarked
with external sources of information to ensure they are within the range of
available market and analyst forecasts;

 $/bbl - real                    2022  2023 onwards
 30 June 2022 - base case        $68   $55
 30 June 2022 - stress case      $50   $50
 31 December 2021 - base case    $81   $55
 31 December 2021 - stress case  $80   $50

 

-     The Group continues to develop its assessment of the potential
impacts of climate change and the associated risks, the transition to a
low-carbon future and our ambition to reduce scope one and two per barrel
CO(2) emissions by at least 50% by 2025. The potential effects of climate
change and the Paris Agreement were considered. It was concluded, based on
benchmarking, that the stress case price deck used in the impairment
assessment is reasonable to reflect the potential impact of meeting

the Paris Agreement targets. The stress case also includes an estimated cost
of the introduction of a carbon tax in Kurdistan;

 

-     Discount rates that are adjusted to reflect risks specific to the
Shaikan Field and the Kurdistan Region of Iraq. The post-tax nominal discount
rate was estimated to be 15%, unchanged from 31 December 2021. The impact of
an increase in discount rate to 20% was considered as a sensitivity to reflect
potential increased geopolitical risks and a higher risk free interest rate;

-     Operating costs and capital expenditure are based on financial
budgets and internal management forecasts. Costs assumptions incorporate
management experience and expectations, as well as the nature and location of
the operation and the risks associated therewith. Base case costs assumptions
used in the assessment are consistent with the June 2022 updated draft FDP
submitted to the MNR. The impact of near-term inflationary pressures were also
considered; and

-     Commercial reserves and production profiles used in the assessment
are consistent with the June 2022 draft FDP submitted to the MNR.

 

 3. Geographical information

 

The Group's non-current assets excluding deferred tax assets and other
financial assets by geographical location are detailed below:

                 Six months     Six months     Year ended

                 ended          ended          31 December

                 30 June 2022   30 June 2021   2021

                 Unaudited      Unaudited      Audited
                 $'000          $'000          $'000
 Kurdistan       407,300        392,688        402,787
 United Kingdom  5,314          3,227          5,001
                 412,614        395,915        407,788

 

The Chief Operating Decision Maker, as per the definition in IFRS 8, is
considered to be the Board of Directors. The Group operates in a single
segment, that of oil and gas exploration, development and production, in a
single geographical location, the Kurdistan Region of Iraq. As a result, the
financial information of the single segment is the same as set out in the
condensed consolidated statement of comprehensive income, the condensed
consolidated balance sheet, the condensed consolidated statement of changes in
equity, the condensed consolidated cash flow statement and the related notes.

Information about major customers

 

All oil sales were made to the KRG.

 

4. Revenue

 

                                                    Six months     Six months     Year ended

                                                    ended          ended          31 December

                                                    30 June 2022   30 June 2021   2021

                                                    Unaudited      Unaudited      Audited
                                                    $'000          $'000          $'000
 Oil sales                                          263,603        133,423        305,142
 Put option hedging losses reclassified to revenue  -              (2,710)        (3,753)
                                                    263,603        130,713        301,389

 

The Group accounting policy for revenue recognition is set out in its 2021
Annual Report, with revenue recognised on a cash-assured basis.

 

During the six months period ended 30 June 2022, the cash-assured values
recognised as oil sales was $263.6 million (H1 2021: $133.4 million; FY 2021:
$305.1 million). The oil sales price was calculated using the monthly dated
Brent price less an average discount of $23.3 (H1 2021: $21.2; FY 2021: $21.2)
per barrel for quality and pipeline tariffs.

 

5. Cost of Sales

 

                                     Six months     Six months     Year ended

                                     ended          ended          31 December

                                     30 June 2022   30 June 2021   2021

                                     Unaudited      Unaudited      Audited
                                     $'000          $'000          $'000
 Operating costs                     18,878         15,033         34,372
 Capacity building payments          20,511         10,288         23,529
 Changes in inventory valuation      242            (52)           (348)
 Depreciation of oil and gas assets  39,474         28,223         54,120
 Depreciation of operational assets  24             24             48
                                     79,129         53,516         111,721

 

A unit-of-production method has been used to calculate the depreciation,
depletion and amortisation ("DD&A") charge for oil and gas assets. This is
based on full entitlement production, commercial reserves and capital costs
for Shaikan. Commercial reserves are proven and probable ("2P") reserves,
estimated using standard recognised evaluation techniques.

 

6. Share option related expense

 

                                                  Six months     Six months     Year ended

                                                  ended          ended          31 December

                                                  30 June 2022   30 June 2021   2021

                                                  Unaudited      Unaudited      Audited
                                                  $'000          $'000          $'000
 Share-based payment expense                      1,193          902            2,255
 Payments related to share options exercised      8,573          4,060          4,142
 Share-based payment related provision for taxes  1,697          1,571          2,093
                                                  11,463         6,533          8,490

 

On the final exercise of the legacy Value Creation Plan ("VCP") share options
by former Directors, the Company elected to make required tax withholding
settlements in cash instead of issuing and selling additional shares.  This
together with payment of dividends accumulated during the vesting period are
the main components of the payments related to share options exercised.

 

There are no further VCP share options outstanding and the plan has been
terminated.

 

7. Taxation

 

                                Six months     Six months     Year ended

                                ended          ended          31 December

                                30 June 2022   30 June 2021   2021

                                Unaudited      Unaudited      Audited
                                $'000          $'000          $'000
 Corporation tax credit         -              103            75
 Prior period adjustment        -              -              28
 Deferred tax credit/(expense)  207            (127)          771
                                207            (24)           874

 

8. Profit per share

 

The calculation of the basic and diluted profit per share is based on the
following data:

 

                           Six months     Six months     Year ended

                           ended          ended          31 December

                           30 June 2022   30 June 2021   2021

                           Unaudited      Unaudited      Audited
 Profit after tax ($'000)  162,814        64,754         164,597

 

 Number of shares ('000s):
 Basic weighted average number of ordinary shares  214,527  212,138  213,384
 Basic EPS (cents)                                 75.89    30.52    77.14

 

The Group followed the steps specified by IAS 33 in determining whether
outstanding share options are dilutive or anti-dilutive.

Reconciliation of dilutive shares:

 

                                                   Six months     Six months     Year ended

                                                   ended          ended          31 December

                                                   30 June 2022   30 June 2021   2021

                                                   Unaudited      Unaudited      Audited
 Number of shares ('000s):
 Basic weighted average number of ordinary shares  214,527        212,138        213,384
 Effect of dilutive potential ordinary shares      8,957          12,119         11,962
 Diluted number of ordinary shares outstanding     223,484        224,257        225,346
 Diluted EPS (cents)                               72.85          28.87          73.04

 

Weighted average number of ordinary shares excludes shares held by Employee
Benefit Trustee ("EBT") and the Exit Event Trustee of 0.4 million (H1 2021:
0.1 million; FY 2021: 0.1 million).

 

The dilutive number of ordinary shares relates to outstanding share options
and is calculated on the assumption of conversion of all potentially dilutive
ordinary shares.

 

9. Reconciliation of profit from operations to net cash generated in operating activities

 

                                                                            Six months     Six months     Year ended 31 December 2021

                                                                            ended          ended          Audited

                                                                            30 June 2022   30 June 2021   $'000

                                                                            Unaudited      Unaudited

                                                                            $'000          $'000

 Profit from operations                                                     166,472        70,287         174,600

 Adjustments for:
 Depreciation, depletion and amortisation of property, plant and equipment  39,853         28,737         55,111
 (including the right of use assets)
 Amortisation of intangible assets                                          77             1              25
 Share-based payment expense                                                154            9              1,197
 Lease modification                                                         -              154            -
 Increase/(Decrease) of provision for impairment of trade receivables       427            (5,034)        (7,065)
 Put option hedging losses reclassified to revenue                          -              2,710          3,752
 Operating cash flows before movements in working capital                   206,983        96,864         227,620
 Decrease/(Increase) in inventories                                         595            980            (258)
 Decrease/(Increase) in trade and other receivables                         23,907         (22,260)       (75,259)
 (Decrease)/Increase in trade and other payables                            (4,214)        7,903          36,977
 Income taxes received                                                      -              -              75
 Cash generated from operations                                             227,271        83,487         189,155

 
10. Intangible assets
                                           Computer software

                                           $'000
 Period ended 30 June 2021
 Opening net book value                    933
 Additions                                 1,292
 Amortisation charge                       (1)
 Foreign currency translation differences  10
 Net book value at 30 June 2021            2,234

 Cost                                      3,282
 Accumulated depreciation                  (1,048)
 Net book value at 30 June 2021            2,234

 Period ended 31 December 2021
 Additions                                 1,450
 Amortisation charge                       (24)
 Foreign currency translation differences  (77)
 Net book value at 31 December 2021        3,583

 Cost                                      4,722
 Accumulated depreciation                  (1,139)
 Net book value at 31 December 2021        3,583

 Period ended 30 June 2022
 Opening net book value                    3,583
 Additions                                 1,925
 Amortisation charge                       (77)
 Foreign currency translation differences  (452)
 Net book value at 30 June 2022            4,979

 Cost                                      6,195
 Accumulated depreciation                  (1,216)
 Net book value at 30 June 2022            4,979

 

The amortisation charge for computer software has been included in general and
administrative expenses.

11. Property, plant and equipment

 

                                            Oil and Gas  Fixtures and  Right of use

                                            Assets       Equipment     Assets           Total

                                            $'000        $'000              $'000       $'000
 Period ended 30 June 2021
 Opening net book value (restated)          402,620      1,187         1,662            405,469
 Additions                                  14,084       139           -                14,223
 Disposals at cost                          -            -             (1,064)          (1,064)
 Revision to decommissioning asset          2,814        -             -                2,814
 Lease modification                         -            -             (107)            (107)
 Depreciation charge                        (28,223)     (168)         (346)            (28,737)
 Depreciation on disposals                  -            -             1,064            1,064
 Foreign currency translation differences   -            -             19               19
 Closing net book value (restated)          391,295      1,158         1,228            393,681

 Cost (restated)                            795,227      7,299         2,450            804,976
 Accumulated depreciation                   (403,932)    (6,141)       (1,222)          (411,295)
 Net book value at 30 June 2021 (restated)  391,295      1,158         1,228            393,681

 Period ended 31 December 2021
 Additions                                  32,081       64            76               32,221
 Disposals at cost                          -            -             (368)            (368)
 Revision to decommissioning asset          4,616        -             -                4,616
 Lease modification                         -            -             107              107
 Depreciation charge                        (25,897)     (183)         (266)            (26,346)
 Depreciation on disposals                  -            -             341              341
 Foreign currency translation differences   (1)          (6)           (40)             (47)
 Closing net book value                     402,094      1,033         1,078            404,205

 Cost                                       831,924      7,363         2,246            841,533
 Accumulated depreciation                   (429,830)    (6,330)       (1,168)          (437,328)
 Net book value at 31 December 2021         402,094      1,033         1,078            404,205

 

 Period ended 30 June 2022
 Opening net book value                    402,094    1,033    1,078    404,205
 Additions                                 41,820     101      -        41,921
 Revision to decommissioning asset         1,468      -        -        1,468
 Depreciation charge                       (39,490)   (174)    (189)    (39,853)
 Foreign currency translation differences  -          (12)     (94)     (106)
 Closing net book value                    405,892    948      795      407,635

 At 30 June 2022
 Cost                                      875,212    7,452    2,152    884,816
 Accumulated depreciation                  (469,320)  (6,504)  (1,357)  (477,181)
 Net book value                            405,892    948      795      407,635

 

The additions to the Shaikan asset amounting to $41.8 million during the
period include the costs of completing SH-15, well and workover activity,
wellsite preparation and plant expansion. The increase in the decommissioning
asset represents further decommissioning obligations that arose on capital
projects.

See note 17 for further information on restated balances.

12. Trade and other receivables

 

Non-current receivables

 

                                  30 June 2022  30 June 2021  31 December

                                  Unaudited     Unaudited     2021

                                  $'000         $'000         Audited

                                                              $'000
 Trade receivables - non-current  -             12,641        -

 

Current receivables

 

                                 30 June 2022  30 June 2021  31 December

                                 Unaudited     Unaudited     2021

                                 $'000         $'000         Audited

                                                             $'000
 Trade receivables - current      149,328      106,788       174,634
 Other receivables                13,228       4,036         3,622
 Prepayments and accrued income   995          804           944
                                 163,551       111,628       179,200

 

Reconciliation of trade receivables

 

                                 30 June 2022  30 June 2021  31 December

                                 Unaudited     Unaudited     2021

                                 $'000         $'000         Audited

                                                             $'000
 Gross carrying amount           150,875       122,580       175,754
 Less: impairment allowance      (1,547)       (3,151)       (1,120)
 Carrying value at 30 June 2022   149,328      119,429       174,634

 

Trade receivables comprise invoiced amounts due from the KRG for crude oil
sales totalling $138.7 million (H1 2021: $113.5 million; FY 2021: $163.6
million) and a share of Shaikan revenue arrears the Group purchased from MOL
amounting to $12.2 million (H1 2021: $9.1 million; FY 2021: $12.2 million).
The amount due from the KRG includes past due trade receivables of $40.2
million(1) (H1 2021: $62.2 million; FY 2021: $43.1 million) related to April
2022 production. While the Group expects to recover the full nominal value of
the outstanding invoices and MOL receivable, the ECL on the trade receivable
balance of $1.5 million was provided against the receivables balance in line
with the requirements of IFRS 9 resulting in an expense of $0.4 million in the
reporting period (H1 2021: $5.0 million recovery; FY 2021: $7.1 million
recovery).

 

ECL sensitivities

No material changes to the Group's profit before tax arise when considering
reasonably possible changes to the estimates which are used to calculate the
ECL impairment allowance.

Other Receivables

Other receivables includes an amount relating to advances to suppliers of $9.1
million (H1 2021: $0.1 million; FY 2021: $0.4 million). Of this $9.0 million
(H1 2021: nil; FY 2021: $0.4 million) relates to advances for capital
expenditure and is included within investing activities in the condensed
consolidated cash flow statement.

 

Also included within Other receivables is an amount of $0.4 million (H1 2021:
$0.5 million; FY 2021 $0.4 million) being the deposits for leased assets which
are receivable after more than one year. There are no receivables from related
parties as at 30 June 2022 (H1 2021: nil; FY 2021: nil). No impairment of
other receivables has been recognised during the first half of the year (H1
2021: nil; FY 2021: nil).

(1) The past due trade receivables amount excludes the associated capacity
building payments due to the KRG which reduces the net amount due to GKP to
$38.1 million (H1 2021: $58.9 million; FY 2021: $41.0 million).

 

 

 

13. Trade and other payables
Current liabilities

 

                            30 June 2022  30 June 2021  31 December

                            Unaudited     Unaudited     2021

                            $'000         $'000         Audited

                                                        $'000
 Trade payables             3,421         1,448         6,494
 Accrued expenditures       28,839        19,828        25,960
 Other payables             69,181        59,854        65,927
 Finance lease obligations  380           388           419
                            101,821       81,518              98,800

 

Accrued expenditures include $4.4 million interest payable as at 30 June 2022
(H1 2021: $4.4 million, FY 2021: $4.4 million), also detailed in note 14.

 

Other payables include $63.9 million (H1 2021: $51.0 million, FY 2021: $56.4
million) of amounts payable to the KRG that are not expected to be paid, but
rather offset against revenue due from the KRG related to pre-October 2017 oil
sales, which have not yet been recognised in the financial statements. Within
this amount, $29.4 million (H1 2021: $18.2 million, FY 2021: $22.6 million)
relates to a non-cash payable for the difference between the capacity building
rate of 20% and 30%, as detailed on page 114 of the 2021 Annual Report.

 

Non-current liabilities

 

                                      30 June 2022  30 June 2021  31 December

                                      Unaudited     Unaudited     2021

                                      $'000         $'000         Audited

                                                                  $'000
 Non-current finance lease liability  475           1,022         789

 

14. Long-term borrowings

In July 2018, the Company completed the private placement of a 5-year senior
unsecured $100 million bond (the "Notes"). The unsecured Notes are guaranteed
by Gulf Keystone Petroleum International Limited and Gulf Keystone Petroleum
(UK) Limited, two of the Company's subsidiaries, and the key terms are
summarised as follows:

 

-       maturity date is 25 July 2023;

-       at any time prior to maturity, the New Notes are redeemable in
part, or full, with a prepayment penalty;

-       the interest rate is 10% per annum with semi-annual payment
dates; and

-       the Company is permitted to raise up to $200 million of
additional indebtedness at any time on market terms to fund capital and
operating expenditure, subject to certain requirements.

 

The liabilities associated with Notes are presented in the following tables:

 

                                           30 June 2022  30 June 2021  31 December 2021

                                           Unaudited     Unaudited     Audited

                                           $'000         $'000         $'000
 Liability at the beginning of the period  103,482       102,993       102,993
 Interest charged during the period        5,266         5,238         10,489
 Interest paid during the period           (5,000)       (5,000)       (10,000)
 Liability at the end of period            103,748       103,231       103,482

 

Liability component reporting in:

 

                                30 June 2022  30 June 2021  31 December 2021

                                Unaudited     Unaudited     Audited

                                $'000         $'000         $'000
 Current liabilities (note 13)  4,359         4,359         4,359
 Non-current liabilities        99,387        98,872        99,123
                                103,748       103,231       103,482

 

The Notes are traded on the Norwegian Stock Exchange and the fair value at the
prevailing market price as at the close of business on the reporting date was:

 

        Market price  30 June 2022

                      $'000
 Notes  102.25        102,250

 

As of 30 June 2022, the Group's remaining contractual liability comprising
principal and interest based on undiscounted cash flows at the maturity date
of the Notes is as follows:

 

                           30 June 2022  30 June 2021  31 December 2021

                           Unaudited     Unaudited     Audited

                           $'000         $'000         $'000
 Within one year           10,000        10,000        10,000
 Within two to five years  100,639       110,639       105,639
                           110,639       120,639       115,639

 

Subsequent to the period end the Notes were redeemed leaving the Group
debt-free.  See note 18 for further details.

 

15. Share capital

 

                                   Common shares
                                   No. of shares  Amount             Share capital               Share premium
                                   000            $'000                     $'000                $'000
 Issued and fully paid
 Balance 1 January 2022 (audited)  213,731        956,645    213,731                             742,914
 Share issue                       2,517          2,517      2,517                               -
 Dividends                         -              (189,831)  -                                   (189,831)
 Balance 30 June 2022 (unaudited)  216,248        769,331    216,248                             553,083

 

Dividends of $189.8 million consist of dividends paid of $114.8million and
both an ordinary dividend of $25.0 million and a special dividend of $50.0
million, as approved at the June 2022 Annual General Meeting, that were paid
after the period end. See note 18 for further dividends declared after the
reporting period.

 

16. Contingent liabilities

The Group has a contingent liability of $27.3 million (H1 2021 and FY 2021:
$27.3 million) in relation to the proceeds from the sale of test production in
the period prior to the approval of the original Shaikan Field Development
Plan ("FDP") in June 2013. The Shaikan PSC does not appear to address
expressly any party's rights to this pre-FDP petroleum. The sales were made
based on sales contracts with domestic offtakers which were approved by the
KRG. The Group believes that the receipts from these sales of pre-FDP
petroleum are for the account of the Contractor, rather than the KRG and
accordingly recorded them as test revenue in prior years. However, the KRG has
requested a repayment of these amounts and the Group is currently involved in
negotiations to resolve this matter. The Group has received external legal
advice and continues to maintain that pre-FDP petroleum receipts are for the
account of the Contractor. This contingent liability forms part of the ongoing
Shaikan PSC amendment negotiations and it is likely that it will be settled as
part of those negotiations.

 
17. Restatement

 

The Group has identified that inventory balances as at 30 June 2021 contained
certain equipment to be used in the development of the Shaikan Field, which
will be consumed over a period in excess of one year. The Group determined
that this equipment met the definition of property, plant and equipment as
defined by "IAS 16 - Property, plant and equipment" and has restated the 30
June 2021 financial statements to reflect this reclassification. This
restatement is consistent with the prior year restatement highlighted in Note
28 of the 2021 Annual Report and Financial Statements. As such, the 31
December 2021 comparative does not require any adjustment.

 

Comparative figures for the reclassification have been presented in the
balance sheet as detailed below. There is no impact to the income statement or
statement of cash flows.

 

Balance sheet

 

                                  30 June 2021             Reclassification of inventory  30 June 2021

                                  As previously reported                                  Restated

                                  $'000                    $'000

                                                                                          $'000
 Property, plant and equipment    362,914                  30,767                         393,681
 Inventories                      35,547                   (30,767)                       4,780

 

18. Subsequent events

 

The Group redeemed the $100 million bond on 2 August 2022 and also paid a 2%
early redemption fee.  The Group is now debt-free.

 

On 31 August 2022 an interim dividend of $25.0 million was declared.

 

GLOSSARY (See also the glossary in the 2021 Annual Report and Accounts)

 

 2P           proved plus probable reserves
 bbl          barrel
 bopd         barrels of oil per day
 Capex        capital expenditure
 CGU          cash-generating unit
 COVID-19     Coronavirus
 DD&A         depreciation, depletion and amortisation
 EBITDA       earnings before interest, tax, depreciation and amortisation
 ECL          expected credit losses
 ESG          environmental, social and governance
 FDP          Field Development Plan
 G&A          general and administrative
 GKP          Gulf Keystone Petroleum Limited
 GMP          Gas Management Plan
 Group        Gulf Keystone Petroleum Limited and its subsidiaries
 HSE          health, safety and environment
 IAS          International Accounting Standards
 IFRS         International Financial Reporting Standards
 IOC          International oil companies
 KRG          Kurdistan Regional Government
 KRI          Kurdistan Region of Iraq
 LTI          lost time incident
 MMstb        million stock tank barrels
 MNR          Ministry of Natural Resources of the Kurdistan Regional Government
 MOL          Kalegran B.V. (a subsidiary of MOL Group International Services B.V.)
 NGO          Non Governmental Organisation
 Notes        the $100 million unsecured, guaranteed notes issued on 25 July 2018 by GKP and
              redeemed in full on 2 August 2022
 Opex         operating costs
 PF-1         Production Facility 1
 PF-2         Production Facility 2
 PSC          production sharing contract
 Shaikan PSC  PSC for the Shaikan block between the KRG, Gulf Keystone Petroleum
              International Limited, Texas Keystone, Inc and MOL signed on 6 November 2007
              as amended by subsequent agreement
 VCP          Value Creation Plan
 $            US dollars

 

 

 

 

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