Gulf Keystone CEO on how ShaMaran merger could boost production, cut costs and unlock growth

with the potential to move towards 100,000 barrels of oil a day when the growth potential of both Hamrin and Shaikan is realized.

Hello, you're watching Proactive. I'm joined by John Harris. He's the CEO of Gulf Keystone Petroleum. John, very good to speak with you. This week you announced a merger with ShaMaran Petroleum. Could you give us an overview of the deal rationale?

Yeah, thanks Steve. Um, and the combination, um, will create a leading independent, uh, oil producer focused on Kurdistan and Iraq, and actually it will move us to about to be in the top 10 of the European independence. I mean there I think there are five key points to the, uh, to that will create value for GKP shareholders. Um, you know, it creates a more, uh, a larger, more diversified, uh, company, more resilient company. Uh, brings together a highly complementary portfolio of four low-cost, long-life assets. I mean it reduces the dependency on the Shaikan cash flows, significant cash flows from Sarsang and Atrush to support investment in Shaikan and the Hamrin field. Significant growth potential from Shaikan and the Hamrin field towards 100,000 barrels of oil per day of production. Positions GKP, um, to deliver more attractive and more sustainable shareholder returns to equity and debt investors with improved liquidity, um, better access to financing and a larger, and a larger market capitalization.

John, why did you structure the deal as a 50-50 merger? Is that balanced for GKP shareholders?

We would absolutely believe so. Um, as you can imagine, um, the terms of the transaction were agreed after months of analysis, looking at the contribution of each company and cash flow and value accretion for GKP shareholders, um, on a standalone and a combined basis. We think the 50/50 is a fair split, will be accretive for GKP shareholders. I think some of the market, uh, have missed why. What, so let me try and explain that. While the contribution looks more weighted, um, for to GKP based on production reserves, every barrel that we produce is not equal. Sarsang and Atrush have significantly, uh, significant cash flow generative, um, with higher netbacks, lower CAPEX and a large cost recovery pool. We are coming out of cost recovery and have a large development program ahead. So those are the sort of main differentiating points between the two between the two companies. Um, cash flow from these assets, one, de-risks the development of Shaikan and Hamrin. So, the cash flow from essentially from from, uh, the two producing fields, um, Atrush and and Sarsang will fund, will we'll use some of that cash to fund the Shaikan and Hamrin. And then with those, when they're, when those expenditures have been have been made, that the production from Shaikan and Hamrin, uh, is significant and will contribute majorly to the returns to shareholders. So if you like one's helping one out during the development phase and then the other one will pay back, um, all shareholders in in the new company. Um,

The valuation equation is balanced by, um, by the 50/50, by sorry, by the $50 million special dividend, um, and Hamrin, which is not in ShaMran's current reported numbers. So if you like, ShaMran announced that they were farming into, uh, Hamrin, um, on Monday. So the people who are just looking at the the valuations on a 50/50 basis prior to, prior to that announcement, you know, can't, can't, would would I would have said we wouldn't have done the deal if Hamrin wasn't going to be included on a 50/50 basis. And we've also, I'll repeat it, we there's a $50 million dividend, special dividend for the Shaikan shareholders, or the GKP shareholders as part of that balancing a 50/50 split in in the merger. Um, I think people, people should get excited about Hamrin. It's a, it's a large, a long-life asset with huge growth potential, both in the near and the long term. Um, and it's got estimated 2P and 2C reserves and resources of between 125 to 250 million barrels on a net basis to, to, uh, ShaMran and and now, uh, GKP shareholders.

On GKP, sorry, Um, GKP has traded at a persistent discount to net asset value over multiple years, and we expect the merger to rerate our mul- our multiple through through increased scale, diversification, stability and our growth prospects.

What does this mean in terms of the growth outlook for the combined business, John?

Okay. So currently we produce 28,000 barrels of oil a day on a net basis. And we're looking as part of, as doing this deal, we'll go up to 53,000 barrels a day on a net basis, with the potential to move towards 100,000 barrels of oil a day when the growth potential of both Hamrin and Shaikan is realized. We should mention also that we are, uh, between now and when we intend to close the deal, we've been working on a commercial arrangement where we, our working interest goes from 80% down to 61.5% working interest. And I think people might be concerned, concerned there's a loss of value in that reduction. But actually, we're addressing it with a, with a change in what's called another part of the commercial economic structure where we reduce our, uh, capital building payments to the government from 40 to 20, which effectively means that that that that reduction in working interest is a wash economically. So there's no, there's no reduction in value as a result of doing that. But I think some, some of our shareholders saw that or in during the announcement that we made on Monday and thought that oh, um, isn't that going to affect the economics and the answer is no, it's second, it's economically neutral.

Um, coming on to, um, Hamrin. Hamrin currently produces around 20,000 barrels of oil a day and holds estimated reserves and resources in the range that said of half of, half a billion to a billion barrels of gross oil, which is 125 million to 250 million net to the 25% working interest that that GKP is going to hold in that asset when we close.

ShaMran and and Hamrin operator HKN are aiming to triple production by the end of 2028 to 60,000 barrels of oil a day, 15,000 barrels a day net to ShaMran. And the reason that's possible is that there are a large number of wells that have been drilled that have not been completed, um, drilled but not completed but also not hooked up. So it was quite, it's relatively easy to complete those wells and hook them up, get them on production, which is why I think that's attainable, uh, level of production in, in a two year time frame to the end of 2028. Further production phases, or further development phases, I should say, could target more than doubling those production levels. So going from 60,000 barrels a day to 220,000 barrels a day gross or 30,000 barrels net on a net basis to, uh, Golf Houston shareholders.

What does the deal mean for your future shareholder returns policy, John?

We think the merger could significantly, um, increase be significantly creative to dividends to GKP shareholders in the first few years and through the development period, which is really important. I think on a standalone basis, we're going to have to invest quite a lot of capital. And if we were doing that, um, even though we expect to be being paid full international prices for the oil, it might be difficult to be to to pay the sort of level of dividends that we're hoping to pay with this once once we've merged merged yeah, we've merged basically. So, I think it's accretive on a dividend basis. The larger, more diversified asset base provides greater stability of cash flow. This is very significant as Kurdistan investors want excess cash out of the business as soon as possible, giving give given the operating environment. continued shareholder returns through the development period and more predictable dividends basically, which is what we're hoping to be able to move to. We expect to formalize the distribution policy of the combined business, um, by or on completion.

Alongside the deal, you announced an intention to de-list from the London market, John. What what's behind that decision and why do you plan to move the sole listing to Oslo?

Okay, yeah. Um, the proposed, um, merger with Shamran has created an opportunity to review the listing venues, um, of both companies. Considering the combined companies will be listed across three separate bourses in London, Stockholm and Oslo, which we think for this size of company, it's it's just, it's just too many and there's a cost, there are costs associated with being on three different bourses with different governance rules. Um, and so after careful consideration, we believe that a single listing in Oslo is ultimately the best option for for Gulf Keystone shareholders. Um, it will centralize and maximize the trading liquidity of the combined company as a result in, in better pricing and a fair evaluation. Uh, we will reduce the cost of running multiple listings as well. So there's a cost saving in it for, for the company. We see the O, the OSC main market as the natural home for the combined company. Both Gulf Keystone and Shamran dual listed on the Euro Next, uh, Oslo, Euro Next growth Bourse in Oslo earlier this year.

Both equity and debt investors are active in Oslo and have an excellent understanding of Kurdistan and our companies. DNO have been listed in Oslo for a long time and and a strong track record of support, um, strong track record of support by the, by the Norwegian boss. And in fact, the bond market has been a very, very, has been if you like a differentiator I think in Norway. They established, they saw an opportunity in the market to get very good returns on Kurdistan, uh, company bonds and, and have been, and have been reaping the benefits of that for a number of years. In fact, we've just gone out for a bond, um, on, on the Norwegian bond market, um, today. Um, so we're also looking at borrowing money, um, on that, on that, in that, in that forum. And the Norwegians are extremely supportive, like you say, of their oil and gas industry and the OSC in a leading hub for conventional energy and capital markets with a broad group of listed companies within the oil and gas sector.

The company has, has broad equity research coverage in Oslo as well. So we've got a lot of people, a lot of Norwegian firms we're hope, with analysts who, who review both us and Shamran. In fact, I think there are seven and I think all of them are recommending that our company is a buy because they recognize the potential that this company has.

John, when's the LSE delisting expected to occur and what will happen to UK retail shareholders?

Yeah, thank you for that. Um I'd like to, I'd like to make a few points clear to UK retail investors who don't need to worry. First, we recognize that we have hundreds of uh retail investors in the UK that have been loyally invested through many stages of GKP's development. We are fully committed to enabling them, um, to participate in the significant value that we believe will be created by the merger.

Second, um, no LSE de-listing will occur until after we have uplisted on the Oslo main market. The OSE main market is regulated market similar to the LSE main market where GKP is currently listed and will enable UK retail investors to transfer or acquire Gulf Keystone shares.

Third, there are a number of major retail platforms in the UK such as Hargreaves Lansdown and AJ Bell that enable an investment in Oslo main market stocks. These platforms would enable UK investors to transfer their shares to Oslo and and keep their holding in the UK.

Fourth, there is ample time for this transaction. We are targeting up listing in Q1 of 2025, well in advance of the completion target in the middle of 2025. We would not delist from the LSE until just before closing. Fifth, we strongly we strongly believe that improved liquidity, um, of a centralized listing in Oslo will strongly outweigh the admin of transferring over and is the best option to maximize value for all of our shareholders.

Finally, I'd really like to emphasize that Gabriel, um, GKP CFO and I both over half both own over half a million shares in Gulf Keystone currently, held in UK dealing platforms and ISs. We've bought more this week because we believe in this deal and the value that's going to be created. Many of our staff and also shareholders in the UK, some with significant positions. We are all incentivized to make sure that this process works for UK retail shareholders and they're not disadvantaged by holding it. So holding um continuing to hold our shares even though we're now listed in the Oslo main market. I'm I'm you know, and with that, I'd just like to say that we're very excited about this deal. We're very excited about the what it will bring to us in terms of the ability to manage the up, the reaching the full potential of Gulf Keystone Petroleum um and the Shaikan field and now the Hamrin field, which we're very also very excited about as part of doing this merger.

John, I hope you'll keep us updated on progress with the merger. Thank you very much for taking us through it today.

Thank you very much for your time.

That's John Harris, the CEO of Gulf Keystone Petroleum.