Kuwait Energy plc (“Kuwait Energy”, the “Company” and together with its subsidiaries and subsidiary undertakings, the “Group”), an independent oil and gas company actively engaged in the exploration, appraisal, development and production of hydrocarbons across the Middle East and North Africa (“MENA”) region, today announces that it intends to proceed with an initial public offering (the “IPO” or the “Offer”).
Kuwait Energy intends to apply for admission of the Company’s ordinary shares (“Ordinary Shares”) to the premium listing segment of the Official List maintained by the Financial Conduct Authority and to trading on the main market of the London Stock Exchange (together, the “Admission”).
Since the Group was established in Kuwait in 2005, it has built a high quality and diversified portfolio of oil and gas assets in the MENA region. The Group’s portfolio currently consists of ten exploration, development and production oil and gas assets in Egypt, Iraq, Oman and Yemen (six of which are currently producing). A Group company is the operator of seven of these assets.
The Group’s 2P working interest reserves attributable to the MENA region have increased from 18.1 mmboe as at 31 December 2008 to 810.0 mmboe as at 31 December 2016, and 2P net entitlement reserves have increased from 6.1 mmboe as at 31 December 2008 to 141.7 mmboe as at 31 December 2016.
In the year ended 31 December 2016, the Group had a total average daily working interest production of 24,432 boepd (2015: 24,988 boepd)1. In the same period the Group generated revenue of $138.9 million and operating cashflow before movement in working capital of $77.2 million.
Summary of the Offer
·The Directors of Kuwait Energy believe that this is an appropriate time to bring the Group to the public markets to support and position the Group for the continued implementation of its growth strategy to become the leading independent oil and gas exploration and development company in the MENA region
·The Offer is expected to raise gross primary proceeds of approximately $150 million from an issue of new Ordinary Shares by the Company, which will be predominantly used to continue the development of the Group’s assets, notably those in Iraq which are expected to significantly contribute to the Group’s future growth
·In addition, the Offer will provide an opportunity for partial realisation by the Company’s current shareholders of their existing shares
·The Company intends to achieve a sufficient free float to meet the eligibility requirements for a premium listing
·It is expected that Admission will take place in June 2017 and that following Admission, the Company will be eligible for inclusion in the FTSE UK Indices
Dr. Manssour Aboukhamseen, Executive Chairman of Kuwait Energy, said:
“I am extremely proud to introduce Kuwait Energy to the London market. Since 2005, we have built a well-known and highly respected independent oil company with an experienced management team and track record of delivery.
“We are part of the communities in which we operate and our proven status as a trusted partner and a truly indigenous operator helps to de-risk our operations. I look forward to growing our company and sharing that success with both existing and new shareholders.”
Sara Akbar, Chief Executive Officer of Kuwait Energy, said:
“We are delighted to announce our intention to list on the London Stock Exchange, the natural home for Kuwait Energy.
“Kuwait Energy’s strong, in-country relationships and track record of operational delivery in the MENA region are major competitive differentiators and provide a stable platform from which to take the Company to the next level of growth. We are already producing close to 27 kboepd in the first quarter of 2017, with a strategy in place to increase that production rapidly, particularly through our Block 9 asset in Iraq which, management believes, has some of the most favourable fiscal terms in the region.
“Over the coming years, the Group’s focus is on developing its current 2P working interest reserves which are in excess of 800 mmboe.”
Business highlights
Attractive reserve base with diversified assets and geographies across the MENA region
· The Group has a number of assets at different stages of exploration, appraisal, development and production which the Directors believe have strong growth potential. These are set out in the table below, as at 31 December 2016
Source: Gaffney, Cline & Associates – Competent Person’s Report
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Notes:
1)
Group 1P and 2P reserves in these columns are presented as at 31 December 2016 on a “working interest” basis and are therefore not directly comparable with the 1P and 2P Reserves presented on a “net entitlement” basis. Group working interest reserves are the Group’s revenue working interest fraction of the gross reserves of a given field. In assets governed by a PSC or a service contract (as opposed to assets under a tax/royalty fiscal regime), Group net entitlement volumes under the terms of the PSC or service contract can be expected to be less than working interest volumes.
2)
Gas and condensate volumes have been converted by the Group to oil equivalent volumes using conversion factors of 6.0 mscf/boe and 1.0 bbl/boe respectively. In respect of Abu Sennan, gas volumes have been converted by the Group to oil equivalent volumes using a conversion factor of 5.0mscf/boe.
3)
Farm-out of a 15% revenue working interest and a 20% cost working interest in Siba announced in October 2016. Farm-out completion is subject to government approvals.
4)
Farm-out of a 25% interest in Abu Sennan announced in 2017. Farm-out completion is subject to government approvals.
5)
The Group is evaluating its options in respect of the Mansuriya asset in Iraq, currently under administrative hold meaning development work in relation to the asset has been suspended due to the security situation in Iraq, resulting in a reduction to the original commercial estimates and projections of the project, while the JV partners are deciding whether to seek changes to the contractual terms of the project before further work is undertaken. The Group intends to spend only the minimum capital expenditures required under the Mansuriya licence.
6)
Block 5 and Block 49 suspended production of oil in 2015 due to the security situation in Yemen.
7)
Reflects the contribution of the Group’s 20 per cent. interest in Medco LLC, which holds a 75 per cent. working interest in the Karim Small Fields in Oman. As the Group does not control Medco LLC, under IFRS 11 Medco LLC cannot be consolidated with the Group’s revenue or expense items on its consolidated income statement. The Group’s interest in Medco LLC is therefore accounted for in the Group’s consolidated income statement under “Share in results of joint venture”.
8)
Sum totals may differ from sums of line items presented as a result of rounding.
9)
Excludes Oman due to the fact that, as the Group has no direct rights to any volumes of oil in Karim Small Fields, external reporting of reserves volumes is prohibited under the terms of the service agreement.
·As at 31 December 2016, the Group had 2P working interest reserves of 810.0 mmboe (of which 93 per cent. are in assets operated by a Group company), 2P net entitlement reserves of 141.7 mmboe, working interest 2C contingent resources of 1,039.7 mmboe and working interest risked prospective resources of 28 mmboe
Attractive range of fiscal terms across the Group’s assets
·In certain jurisdictions, particularly Iraq, the Group’s production is governed by fixed-remuneration fee service agreements which are based (other than in respect of cost recovery) on production volumes, rather than market prices. The remuneration fee rates that the Group has for its service contracts are, management believes, among the most attractive in Iraq
·Across the Group’s other assets in Egypt, Yemen and Oman, it operates under a mix of fiscal regimes including Production Sharing Contracts (“PSCs”) and service contracts. Under these fiscal regimes, higher market prices for oil and gas may generate higher revenues under the terms of such fiscal agreements
·The Directors believe that this combination of fiscal arrangements across its asset base should enable the Group to drive future production growth and operating cashflow
Indigenous company in the MENA region with access to growth opportunities through strong regional relationships
·Over the past three decades of working in the MENA region, the Group’s management team has built strong relationships with national oil and gas companies and key decision-makers and officials in the oil and gas industries in various countries in the region
·These relationships include the Egyptian General Petroleum Corporation (“EGPC”) in Egypt, the Iraqi Ministry of Oil and the Petroleum Exploration and Production Authority in Yemen
Consistent track record of growing reserves and production
·The Group has rapidly grown its overall MENA reserve base since inception with 2P working interest reserves attributable to the MENA region increasing from 18.1 mmboe as at 31 December 2008 to 810.0 mmboe as at 31 December 2016 (61 per cent. CAGR) and 2P net entitlement reserves increasing from 6.1 mmboe as at 31 December 2008 to 141.7 mmboe as at 31 December 2016 (48 per cent. CAGR)
·Kuwait Energy’s average daily hydrocarbon production (oil, gas and condensate) on a working interest basis has grown considerably, from 680 boepd in 2006 to 24,432 boepd in 2016
·The Company’s rapid growth, and its ability to convert resources into reserves, is attributable to the success of its management and technical teams, which have technical, operational knowledge and expertise as a result of their extensive experience with the geological and subsurface conditions as well as having a long history of operating and investing in the MENA region
Established and experienced operator in politically and operationally challenging geographies
·The Group’s management team has an in-depth understanding of the oil and gas industry in the countries in which it operates and has extensive experience in operating its oil and gas assets effectively, including during periods of political instability
·In Iraq, the Group has benefited from being pre-qualified as a relatively small company at the time by the Iraqi Ministry of Oil. This has led to the award of three significant service contracts since 2010, all in a public process with the Iraqi Ministry of Oil. Production from the Faihaa-1 well in Block 9 commenced in October 2015 with the Group receiving its first Iraqi cargo payment of $13.6 million on 15 November 2016
·In Egypt, during the period of political turmoil and civil unrest, the Group has avoided significant interruptions to its field development programme. Although EGPC has typically remitted payments due to the Group several months in arrears since 2011, the Group has continued to receive cash payments from EGPC, and the Group’s receivables from EGPC have declined significantly from their peak of $188.8 million as at 30 June 2012 to $58 million as at 31 December 2016
Experienced management creating value through operational excellence and cost control
·The executive management team has significant depth and breadth of oil and gas industry experience across the exploration, appraisal and production sector especially in the MENA region
·Dr Mansour Aboukhamseen (Group Chairman), Sara Akbar (Chief Executive Officer), Mohammad Al Howqal (Senior Vice-President HSSE, Risk & Compliance) and Mohammed Aboush (Senior Vice-President for Iraq), as well as many of the Group’s key business managers have spent the majority of their working careers with companies focused on the MENA region
·The four above-named individuals have, in aggregate, over 125 years of work experience in the oil and gas industry in the MENA region
Low-cost operator with prudent capital structure
·As an independent oil and gas company, Kuwait Energy’s cost base is significantly lower than that of the National Oil and Gas Companies (“NOCs”) and the major International Oil and Gas Companies (“IOCs”)
Strategy
To be the leading MENA-based independent oil and gas company
In the MENA region, the upstream oil and gas industry has historically been dominated by NOCs and IOCs, particularly in the main producing GCC countries including Saudi Arabia, Kuwait and Qatar.
Over the last decade in the MENA region, economic and political developments have presented unique opportunities and challenges in the hydrocarbon sector, such as regional shifts to democracy, rapidly-growing demand for gas, increasing maturity of some large producing fields and the need to diversify local economies from oil income dependence. These developments present new opportunities for independent oil and gas companies such as Kuwait Energy.
Kuwait Energy’s strategy is to be the leading independent oil and gas exploration and development company in the MENA region. As a result of their size, independent oil and gas companies in comparison to NOCs and IOCs, are typically able to operate more efficiently with a lower cost base allowing them to specialise in developing and producing smaller, more technically difficult and/or mature fields. The increasing demand to develop and produce critical hydrocarbon resources as well as the need for more specialised knowledge to develop such resources in the MENA region present Kuwait Energy with an opportunity for growth. The Directors believe that Kuwait Energy’s track record, local expertise and existing relations in the region means that it is well positioned to take advantage of these opportunities.
Focus on the MENA region
Kuwait Energy is a MENA-focused exploration, development and production company with a presence in Iraq, Egypt, Yemen and Oman. The Group disposed of its assets in Ukraine and Russia in 2014 in order to focus on its MENA assets. Its main asset, Block 9 in Iraq, represents one of the largest independently operated oil field developments globally. Currently, Kuwait Energy is focused on the development of its Iraqi assets, Siba and Block 9, with a long-term view to grow its portfolio by increasing its asset base in the MENA region.
The MENA region has many proven and prolific hydrocarbon basins. According to the June 2016 BP Statistical Review of World Energy, as at 31 December 2015 there were approximately 800 billion barrels of oil still to be produced in the Middle East. MENA is of significant importance to the oil and gas industry globally given the vast quantities of oil and gas as well as the low cost and relatively straightforward means of production in the region. As at 31 December 2016, Kuwait Energy had a 47% exploration success rate overall, and a 100% exploration success rate in Iraq, which has lowered its overall costs of exploration.
Kuwait Energy’s management has a profound understanding of the culture as well as the social and political background of the MENA region. Kuwait Energy’s operational experience and understanding of the geological composition of the region has resulted in a strong track record for the Group. Due to their long tenure and breadth of experience working in the oil and gas industry in MENA, the management of Kuwait Energy have cultivated meaningful and long-lasting relationships with governmental agencies and representatives in the oil and gas industry in a number of countries within the region.
Kuwait Energy’s management believes that the large volume of reserves and resources in MENA as well as the political shift to the opening of the oil and gas industry to independent oil and gas companies present opportunities to grow and expand its operations in other countries within the region. As a result of its strong position in MENA, Kuwait Energy believes that it is well placed to take advantage of these opportunities.
Emphasise production and development over exploration and acquisition
There are many development and production assets given the wealth of reserves and resources in the MENA region. The Block 9 development, with over 2.5 billion barrels of gross proven and probable reserves and contingent resources, emphasises the importance of creating value from existing oil and gas developments.
The Group’s focus remains on production and development as it believes there are greater opportunities in successfully developing the large discovered reserves and resources given available volumes.
Commercial production from the Faihaa-3 well in Block 9 in Iraq commenced on 8 February 2017. The Directors expect production from Block 9 to increase to approximately 20,000 boepd in 2017, assuming that a fourth well is able to come on-stream. Further, the Group expects first production of gas from Siba in Iraq in January 2018. Management expects the daily average production rate to be 100 mmscfd in 2018, with current plans to drill a total of 18 new wells throughout the life of the field to attain and maintain this production rate.
Actively manage and operate the Group’s assets
The majority of the assets in Kuwait Energy’s portfolio are operated and controlled by the Group. It is a strategic priority of Kuwait Energy to operate its assets as the Directors believe that enables the Group to develop and produce the assets in the most efficient and effective manner. Being an operator also allows Kuwait Energy more flexibility in timing of operations such as drilling wells, including, for example the opportunity to advance drilling when contractor prices are low. It also allows the Group to more effectively manage costs and timing of expenditures and attracts joint venture partners that wish to operate in the MENA region with an operator who is experienced in the region.
Leverage local knowledge and expertise
Kuwait Energy was established by entrepreneurial founders from Kuwait and has maintained this entrepreneurial culture throughout its operations.
Kuwait Energy utilises a full team of in-house geologists, subsurface specialists, drilling and facility engineers, and its management have focused on the employment of nationals in the countries in which it operates. As at 31 December 2016, Kuwait Energy had 717 employees, with locals representing over 90% of its employees in each of its offices in Cairo, Basra and Sanaa. This focus reinforces local relationships with governmental agencies and representatives in the oil and gas industry and enhances Kuwait Energy’s local knowledge and expertise. It also allows Kuwait Energy to better manage and anticipate risks specific to operating in the region and industry.
Kuwait Energy’s experience and local expertise have enabled it to form substantial and long-lasting partnerships with government entities in the countries in which it operates. As an example, Kuwait Energy’s relationship with the EGPC has led to the farming in of EGPC to two Iraqi assets operated by the Group, which represents the first time EGPC participated in oil and gas assets outside of Egypt.
Prudently manage financial risk through a conservative capital structure
The Group aims to manage its financial risk by applying strict return criteria, maintaining a prudent capital structure and focusing a significant part of its operations on developed and producing assets.
Kuwait Energy actively seeks shareholder returns and has paid dividends twice, in 2011 and in 2012, during the course of its operations. Initially, the Group grew largely through equity capital contributions and in later years, a greater amount of debt capital was used to fund the Group’s growth, including a 2014 offering of senior guaranteed notes due 2019 (the “Senior Notes”), which raised $250 million in aggregate proceeds. The proceeds of the Senior Notes were used to refinance the Group’s secured bank facilities, with cash remaining on balance sheet to fund capital expenditures, particularly for the Group’s operations in Iraq. The Group has demonstrated the discipline necessary to operate and grow its business despite the restriction inherent in such borrowings and has remained in compliance with the covenants and terms of its Senior Notes. In addition, the Group actively manages its portfolio in efforts to optimise cash flows, most recently through the sale of a 10% interest in Block 9 in 2015, a 15% revenue working interest and 20% cost working interest in Siba in 2016 and a 25% interest in Abu Sennan in 2016 (the sales of interests in Siba and Abu Sennan are subject to government approvals).
Maintain robust international standards of corporate governance
The Directors believe robust corporate governance practices are a key element of the Group’s strategy and necessary to create value for shareholders. The Board has established audit and risk, remuneration and nomination committees and has had such committees in place since 2012. The Group audits its reserves and resources in accordance with the internationally recognised standards of the Society of Petroleum Engineers’ guidelines, audits its financials the International Financial Reporting Standards and also runs its Board in accordance with the UK Corporate Governance Code. The Group has a majority of independent non-executive directors on the Board with three executive directors and six independent non-executive directors.
Additionally, the Company has established Health, Safety, Sustainability and Environment (“HSSE”) programmes based on internationally recognised standards which are regularly audited. The Group uses HSSE as a primary criterion for sub-contractor selection and includes HSSE measures as part of its annual corporate performance review.
Through the Group’s operations in the MENA region and focus on employment of local nationals as well as its contributions in various corporate social responsibility programmes, it is able to assist with the development and growth of societies and economies in the region.
