# DIRECTORS' REPORT

_Source: `DeepSeekOCR_Ardian_pruned_1k/energy-oil-gas-e-p/LSE_GKP.L_2017/LSE_GKP.L_2017.mmd` · pages 63-69_

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DIRECTORS' REPORT

The Directors are pleased to present their report on the affairs of the Group, together with the consolidated financial statements of the Company and auditor's report, for the year ended 31 December 2017. A review of the business is set out in the preceding sections of this Annual Report, including the Chairman's Statement, Executive Review and Operational Review, which are incorporated into this report by reference. The Corporate Governance Report also forms part of this report.

## Results and dividends

The Group's financial results for the year ended 31 December 2017 are set out in the consolidated financial statements. The Group made a net profit after taxation for the year of \(14.1 million (2016 loss of \)17.4 million) and the Directors do not recommend a dividend for the year (2016: \(nil). Future payments of dividends will depend on the earnings and financial condition of the Company and such factors as the Board of Directors consider are appropriate.

Gulf Keystone uses a number of financial and non-financial KPIs against which it monitors its performance. Detailed KPI targets and benchmarks for each year are set by the Board and are regularly reviewed during the Board meetings for progress against actual results. Where necessary, the targets are adjusted to accommodate changes in the operating environment. Gulf Keystone's KPIs are discussed in the Directors' Remuneration Report on pages 52 to 57.

## Capital structure

Full details of the authorised and issued share capital, together with movements in the Company's issued share capital during the year, are shown in note 19 to the consolidated financial statements. The business is financed by means of debt (see note 16 to the consolidated financial statements) and external share capital.

## Share rights and restrictions

There are no specific restrictions on the size of a holding nor on the transfer of common shares, both of which are governed by the general provisions of the Company's Byelaws and prevailing legislation. The Directors are not aware of any agreements between holders of the Company's common shares that may result in restrictions on the transfer of securities or on voting rights. No person has any special rights of control over the Company's share capital and all issued common shares are fully paid.
Details of the employee share schemes are set out in note 22 to the consolidated financial statements and details of the Directors' awards are included in the Remuneration Committee Report.

## Voting rights and byelaw amendments

The Company's Byelaws may only be revoked or amended by the shareholders of the Company by resolution passed by a majority of not less than three-quarters of the shareholders as vote in person or, where proxies are allowed, by proxy at a general meeting. Resolutions put to the vote of any general meeting are decided on a show of hands unless a poll is demanded in accordance with the Company's Byelaws.

The Company's Byelaws are available on the Company's website at www.gulfkeystone.com.

## Directors

With regard to the appointment and replacement of Directors, the Company is governed by its Byelaws, the Companies Act (Bermuda) and related legislation. In accordance with the Byelaws, all of the Directors are required to stand for re-election by the shareholders each year at the Annual General Meeting.

The following Directors have held office during the year:

Jón Ferrier – Chief Executive Officer \( ^{(4,5)} \) 

Sami Zouari – Chief Financial Officer \( ^{(5)} \) 

Philip Dimmock – Senior Independent Director \( ^{(1,2,3,5)} \) 

Keith Lough – Non-Executive Chairman \( ^{(3)} \) 

Garrett Soden – Independent Non-Executive Director \( ^{(1,2,3)} \) 

David Thomas – Independent Non-Executive Director \( ^{(1,2,3)} \) 

Jaap Huijskes – Independent Non-Executive Director (appointed November 2017) \( ^{(1,3,4,5)} \) 

(1) Member of the Audit and Risk Committee as at the date of this report.

(2) Member of the Remuneration Committee as at the date of this report.

(3) Member of the Nomination Committee as at the date of this report.

(4) Member of the HSSE and CSR Committee as at the date of this report.

(5) Member of the Technical Committee as at the date of this report.

## Directors' indemnities

The Company has made qualifying third-party indemnity provisions for the benefit of its Directors during the year and these remain in force at the date of this report.

## Directors' interests in shares

None of the Directors who held office at 31 December 2017 had any interest in the common shares of the Company. \( ^{(1)} \) 

At the date of this report, the EBT held 10,672 common shares of the Company. A further 100,000 common shares are held by the Exit Event Trustee in relation to the Exit Event Award (see note 22 to the consolidated financial statements).

Directors' interests in share options of the Company and the Company's bonus scheme grants, including family interests, as at 31 December 2017 are disclosed in the Remuneration Committee Report.

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## DIRECTORS' REPORT continued

## Significant shareholdings

As at 3 April 2018, being the date of the most recent analysis of the Company's share register, the Company discloses the following significant shareholdings:

<table><tr><td>Shareholder</td><td>Number of common shares</td><td>Percentage of issued share capital</td></tr><tr><td>Taconic Capital Advisors</td><td>31,134,938</td><td>13.57</td></tr><tr><td>Lansdowne Partners</td><td>29,280,882</td><td>12.76</td></tr><tr><td>Sothic Capital Management</td><td>29,238,448</td><td>12.74</td></tr><tr><td>UBS Group AG</td><td>26,195,453</td><td>11.42</td></tr><tr><td>Capital Research Global Investors \( ^{(1)} \)</td><td>19,593,285</td><td>8.54</td></tr><tr><td>Cowell &amp; Lee Advisors</td><td>11,249,540</td><td>4.90</td></tr></table>

(1) Investment adviser to the New World Fund, Inc and SMALLCAP World Fund, Inc.

## Going concern

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Chairman's Statement, the Executive Review and the Operational Review. The financial position of the Group at the year end and its cash flows and liquidity position are included in the Executive Review.

The Group has seen a significant improvement in the pattern of cash receipts from the MNR, with the total receipts of \(132 million net to the Group in 2017 and further net receipts of \)61.5 million in the first quarter of 2018 in relation to 2017 sales.

Following the relinquishment of the Ber Bahr block in July 2017, the Group has focused on its core asset, the Shaikan block. The Group's improved liquidity is expected to allow the implementation of the Group's near-term investment plan to maintain production at 40,000 bopd with the potential to increase production to 55,000 bopd. This is subject to the MNR and MOL approvals, the continuation of the regular payment cycle from the MNR and a commercially acceptable investment environment.

The option to delay the Reinstated Notes interest payments, the improvements in oil revenues receipts and prudent cost management give the Group the financial flexibility and capability to meet its working capital requirements.
The Group continues to closely monitor and manage its liquidity risk. Cash forecasts are regularly produced and sensitivities run for different scenarios including, but not limited to, changes in commodity prices, different production rates from the Shaikan block, costs contingencies, disruptions to revenue receipts, etc. The Group has taken appropriate action to reduce its cost base and has $203 million of unrestricted cash as at 10 April 2018. The Group's forecasts, taking into account the risks applicable to the Group, show that the Group will be able to have sufficient financial headroom for the twelve months from the date of approval of the 2017 Annual Report and Accounts.

Based on the analysis performed, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus, they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

## Significant agreements – change of control

There are a number of agreements that take effect, alter or terminate upon a change of control of the Group including the Shaikan PSC and employee share plans. The Directors are not aware of any agreements between the Group and its Directors or employees that provide for compensation for loss of office or employment that occurs because of a takeover bid.

## Auditor

Each of the persons who is a Director at the date of approval of this Annual Report confirms that:

• so far as the Director is aware, there is no relevant audit information of which the Group's auditor is unaware; and

- the Director has taken all the steps that he/she ought to have taken as a Director in order to make himself/herself aware of any relevant audit information and to establish that the Group's auditor is aware of that information.

On behalf of the Board

## Jón Ferrier

Chief Executive Officer

10 April 2018