Operational & Corporate Update

30 January 2023

Gulf Keystone Petroleum Ltd. (LSE: GKP)

(“Gulf Keystone”, “GKP” or “the Company”)

Operational & Corporate Update

Gulf Keystone, a leading independent operator and producer in the Kurdistan Region of Iraq (“KRI” or “Kurdistan”), today provides an operational and corporate update. The information contained in this announcement has not been audited and may be subject to further review.

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

“2022 was a strong year for GKP, in which we made progress on multiple fronts that will position the company to maximise long-term value from the Shaikan Field. We laid the initial groundwork for a material increase in production levels in 2023 and 2024, while progressing towards key project sanction milestones of the Shaikan Field Development Plan. In addition, we paid record dividends to our shareholders of $215 million, bringing total shareholder distributions to $415 million since 2019, while at the same time strengthening our balance sheet through repayment of our $100 million bond.

Looking ahead, we are positive about the outlook for oil prices, although we remain vigilant about the challenges facing the global economy and the recent delays to KRG payments. Consequently, as we move towards FDP approval and transition to increased investment in profitable production growth from the Jurassic reservoir to drive cash generation, we have put in place a flexible capital programme for 2023 that is responsive to the external environment. This will enable the Board to prudently manage the balance between our liquidity levels, growth investment and distributions to maximise total risk adjusted returns for shareholders. To underline the Board’s continued commitment to reviewing the return of excess cash to shareholders as we progress, we are pleased to announce the declaration of an interim dividend of $25 million.”

Operational

• 2022 was a Lost Time Incident (“LTI”) free year with only one minor recordable incident. Following over 440 days without an LTI, an incident occurred during drilling operations in January 2023. The safety of our workforce is our priority and we are currently carrying out an investigation
• Gross average production in 2023 year to date of c.47,800 bopd(1), with the recent increase driven by the gradual ramp up of SH-16, which was brought online in December 2022
• Ongoing drilling programme expected to drive production growth:
  • SH-17 drilled and completed in early 2023, under budget and ahead of schedule; currently being hooked up to commence production in Q1 2023, in line with guidance
  • SH-18 (formerly SH-P) recently spudded, with first production expected in Q2 2023, as previously announced
• Gross average production for 2022 of 44,202 bopd in line with guidance, up from 43,440 bopd in 2021: 
  • Incremental production driven by:
    • The benefit of SH-13 and SH-14 production, brought on-stream in December 2021
    • Start-up of SH-15 in April 2022 and SH-16 in December 2022
  • Mostly offset by:
    • Prudent management of well production rates to avoid trace amounts of water production ahead of installation of water handling capacity, including the shut-in of SH-12 for most of H1 2022
    • The temporary shut-in of one well during Q4 2022 due to an isolated ESP electrical failure
    • In line with expectations and our development plan, continued base natural decline currently estimated at 6-10% per annum across the Shaikan Field, which remains low relative to the industry even following production of around 115 million barrels to date

Financial

• 2022 net capex of c.$115 million comprised of:
  • Drilling costs of c.$65 million, including the SH-15 and SH-16 wells that were drilled and brought online during the year, and SH-17 which was completed in early 2023
  • Facilities and future well pad preparation costs of c.$35 million, including early work related to the expansion of PF-1 and PF-2 with water handling capacity and installation of flowlines connecting the new well pads to the production facilities
  • Well work over and intervention costs of c.$15 million
• 2022 gross Opex per barrel of c.$3.2/bbl, in line with 2022 guidance of $2.9-$3.3/bbl, despite increased activity and industry cost inflation
• During 2022, GKP received $450 million from the Kurdistan Regional Government (“KRG”) for crude oil sales and repayment of historic revenue arrears
• GKP recently received net $39 million from the KRG for August 2022 crude oil sales. Discussions are ongoing with the KRG regarding payments for September to November 2022 crude oil sales, which are overdue
• Continuing engagement with the Ministry of Natural Resources (“MNR”) regarding proposed amendments to the Shaikan Lifting Agreement, including a change in reference price for Shaikan crude oil sales from Dated Brent to the local Kurdistan Blend benchmark (“KBT”), effective 1 September 2022
• Record dividends paid in 2022 of $215 million, representing a sector-leading dividend yield of 41%(2)
• Cash balance of $151 million(3) with no outstanding debt

Outlook

• As we move towards approval of the Field Development Plan (“FDP”), we are focused on driving profitable production growth by expanding the production facilities and continuing our drilling campaign in the Jurassic reservoir, capitalising on the attractive returns resulting from the quick payback of investment under the PSC(4) following the recent recovery of the majority of our historic costs, while continuing to return excess cash to shareholders, underlined by our declaration of a $25 million interim dividend, payable on 3 March 2023
• In line with our rigorous focus on capital discipline and maintaining a robust balance sheet, we have built flexibility into our work programme, predicating investment levels on the timeliness of KRG payments and oil prices:
  • Improvements in KRG payment timing and a continuation of the robust oil price environment would enable us to continue drilling beyond SH-18 and update our guidance
  • A deterioration in market conditions, including continued delays to KRG payments, would lead us to review potential reductions in our work programme and guidance
• In 2023, we will bring SH-17 and SH-18 online to target double digit percentage production growth, while laying the foundation for an inflection in annual average production growth in 2024 by preparing well pads and flowlines to enable continuous drilling and advancing the expansion of our production facilities, including the installation of water handling capacity
• We remain confident in the Shaikan Field’s significant production growth potential. We are preparing a Competent Person’s Report (“CPR”) as at 31 December 2022, which will provide an updated independent third-party evaluation of Shaikan’s reserves and resources. We expect to announce the results of the CPR in Q1 2023

2023 guidance

• Gross average production in 2023 is expected to be 46,000 to 52,000 bopd, representing an 11% increase from 2022 at the mid-point:
  • Reflects anticipated contributions from SH-17 and SH-18, the benefits of well workovers, continued prudent management of well production rates to avoid trace amounts of water production, and natural field declines
  • If we continue to drill beyond SH-18, we would expect to review production guidance
• 2023 net capital expenditure guidance of $160-$175 million:
  • $30-$35 million: Completion of SH-17, drilling of SH-18 and well workover programme to optimise production
  • $45-$50 million: Long lead items and preparing well pads to enable continuous drilling beyond SH-18
  • $85-$90 million: Continued expansion of production facilities, targeting by H2 2024 an increase in total field capacity from c.60,000 bopd currently to 85,000 bopd and installation of water handling capacity, potentially enabling the increase in production rates from constrained wells
  • We continue to manage pressures in a supply constrained market
• 2023 gross Opex guidance of $3.0-$3.4/bbl, underpinned by the Company’s continued focus on strict cost control
• Monitoring discussions between the Federal Iraqi Government and the KRG on the management of oil and gas assets in Kurdistan following the Iraqi Federal Supreme Court ruling in February 2022. GKP operations currently remain unaffected

Shaikan Field Development Plan

• The FDP is expected to enhance the sustainability and longevity of the company’s capacity for shareholder distributions, while generating material economic value for Kurdistan and significantly reducing flaring through the Gas Management Plan, a requirement of the PSC
• Capitalising on the Shaikan Field’s significant growth potential and current estimated 2P reserves to production ratio of c.29 years, the FDP is expected to increase Jurassic gross production plateau up to 85,000 bopd and test the Triassic reservoir, targeting initial pilot production of up to 10,000 bopd
• As we move towards FDP approval, we have agreed with the MNR to proceed with execution of the Jurassic reservoir expansion to increase profitable production and cash flow generation, with investment levels predicated on timely payments from the KRG and a robust oil price environment
• While timing of FDP approval remains uncertain, we are making good progress towards key project sanction milestones:
  • Finalisation of technical scope and future work programme, which is substantially complete
  • Optimisation of phasing of the work programme to facilitate accelerated cost recovery, dependent on oil prices and timing of KRG payments
  • Finalisation of commercial negotiations, including a potential update to the PSC with the target of ensuring any changes are at minimum value neutral for GKP
  • Conclusion of the Gas Management Plan (“GMP”) tendering process and, as appropriate, financing arrangements
• The Company will continue to update the market and intends to host a Capital Markets Day as we move closer towards FDP approval

Financial framework & shareholder distributions

• As the Company transitions to increased investment in profitable production growth from the Jurassic reservoir through a flexible capital programme, the Board remains focused on balancing investment in growth with sustainable shareholder returns, while maintaining a robust balance sheet and prudent liquidity levels
• The Company has a policy of paying an ordinary dividend of at least $25 million per annum, and is committed to distributing excess cash to shareholders by way of dividends and/or share buybacks
• In determining the level of shareholder distributions, the Board regularly reviews the Company’s expected liquidity, cash flow generation and investment needs, based on a rigorous framework that includes an assessment of the outlook for oil prices, Shaikan production and future PSC and capital commitments (including costs associated with the FDP), as well as timeliness of payments from the KRG, among other factors
• Since 2019, the Company has successfully delivered against this strategy by growing gross average annual production by 34%, distributing $415 million to shareholders and maintaining a strong balance sheet, against a backdrop of commodity price volatility and the COVID-19 pandemic
• To underline the Board’s continued commitment, the Company is pleased to announce the declaration of a $25 million interim dividend:
  • $25 million interim dividend is equivalent to 11.561 US cents per Common Share of the Company and is expected to be paid on 3 March 2023, based on a record date of 17 February 2023 and ex-dividend date of 16 February 2023
  • Shareholders continue to have the option of being paid the dividend in either GBP or USD, with the default currency GBP
• Closer to FDP approval, the Board expects to provide an update on the impact of the FDP on the overall financial framework of the Company

Board update

Following the Company’s announcement on 19 December 2022 advising of the intention of the Chair of the Board, Jaap Huijskes, to step down at the 2023 Annual General Meeting, the Company’s Board and Nomination Committee has conducted a process for appointing a successor. The Company is pleased to announce that the current Deputy Chair and Senior Independent Director (“SID”), Martin Angle, will be appointed Chair of the Board following the conclusion of the AGM. Ms Kimberley Wood, current independent non-executive director, will be appointed Deputy Chair and SID at this time.

Mr Angle has served on the Board since 2018 and, in addition to his Deputy Chairman and SID roles, also serves as Chair of the Audit and Risk Committee. He is a highly experienced independent non-executive director having held senior executive roles in investment banking, industry and private equity through his career. He is currently Deputy Chair and SID of Spire Healthcare Group plc and a non-executive director of Ocean Biomedical Inc.

Ms Wood was also appointed to the Board in 2018 as an independent non-executive director. She is also Chair of the Remuneration Committee. An energy lawyer by profession, she held senior roles in a number of law firms including Norton Rose Fulbright and Vinson and Elkins. She is also an independent non-executive director of Energean plc, Valeura Energy Inc., and Africa Oil Corp.

The Company will review its Board Committee membership at the time these changes become effective. All directors will be subject to annual re-election at the AGM.

The Company is cognisant of the Financial Conduct Authority’s new listing rules on board diversity and inclusion and acknowledge that these also apply to standard listed companies with effect from 2024. It is the intention of the Company to move to compliance as stipulated in these rules whilst also taking account of the size and scale of the business.

Audit tender

In line with best practice, the Company has conducted a competitive tender process to appoint a new auditor as Deloitte LLP, the Company's current auditor, is approaching the 20-year maximum term. The Company intends to appoint BDO LLP as auditor for the financial year commencing 1 January 2023. The appointment is subject to shareholder approval at the 2023 Annual General Meeting. Deloitte LLP will undertake the audit of the Company for the financial year ending 31 December 2022.

Corporate presentation

An updated corporate presentation will be made available today on the Company’s website on the Presentations page.

Notes

1. As at 28 January 2023
2. Based on GKP’s closing price on 30 December 2022
3. As at 27 January 2023
4. Shaikan Production Sharing Contract

Enquiries:

or visit: 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

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.