Gulf Keystone Interim Results

Finance Director's Financial Review

General and administrative expenses during the period were $2.7 million (1H09 $6.0 million).  Adjusting for a foreign exchange gain of $5.6 million (1H09 $0.2 million), Algerian oil field operating costs of $nil (1H09 $0.6 million) and share-based payment expense $3.0 million (1H09 $0.2 million) underlying costs overall were flat.

Other losses of $0.2 million (1H09 $nil) relate to the change in the fair value of the Standby Equity Distribution Agreement ("SEDA") with YA Global Master SPV Ltd, which has been treated as a derivative financial instrument.

Interest revenue of $0.03 million (1H09 $0.6 million) declined due to reduced cash balances and lower rates of interest.

Finance costs of $0.2 million (1H09 $0.1 million) relate to the interest charge on the decommissioning provision and bank guarantee.


The tax expense of $0.02 million (1H09 $0.01 million benefit) is related to UK activities.

Profit after tax

The results for the first half of 2010 show a reduced loss after tax of $3.1 million (1H09 $5.6 million) reflecting the foreign exchange gain during the period.

Issue of equity

Between January and May 2010, 8,179,645 new common shares were issued under the SEDA at a weighted average price of £0.84 per share for a total value of $10.8 million.

On 10 March 2010 the Company announced a reorganisation of its assets in Kurdistan.  In order to meet the anticipated $52.0 million payment associated with the Sheikh Adi and Ber Bahr PSC acquisitions and to fund the envisaged work programme during the remainder of 2010 and into the second quarter of 2011, the Company issued shares to existing and new institutional shareholders.  On 25 May 2010 the Company placed 152.3 million new common shares of $0.01 each at a price of £0.75 each, raising gross proceeds of $165.0 million.

On 15 March 2010 the Company placed 20,915,034 new common shares of $0.01 each at a price of £0.765 each, raising gross proceeds of $24.0 million.

Cash flow

Net cash outflow from cash used in operations was $15.5 million (1H09 inflow of $5.8 million).

Capital expenditure of $39.0 million (1H09 $29.4 million with expenditure also in Algeria) relates mainly to exploration activities in the Kurdistan region of Iraq.

The issue of new common shares during the period raised net proceeds of $192.1 million (1H09 $6.8 million).

Taking into account the net cash used in operations, capital expenditure and proceeds from the issue of shares, the net cash inflow during the half year was $137.6 million (1H09 outflow of $16.9 million).

Cash and cash equivalents at the end of the period were $161.7 million (1H09 $16.7 million).  As at 6 September 2010 they were approximately $91.9 million.

Other and recent events

During May 2010 Sonatrach exercised a guarantee of $15.6 million in relation to the Ben Guecha Permit Blocks 108 and 128b in Algeria as the exploration commitments were not satisfied.  This guarantee had been provided for from existing cash resources prior to the $165.0 million share placing.

Gulf Keystone announced in February of this year an agreement with BG North Sea Holdings Limited ("BG") for the proposed withdrawal of the Company from the Hassi Ba Hamou ("HBH") Permit in consideration for a net cash payment of $10.0 million from BG.  The agreement is subject to the conclusion of separate withdrawal documentation which will require the approval of Sonatrach and the necessary Algerian governmental authorities.  On 23 August 2010 the parties to the HBH permit executed an amendment to the production sharing contract extending the expiry of the exploration period from 23 September 2010 until 23 September 2012.

During April Gulf Keystone upgraded its American Depository Receipt ("ADR") programme in the United States and began trading on the prestigious OTCQX International under the symbol "GFKSY", where each ADR represents 20 ordinary shares listed on the AIM market under the symbol "GKP".  US investment bank Madison Williams and Company LLC acted as sponsor and Principal American Liaison ("PAL") for Gulf Keystone.

The Company established an Employee Benefit Trust and there under i) granted Long Term Incentive Performance Share Options and awarded ii) an executive bonus, all of which are detailed in an announcement on 7 June 2010 and 25 June 2010.  Full details are also provided in the 2009 Annual Report and Accounts.

During August 2010 the Company paid $52.0 million to complete the reorganisation of its interests in Kurdistan.

At the Annual General Meeting in early August approval was obtained to increase the authorised share capital of the Company and to issue up to 900 million new common shares of $0.01 each of which 676,215,161 are currently in issue.


With the successful equity fundraising of $165.0 million in May 2010, Gulf Keystone is now following through on its stated exploration and appraisal activity.  The scale of the operations on the ground reflects this ambitious programme with the seismic crews active over Shaikan, the recent spudding of both Sheikh Adi-1, the shallow Shaikan-3 and extended well test due to commence from Shaikan-1.  The eagerly awaited Shaikan-2 well location is fully prepared for commencement of drilling currently planned for the fourth quarter of 2010 and the Shaikan-4 well location largely complete.  The pipeyard is stocked with casing, wellheads and equipment.  The office in Erbil has in turn expanded to provide the technical and logistics support required.

It will take a few months to reach a steady oil rate from the testing of Shaikan-1 as the production facilities are fully commissioned, personnel trained and the testing programme executed.  The first deliveries of test production for sale are imminent and greatly anticipated and the associated revenues will further bolster the Company's finances.

The Board, along with its shareholders, partners and the KRG await the results of this extensive campaign which offers the potential for significant further value creation.

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