Earnings Transcript for GENL.L - Q4 Fiscal Year 2021

Bill Higgs: Good morning, everyone, and welcome to our 2021 annual results presentation. As usual, I'm joined by Esa Ikaheimonen, Chief Financial Officer; Paul Weir, Chief Operating Officer and Mike Adams, our Technical Director. We'll run through a presentation and then there'll be an opportunity for analysts to ask questions. Before we begin, we are keenly aware that we are making this presentation with the backdrop of the terrible war in Ukraine and the impact that it's had on oil price. What we see each day on the news is horrifying. We also hope that there is a swift resolution. However unlikely this may seem right now. I'll briefly pause on our usual disclaimer. As many of you will know, we are Genel Energy and we have highly cash generative production from three producing licenses in Kurdistan. This production is currently over 30,000 barrels of oil per day. It's low cost and low carbon and it supports our simple strategy to generate cash, invest in growth, have enough remaining to pay material and progressive dividends, whatever part of the cycle we're in. And as our balance sheet strength in the course of '22, it is important year for us to put our balance sheet to work to deliver a long term and progressive dividend by balancing growth and returns. This strategy is supported by our now well proven business model, which we developed in order to build a company that was fit to face the challenges and uncertainties in our sector. Financial disciplines are watch worth when we're committed to keeping costs low. Our balance sheet remains robust and our capital commitments remain almost entirely at our discretion. By doing this and always looking to mitigate against risks, we're able to continue to pay our material dividend in 2020 even as the external environment deteriorated and the oil price crashed, and we are now well positioned to take advantage of the improvement in oil price going forwards. Spike in the oil price does not change our approach to delivering shareholder value. We may change the tools that we have at our disposal, more on that later. I would now like to talk about ESG which of course is something has to be in the mind of any natural resources company that looks to mitigate downside risk. On this, focusing on all applicable aspects of ESG is the right thing to do, has long been a priority of our management and something that is very important to us, aimed to have the right assets, being low cost and low carbon in the right places where they can -- where they and we can make material contribution to the society and communities in which we operate. It is now 20 years since we began operating in the KRI, something that we are making marking this year through our Genel 20 initiative, this will see us expand the ambitions of our already notable social investments in Kurdistan. So watch this space as the year moves on. It clearly had a positive impact with Tawke and Taq Taq having already generated over $20 billion for the Kurdistan Regional Government. We will be quantifying our impact further when we issue our third sustainability reports on the day of the AGM. For those not familiar with our story, I urge people to take a look at our previously published reports. Take a look at our portfolio. I'll now hand over to Esa.

Esa Ikaheimonen: Thank you, Bill. And good morning, all. Let me kick this section of the presentation off with an outline of our performance in 2021. Given our focus on cash flow, the easiest way just to look at where the money comes from or where it goes to. Let's look at the sources first. Production was solid last year, in line with expectations with Peshkabir field, in particular, performing very strongly. And the early pilot production from Sarta offsetting declines of Taq Taq. As usual, this production was also low cost, production costs at about $4 per barrel on average. The result on net income after cost recovered CapEx was an impressive $21 per barrel. This is about three times what it was a year earlier. It's mainly due to two familiar things. Firstly, the improvement in oil price obviously, was increased from $42 per barrel in 2020 to an average of $71 a barrel in '21. Secondly, the resumption of the override payments relating to Tawke production, we received an incremental 4.5% of field revenue from the government. The remainder of these payments were suspended most of 2020. So the total of 11.6 million barrels that we produced during the year therefore resulted in $239 million of net income. This figure also includes all of the cost recovered CapEx in Tawke in Taq Taq. It was about 50 million, primarily relating to wells of the Tawke license offsetting its natural declines. From that $239 million, we generated about $150 million of cash flow before investing in growth. A $150 million figure included for corporate costs and interest expenses, which was some $40 million in total. Given the Brent rise and the resumption of the override, our cash flow would have been considerably higher. But KRG's unilateral decision to change payment terms from 1 month in arrears to 3 months in arrears during the year effectively meant that $65 million of cash flow moved out of 2021 and into 2022. This negative impact was then partly offset by receiving $35 million for deferred receivables from KRG. Away from our investment in production, our capital allocation was focused on continued appraisal of Sarta where we are working to derisk the asset base and better understand the reserves potential and drilling the exploration well carried out. The total CapEx of those two licensees was significant, about $110 million overall, for the various working capital movements associated with income and spend, we generated free cash flow of $86 million before any dividend payments. Dividend payments to our shareholders were $45 million in total in the calendar year. The reminder of the past, Genel was one of the very few oil and gas companies that did not suspend or even reduce its dividend during the challenging year of 2020. We have been clear that we want our dividend to be material, sustainable and progressive. We started fulfilling also this last element of the policy through increasing the interim dividend by 20% last year. The continuing strong cash generation of the business, the Board of Genel proposed increasing the final dividend also by 20%. We continue to favor the semi-annual dividend as preferred method to return capital. We continue to believe our current dividend policy is the correct one. Investors to know what to expect and to be able to value our ordinary dividend, see our latest dividends are sustainable in the medium term, the current level of payments as the minimum distribution. That said, our capital allocation remains focused on increasing our production, finding growth opportunities in order to build a diversified and long range asset base underpins the important dividend program. Clearly these are extraordinary times and given the oil price, our cash generation this year is said to be exceptional. Something you'll see on the next slide. So what to expect next, this year that is? Well, I've already talked about the cash flow that our barrels delivered in 2021, 2022 barrels would be about the same at a flat oil price, benefiting from a full year of monthly payments, other than the 10 received in 2021. You can see from the chart on the right, as the oil price increases and sold as a margin and dramatically so. It is obviously for you to take a view on oil price outlook, but we've simply tried to make it a bit easier here for you to calculate the impact on our cast generation. So if we use the pre-invasion of Ukraine price of $90 per barrel, we'd expect to see Genel earning about $29 plus per barrel. This margin multiplied by about 11.5 million barrels of working interest production is about $335 million in total. Then take off corporate interest cost of around $40 million and approximately $50 million investment in Sarta. It looks like free cash flow of around $250 million dollars. That by the way is nearly half of our market cap. And if you buy shares today, you get some money back through the increased dividend in three months' time and summary of the free cash flow story is good. Dividend policy is competitive. With that in mind and reverting into what I said earlier about the dividend, when we consider our capital allocation later this year. We'll also consider whether conditions continue to support additional and special return to capital, return of capital to shareholders. So how about the balance sheet? A little bit of perspective. When I started in Genel in 2017, the company had a very different financial position and it is obviously pleasing for the outgoing CFO to check out with the balance sheet is as strong as it is. In addition to strengthening the balance sheet since those days, we've also put a lot more cash to work, making disciplined investment in growth and introduce the material and sustainable dividend, dividend that we are now growing. The chart on the right shows how the strong balance sheet has been maintained despite putting on average about $100 million per annum towards dividends and investment in growth. What we now have is a material amount of net cash, a liquidity of well over $300 million and an outlook cash generation that could see us generate half our market cap in free cash flow in the next 12 months. We also have a significant resource potential and the company intends to put that cash towards delivering shareholder value effectively. In order to do that, our capital allocation remains focused on supporting a sustainable, progressive and long-term dividend. And with that in mind, we invest first in our production assets, which benefit from super fast payback in about 3 months, in fact, and which can contribute incremental cash flow nearly as quickly. Then we are focused on further appraisal at Sarta, much more of that from Mike in a moment. And we are now particularly excited about the recent farm-out on Somaliland, reducing our equity from 100% to 51%. And as a result, we now see a route to drilling an exploration well there, in an area that has real potential. As a reminder, we've always said we will drill, but needed other people's money for it. Now we've got it. Again, Mike will tell you more. And coming to an end of my section. But I add that it's clear that we need to prioritize building new income streams to continue with the kind of cash generation that will facilitate higher dividend returns, returns that are also sustainable longer term. Genel remains well positioned to do this. We have a very significant liquidity resource to put to work. And finally, and before I pass over to Paul and Mike, I just wanted to say a few words as the very nearly ex-CFO and one of those oil and gas veterans, and over the last 30 years I've had anything but exciting jobs. The fact that the 5 years with Genel is by far the longest in any of my jobs, demonstrates that I've thoroughly enjoyed the journey. Genel has got a great CEO, a world-class leadership team, a highly competent, dedicated and creative finance, business services and IT teams and operational and technical capabilities to be proud of. With that testimony opportunity, over to you, Paul, one of those world-class oil and gas leaders.

Paul Weir: Thank you very much, Esa, and good morning, everyone. As you can see on this slide and as is further detailed in the results announcement, we have more than 100 million barrels in 2P reserves. And as Esa has said, our priority, our operational focus remains safely maximizing the production of these highly cash-generative reserves, these high-margin barrels. On the Tawke license, there will be a significant increase in drilling in 2022. At Tawke field itself, operations are ramping up. We'll leave it to DNO to provide the operational detail. But there is an intensive drilling program underway there, and we are fully aligned on the importance of that work and very supportive of the work the operator is doing. Again, as Esa mentioned briefly, production from Peshkabir was excellent in 2021. The field averaged a daily production rate of more than 60,000 barrels a day, providing the lion share of the 108,000 barrels a day that the license averaged for the year. The operator expects production to be around 105,000 barrels a day from the license this year, which will again provide us with the key platform of our production in 2022. Taq Taq continues to be a less significant contributor of production, but remains cash generative, especially current oil prices. Having finalized the drilling plan with our partners, we aim to resume drilling at the field later this year. The wells we plan to drill at Taq Taq have the potential to mitigate the client at the field and pay back in a manner that supports the investment. Any declines we do see in 2022 are set to be potentially offset by production at Sarta where we aim to convert a significant portion of our considerable 2C resources into reserves. For more on Sarta appraisal and that part of the portfolio, I'll now hand over to Mike.

Mike Adams: Thanks, Paul, and good morning, everyone. So let me talk in a little more detail about the appraisal and preproduction part of our portfolio, bookended by the 2 Ss, Sarta and Somaliland. 2021 was the first year in the life of the Sarta field and much like a typical first year book, was characterized by milestone moments, lots of learnings, some surprises along the way, but ultimately, very rewarding, quite literally in the context of this profitable pilot philosophy we embarked on the project with. Gross production averaged 6,400 barrels of oil per day, and we produced close to 2.5 million barrels, generating net revenue of $30 million, equating to circa $15 million net operating profit in 2021. The Phase 1A pilot did what it was designed to do, gather dynamic data about the fluids and reservoir conditions in the primary Mus and Adaiyah interval over a production time scale, that is months and years. CapEx efficiently, utilizing in the first instance, 2 legacy exploration wells drilled by Chevron, whilst we embarked on drilling and completing additional wells in a more optimal manner, that is with modern, smart, multi-zone completions for subsequent production operations. We started to unravel what is clearly and not unusually for these rather niche fracture-dominated KRI reservoirs, a complex picture, initially through Sarta-2 and 3 until we were able to add the next piece to the puzzle, Sarta-1D, a third offtake point in this immediate Phase 1A pilot area. So let me talk about the results of that Sarta-1D well, their impact on our understanding and on the bottom line of production. S-1D well testing has now been completed and the well hooked up to production. The multiple zones of the primary Mus and Adaiyah reservoirs all produced oil on test at individual rates ranging from the hundreds to the thousands, i.e., in excess of 3,000 barrels of oil per day. The Mus and upper Adaiyah zones produce dry oil whilst the lower Adaiyah zones, in line with our expectations, produced a mixture of oil and water. In addition to the primary reservoir interval, the S-1D well targeted some of the substantial resource stack associated with the rest of the Jurassic. And to that end, a test of the prospective resources of the deeper Butmah interval flowed oil at rates in excess of 1,600 barrels of oil per day, representing a new discovery, the magnitude of which will be quantified in due course through future well penetrations. Whilst there is still much work to be done with the newly gathered well test data and the future dynamic data that manifests itself with the addition of S-1D to the production stream, there have been no further surprises to date in terms of which intervals are more or less or not connected, either vertically or between what is now a 3-well Phase 1A access. Containers within containers, i.e., the central portion, more limited than our expected extent of the Mus reservoir and stacked accumulations in reservoirs of this nature are, of course, commonplace in this basin. In keeping with our expectation, we again saw water in the mix in the lower Adaiyah section, something we had already been quick to react to in terms of how we deal with what is a very conventional part of production operations. That quick reaction saw us recomplete the vintage S4 well as a water injector in mid-February from a standing start, on time and under budget. Another example of our knack of finding capital-efficient solutions by making the most of what is already in our hand in the Sarta inventory. That water disposal, which will become fully operational in the coming weeks, with rental surface equipment in place goes a long way towards protecting production and safeguarding revenue by greatly increasing our optionality around which reservoir intervals we can produce going forward and longer term. In the immediate term, we have hooked up the dry oil of the Mus and upper Adaiyah to the EPF at a conservative 2,000 to 2,500 barrels of oil per day by way of balancing ongoing S2 offtake, taking field production to between 7,000 and 7,500 barrels of oil per day. So not quite where we had hoped to be production-wise at this stage of proceedings, but still very early days. And looking ahead, we are now in a position to most optimally utilize these 3 Phase 1A wells together with the S4 water injector in order to maximize production, i.e., revenue whilst protecting the reservoir. Okay. So that's the relative postage stamp of the Phase 1A pilot area centered around the EPF. Let's widen our lens now to the bigger picture being appraised by the S5 and S6 wells. To date, we've potentially only scratched the surface in this central area, which could really be just a tip of an iceberg for which S5 and S6 are going to tell us just how big and how deep that iceberg is. How big is the Sarta accumulation? And in so doing, inform us what a full field development looks like, what activity, what capital and when. S5 12 kilometers up dip from the Phase 1A pilot hub is really all about the aerial extent of the accumulation and in success, reservoir deliverability beyond the known. Having completed the drilling around the turn of the year, again with a 10 zone smart completion, we expect to commence flow testing of the well in April, once again targeting a combination of the primary Mus and Adaiyah reservoirs together with the contingent and prospective resources elsewhere in our Jurassic stack. The nature of our well test setup is such that in success, we will already be monetizing oil from the test itself, processed on site and trucked to Khurmala. Early monetization, we are looking to continue as seamlessly as possible via an extended well test phase by way of bridge to the temporary production facility, we've spoken about previously with this relatively distant S5 area. So essentially accelerating production by at least 6 months versus that more permanent facility. Finally, at S6, around 6 kilometers from the EPS, drilling has reached around a kilometer in depth on route to this test of the down dip extent of our reservoir objectives, late June to early July being targeted for commencement of the well testing program. Together, these 2 appraisal wells with chances of success in the 1 in 2 to 1 in 3 range are going to tell us a great deal about the size and shape of Sarta and with the Phase 1A dynamic data inform the next phase of the project under our paddy philosophy, the transition from pilot and appraise into develop. Finally, on Sarta and a slightly different take on my iceberg analogy, our work towards reducing emissions is making great progress on 2 fronts. Firstly, our gas management planning is accelerating through a stage gate process with a number of alternatives above and below ground being narrowed down through a viability lens. Then secondly, we've completed the assess phase of a renewable energy study initiated late last year. Our self-adopted, socially responsible brand doesn't and won't just happen. It is intrinsic to us, and we put the hard yards in to make it so. Changing gears now to Qara Dagh, a step further back at the exploration and appraisal end of the spectrum, the QD-2 well was suspended in late December after encountering insurmountable technical problems that meant the primary objective testing of the Shiranish reservoir could not be achieved. So what happened? In a nutshell, it was all about the rocks, meaning the one encountered an unexpected major thrust fault 2 months into drilling operations, which put the reservoir objective significantly deeper than prognosed and demanded a radical modification of the well trajectory to reach it. This fault was not detectable on seismic data, a common imaging issue for structures in the KRI nor encountered by the QD-1 well. A picture paints a thousand words or at least the before and after cartoons on the slide do. Optionality on a revised trajectory at that point as a combination of the fixed surface location and subsurface position resulting from the 2 kilometers of wellbore drilled to the intermediate casing shoe was extremely limited, i.e., no reasonable option to go around the crest of the structure, only through it. So we tried to do just that. Three sidetracks of the main wellbore was subsequently attempted, but ultimately failed due to a lack of borehole stability around a structurally complex zone above the crest of the structure, which made drilling extremely slow and subsequent securing of drilled sections behind casing extremely challenging. If you're lucky enough to be on a white sand beach sometime this summer, see what happens when you try to create a hole in it, the way it builds back in on itself. That gives you an insight into the issue we had. At the time of suspension of the third and final attempted sidetrack, the reservoir objective was estimated to be between 700 and 1,500 meters below the drill bit still. But all of this said, the geological case and the size of the price remains untested and undiminished by the QD-2 result. So where does that leave us? Well, firstly, it leaves us in a 1-year extension to the license in order to conduct the post-well analysis required to inform us on the technical feasibility and nature of a further well on the structure, together with the investment case for drilling such a well, which if we and our partner, Chevron, were to elect to undertake on a risk and reward basis, would be in late 2023 under a further 1-year extension available to us under the PSC. Finally, a few words on Somaliland, an exploration project we've have considered a hidden gem in our portfolio for quite some time. A view now shared by our new partner, CPC, the state-owned Taiwanese National Oil Company, having formed into the license for a 49% non-operated interest late last year in a deal that saw us recover half of our historical back costs in upfront cash consideration along with an additional cash premium, more than sufficient to fund our share of a well in the block in late 2023, what would be a historic first well in Somaliland for over 30 years. To remind you, the block is highly prospective, characterized by rocks analogous to the prolific Yemeni basins and in the event of what would be a play and basin opening discovery, the JV acreage position encompasses that entire basin. We have a strong feeling that the stars are aligning for Somaliland as a whole and this project specifically as some of the natural advantages are maturing in parallel. Our proximity to the deepwater port of Berbera on the Gulf of Aden shipping lane at a time when those facilities and infrastructure are developing at a pace, something we saw firsthand as a management team a couple of weeks back and all against the backdrop of exploration friendly oil prices. On that positive note from this little corner of Africa in our portfolio, let me hand back to Bill to close out with an equally positive looking 2022 outlook for Genel as a company.

Bill Higgs: Thanks, Mike. So what does 2022 look like? It looks very cash generative. We have provided guidance of stable production year-on-year with the potential for Sarta to more than offset any declines of Taq Taq. With the margin per barrel of our production business benefiting from oil price, it is likely that we'll see a higher margin per barrel this year than last. We have guided $45 million to $80 million of investment in Sarta where the appraisal campaign continues with important results during the first half of the year. After the [indiscernible] our free cash flow is expected to be above $0.25 billion at $90 per barrel average. Following the horrific situation in Ukraine, the oil price is over $100 a barrel a day and each $10 a barrel on Brent adds $50 million to our net income. As you heard, we remain committed to a material and progressive dividend. As the year progresses, we will consider additional returns to reflect the current situation, but we also remain very committed to building a portfolio that continues to support both growth and progressive long-term returns. Thank you for your time. And so we can now pass over to any questions. But before we do so, I take this opportunity to say thank you to Esa for his commitment to the Genel journey over the last maybe 5 years. When he arrived, as he mentioned, we were substantially in net debt. We've never paid a dividend and had no line of sight on new growth. Much has changed during his time with us, and I wish him very well and all the best for his future endeavors. However, given that it is his last results presentation with Genel, please feel free to ask him as many difficult questions as you can. With that, I'll hand over to questions.

Operator: [Operator Instructions] The first question comes from the line of David Round from Stifel.

David Round: Thanks, guys. I think I'm going to have to let Esa off because I wanted to focus on Sarta, please. Firstly, just 1D felt a bit light. I certainly had about 5,000 barrels a day in my head, which I think is what Sarta-2 is doing. So perhaps you can just explain the differences between those 2 wells, please? And whether you'd get to the same place if you did produce more the 1D intervals? And secondly, you did previously talk about 1D be necessary to tell you where the water is coming from. So are you able to just update us on latest thoughts there and whether that does imply the development concept has to change a bit?

Bill Higgs: Will you take that, Mike?

Mike Adams: I'd be delighted to. Hello, David, good morning. Yes, Sarta -- so Sarta 1D results, we're certainly not considering Sarta 1D a disappointing result in any way. So the initial rate really is a reflection of the fact that this first new well is close to the existing Phase 1A pilot wells, S2 and S3. So in terms of that initial hookup rate, we have half an eye on managing offtake certainly ahead of our S5 and S6 results which will give us more disparate take points. But certainly, to the second part of your question, there's certainly still room for maneuver in terms of adding production from lower zones, given this is only production from the upper part of the reservoir, again, the Mus and the upper Adaiyah. So on a standalone basis, this well could achieve those kind of 5,000 barrels per day, but we're managing the offtake in the context of S2 given these 3 wells now along this axis are pretty close together. So I think the well confirmed and refined what we had learned from the pilot to date and certainly has plenty of running room going forwards. One of those learnings from the pilot today that you referenced was around water. So I think it's a well that certainly has confirmed that water is with us. We've established now that it is formation water associated with certain parts of this stacked Mus and Adaiyah accumulation. So there are 7 discrete zones in this reservoir stack. The identity of -- the exact identity of which of those zones are contributing water is still being unraveled with our new S-1D test data along with initial production post S-1D hookup and what we see from the 3 wells and probably future surveillance as well. But I think we've reacted quickly to get the necessary water management solution in place for, as I've said, was a very conventional production operations activity.

Bill Higgs: Maybe just to add to that, David, the key thing which Mike alluded to is that more through -- because we've got water in the lower Adaiyah zones in Butmah, we need to be able to manage that water through disposal to be able to bring up the rate of S-1D. At the moment we're using the clean oil interval as our production. So it's about bringing that system back up to manage the water offtake and then we can get more higher oil rates. So expect that to come in the next months ahead.

Operator: The next question comes from the line of Teodor Sveen-Nilsen from SB1 Markets.

Teodor Sveen-Nilsen: Congratulations on 2021 full year results. Three questions from me. First on dividend expectations. You're guiding for free cash flow this year of $250 per barrel, given $90, sorry, $250 million, given $90 per barrel non-CapEx [indiscernible] million. I just assume -- should we assume that if all the free cash flow of $70 million in that scenario should be paid out as dividends or will you consider to look at M&A? So that's the first question. And second question, just briefly on the impact of the Supreme Court judgment in mid-February. I noticed that you do write in your report that it has not had any impact on your operations in this part. Of course, hard to comment on, there may be, you can just briefly discuss potential impact in the long-term on that third quarter judgment? And my last question is on CapEx flexibility. Your full year guidance of $240 million to $280 million, as far as I understand, how much of that is committed and how low could you actually go?

Bill Higgs: Esa, do you want to start with the M&A question? Do you want to talk about that? Take the – about capital allocation.

Esa Ikaheimonen: Yes. Good question. Thank you. Thoughtful. It's all about growth and returns for us, actually. So I think the way you should think about the capital allocation going forward, priority is pretty much unchanged. Actually we continue to invest meaningful amounts of production. We've got a dividend floor now that we are reestablishing through the progression and the increase. And the surplus cash flow that we generate as well as the liquidity on our balance sheet is going to be reallocated in a sort of balanced manner between growth and dividend. Now what does that mean in practice? We will be actively looking for M&A opportunities to improve the quality of our portfolio, particularly medium and longer-term quality of the portfolio in order to underpin the progressive dividend over a longer period of time. So M&A activity are likely to be quite active. We've been looking for suitable add-ons to our portfolio and depending on how the surplus situation develops over the next 12 months or so, we will consider a special dividend, as you would expect us to do, given the fact that the outlook is pretty cash-generative. Anything to add to that, Bill?

Bill Higgs: That's good. Yes. Just picking up on the Federal Supreme Court ruling from 15th of February. Firstly, that was -- it was a majority ruling of the Federal Supreme Court. And I think clearly, in the eyes of anybody and everybody that knows the region, it seems to be very politically motivated. We have seen a very strong response from the Kurdistan regional government immediately post that announcement, reemphasizing their continued support for the industry and their continued honoring of the production sharing contracts and the industry as a whole. So we see this as a, again, just part of the risk profile of working and producing in Kurdistan, but have seen and continuously through the payments process continued commitment from the Kurdistan regional government to its operators. On the capital allocation point around how low can we go. Theoretically, I think in our actual 2022 expenditure, we have currently no committed capital as such. But obviously, the capital program is -- becomes more and more mature as you go through the year just through the fact that you're working with approved work programs and budgets with your JV partners and the government. But in terms of actual firm commitment that we have to have in our floor program, as I'm looking at my friends across the table here, I think there's nothing in '22, and we would start commitment again in '23 with the already prefunded Somaliland exploration well. So we're in a very comfortable position from that point of view.

Mike Adams: [indiscernible] business model, obviously, would just add to that. We've continuously done what is possible to maintain flexibility with regards to our capital program and that continues. So right now it's probably not quite as acute to talk about flexibility of capital and lack of committed CapEx, but it's the same story. So for whatever reason, we would want to start reducing our CapEx expenditure to do in the near term would obviously complete ongoing activities that have already been contracted and where the work is in progress, but we would have pretty much full flexibility in terms of what to do going forward. And given the environment, quite obviously, it's obviously kind of incentivizing to do more rather than less, particularly given the high margin of barrels that come out of our main assets, the Tawke license and now increasing the Sarta.

Operator: The next question comes from the line of Nick Stefanou from Renaissance Capital.

Nick Stefanou: Nick from RenCap here. Esa I would like to wish you the best for the next chapter in your career and life and it was a pleasure working with you. I've got 2 questions to ask. First one is, I guess, it's for Mike. Mike, just a quick clarification on Sarta. The water injection will just be for disposal, right? You don't really -- it's not about any secondary recovery. Is that the case?

Mike Adams: Yes, that's right, Nick. It's water disposal. And so we have 2 intervals that we've completed there that give us optionality on our water disposal. So yes, entirely disposal.

Nick Stefanou: Because I was worried about if it could kind of like push the oil column a bit upwards and not really give time for the metrics to replenish the process. If that was -- but that's not the case from what I understand.

Mike Adams: No. And Nick, being disposed into an interval, which isn't oil bearing anyway.

Nick Stefanou: The second one is on the arbitration. Can you give me a sense of what the time line? Is there, I mean, these things take time, but I just want to get a sense of what are the next steps, what kind of like time line is there? And by when maybe we could have a potential of like ruling?

Bill Higgs: Well, Nick, as you would expect, we're not going to say very much today about the ongoing arbitration and you quite rightly say that these things take time. But I think it's important to recognize that one of the things that we feel quite good about at the moment is that we've done a good job of separating the rest of our business from the ongoing arbitration in respect of our relationship with the Kurdistan regional government. So we continue to be very, very engaged and they continue to be very engaged with us on the rest of our business. And that process will go ahead and it's got its own time line, it's got its own agenda and there's not much more that we can say about it at this time.

Nick Stefanou: And just a final one. On the commentary you made about M&A. Okay. I think you're well positioned to buy something material. But I was just wondering, would you be willing to kind of like double down on your exposure in Kurdistan, also given some of the recent updates there? Or -- and if not, what are the other kind of like geographical locations you might be interested in looking at?

Esa Ikaheimonen: Yes. And I think if you look at the characteristics of what we’re saying in terms of our business model, it is, to my mind, in this world of the fewer and better projects as we head into this energy transition. Those fewer and better projects need to have the characteristics of high margins, low carbon and in geographies where it makes a material benefit to the societies and communities in which they are produced. So clearly, the Kurdistan region meets those criteria. And we certainly are comfortable with the risk profile around operating and producing in Kurdistan. As we said, have been there for 20 years and have a good relationship with our partners there. So clearly, that would fit. But I think with those 3 criteria, it gives you a flavor of some of the other things that we may look to do. I think it’s also worth adding in here, obviously, in this price environment, we do remain very focused as a business on managing downside risk, and it's important to stay focused on that because the circumstances can change. So it’s a difficult price environment in which to transact, yes.

Operator: [Operator Instructions] The next question comes from the line of James Thompson of JPMorgan.

James Thompson: Yes, like our previous entrance there, so I hope you -- wish you all the best for the future. I also want to just ask about M&A actually. I mean, obviously, Qara Dagh and gas would be -- would have been useful growth projects for the next couple of years. And certainly your comments on Qara Dagh makes me feel like it's going to be a slightly longer process, if anything. I guess, Bill, I just wanted to sort of understand the kind of desire to get something done quickly here. I mean you obviously talk also about special dividends or potential for a special dividend. Is it sort of one or the other in terms of if you can find something this year to add some growth to the business, you will do that versus returning capital? And if you don't find something, you'll return a significant slug of cash back. Is that how we should be thinking about it? I mean, I guess, I'm conscious that 2023 cash flow even in this sort of oil price environment will obviously be much lower at the end of the receivables recovery.

Bill Higgs: Yes. Thanks, James. I guess the way that I look at it is there are 3 -- there are sort of 3 variables that are in place today. We've talked a lot today about how important it is for the business to understand the appraisal results of Sarta-5 and Sarta-6 so that we have the clearest definition of the way forward in terms of what the capital demand for Sarta is going to be over the coming years. So that's important. That's important part of the framework for thinking about capital allocation. And again, coming back to the point that actually, if you look at the net margins on Sarta barrels, incremental Sarta barrels, they're extremely profitable. In fact, in many ways, you can think of a Sarta barrel materially replacing more than 1 barrel equivalent of [RE] and receivable barrels. So they are -- they're high margin barrels that really fill that gap. And in fact, actually, if you go back to sort of 2018 when we sort of started this journey, it was clearly identified by us as one of the things that we needed to be ready to do was to fill the gap when the RE disappeared. And that was part of the reason why we entered into the Sarta project in the first place. So it has the ability to do that, but we just don't know what a capital profile is for here. We will do as the year progresses. I think then you look at it and say, well, actually, it could be and it could be we -- notwithstanding the price environment and the challenges of doing a good deal in the price environment that gives us the flexibility of downside protection. We've got to deliver the cash to the balance sheet to enable that M&A, and we've got to deliver the cash to the balance sheet that would enable us to feel comfortable about a special dividend. But with the potential to generate more than $250 million of free cash flow in the year, today, that's potential at the end of the year hopefully, it's realized, and then we'll be able to act accordingly. So -- but I think there's enough flexibility in the balance sheet to be able to potentially be in an and position at the end of the year. does that makes sense?

James Thompson: Yes. That makes sense. I guess the second question is on Qara Dagh. I mean the -- obviously, it's sort of one slide to have a look at it, but thank you very much for that. I mean it seems to me to be pretty complex to get down into, if you like, the main structure now with the full kind of across the top of that. I mean, is this -- you're obviously sort of right to do that much more cautious tone. But I mean, is there a chance that perhaps Qara Dagh isn't something you pursue?

Mike Adams : Yes. I think -- hello, James, it's Mike. What I would say is that we -- whilst that was clearly a disappointing outcome at the end of the year, I think it was very much the right decision that we took, which was to take a little bit of a step back, take a pause and take the learnings that we saw from that well, which were actually quite profound as you can see from the cross-section there and learnings that we could only have taken with the drill bit. So there's -- I think there's a bit of wood to chop as my esteemed outgoing CFO likes to frequently say here in terms of the post-well analysis, just integrating all of that information and seeing really just what is the art of the possible, very much through a kind of risk and reward lens because we know the reward side of that balance is very considerable here. And now I think we need to reassess the risk side of that balance and see what the art of the possible would be with another well, as we say, which needs to, in simple terms, find a way of going around rather than through that very complex geology at the core of the structure.

Esa Ikaheimonen : I think it's worth in adding to that, James, that we -- yes, hindsight is a wonderful thing. And if we've clearly known before drilling that that was what the geology was in the crest of that structure. We wouldn't have drilled that well trajectory. So I think there is an opportunity to drill an optimal world trajectory that avoids that challenge. It's just that once we set off on the path we were on, as Mike alluded to earlier, that the flexibility available to us to avoid that area became essentially nonexistent, so.

Bill Higgs: And I think just -- sorry, just to add to that, add to that add, James. We talk a lot about optionality and the fact that we're very big on maintaining optionality for ourselves. So that's very much what's happened with Qara Dagh by going into this extension period. We've given ourselves the optionality going forwards of still being able to drill a well on that structure if ourselves and our partner, Chevron, decided that's the prudent thing to do, and that would be, as I say, at the end of next year.

James Thompson: Final one for me. Just in terms of '20, actually, I mean, I think we sort of live in a world now where from an oil industry perspective, I suppose the [SE] is actually becoming a lot more important than perhaps it was a few weeks ago. So could you maybe just sort of flush out what it is you're sort of thinking about doing, maybe scale it in terms of how much you're willing to invest here and what sort of project you might be doing?

Bill Higgs: For the Genel 20 initiative. Yes, we're excited about that because, I mean, it is a good opportunity for us to sort of take stock and look back at the 20 years that we've spent in Kurdistan. And there's a number of initiatives we're looking at, but many of them around, should we say, enhanced capability development and investment in young talents really in terms of leadership talent and trying to do some work on developing young leaders across sectors, not just in the oil industry as well as sort of making sure that we have the opportunity to focus on what's next for Kurdistan and how does Kurdistan leverage its industry to benefit its move to a much more diversified economies, and we've got some work and some initiatives on that as well as doing the great work that we do on the ground around our operations and supporting the development of small businesses and in the development of and support of the communities where they need our help most. So it's quite a wide variety of initiatives, and we look forward to telling everybody more about it as we go through the year. Great. Well, thank you very much, everybody. Thanks for listening to our 2021 results presentation today. As I said, I've got an exciting year ahead and some very important results coming up in the near term with the Sarta appraisal program. So we look forward to telling you more about all of that hard work as we go through the year.