Gulf Keystone Petroleum Ltd. Half Yearly Report (1839Q)

Share Name	Share Symbol	Market	Type	Share ISIN	Share Description
Gulf Keystone Petroleum Ltd	LSE:GKP	London	Ordinary Share	BMG4209G2077	COM SHS USD1.00 (DI)

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	2.60	2.40%	111.00	110.60	111.00	111.80	107.70	110.00	1,215,835	16:35:07

Industry Sector	Turnover	Profit	EPS - Basic	PE Ratio	Market Cap
Oil And Gas Field Expl Svcs	123.51M	-11.5M	-0.0517	-21.45	246.69M

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RNS Number : 1839Q

Gulf Keystone Petroleum Ltd.

28 August 2014

Not for release, publication or distribution, directly or indirectly, in whole or in part in or into the United States or any jurisdiction other than the United Kingdom and Bermuda where to do so would constitute a contravention of the relevant laws or regulations of such jurisdiction. This announcement (and the information contained herein) does not contain or constitute an offer to sell or the solicitation of an offer to purchase, nor shall there be any sale of securities in any jurisdiction where such offer, solicitation or sale would constitute a contravention of the relevant laws or regulations of such jurisdiction.

28 August 2014

Gulf Keystone Petroleum Ltd. (LSE: GKP)

("Gulf Keystone" or "the Company")

Half Year Report for the six months ended 30 June 2014

Gulf Keystone, an independent oil and gas exploration, development and production company with operations in the Kurdistan Region of Iraq ("Kurdistan Region"), today announces its results for the six months ended 30 June 2014.

Operational highlights

-- Gulf Keystone's operations in the Kurdistan Region remain secure and production and crude oil sales from the Shaikan field have not been interrupted in any material way

-- Ramp-up of Shaikan production in H1 2014 from 10,000 gross barrels of oil per day ("bopd") to rates of in excess of 20,000 gross bopd through the tie-in of an additional producing well to Shaikan PF-1 and the commencement of production operations from Shaikan PF-2

-- Crude oil export deliveries by truck to Turkey in H1 2014 totalled 2.2 million barrels gross with total gross production from Shaikan to date fast approaching 5.5 million barrels

-- Initial payments for the export crude oil sales received with the realised price at the Shaikan facility estimated as US$51-56/bbl. Through an ongoing dialogue with the Ministry of Natural Resources of the Kurdistan Regional Government ("MNR" and "KRG"), the Company is seeking to establish a regular payment cycle for past and future Shaikan crude oil export sales

-- Gross domestic sales for H1 2014 of 0.1 million barrels with a realised price of US$42/bbl

-- Agreement of the Field Development Plan ("FDP") for the Akri-Bijeel Block by the MNR in August with production from the Bijell and Bakrman discovery areas expected by MOL Kalegran Limited, the operator, to reach 35,000 gross bopd in 2015

Financial highlights

-- Revenues of US$18.7 million achieved for H1 2014 (1H13: $nil; FY13: $6.7 million); additional revenue in the region of US$35 million owed but not yet recognised for H1 2014 crude oil export sales

   --      Loss after tax for H1 2014 of $29.8 million (1H13: $26.4 million; FY13: $32.0 million)

-- Net proceeds of US$240 million raised from the issue of debt securities and associated warrants in April 2014

   --      Cash and cash equivalents at 26 August 2014 of US$177 million

Outlook

-- Company continues to target 40,000 bopd of Shaikan production by year end through the tie-in of three additional producing wells (Shaikan-7, -8 and -10), although certain consequences of the recent security situation, including the current short term limited availability of some international contractors, may cause this to move to Q1 2015

-- Conclude discussions with the MNR on the establishment of a regular and predictable payment cycle for past and future Shaikan crude oil export sales in order to generate steady revenues, which is of critical importance to Gulf Keystone's funding position

-- Manage expenditure in a responsible and prudent manner, continuing to review and control capital commitments. Once a steady flow of revenues has been established, make decisions on investment in additional production facilities, development wells and infrastructure in order to increase Shaikan production in line with the approved Shaikan Field Development Plan

-- Continue to review options regarding the Company's 20% working interest in the Akri-Bijeel Block and explore other funding options available

-- Complete the appraisal of the Sheikh Adi discovery, submit the appraisal report and make a decision regarding early production and development

Simon Murray, Non-Executive Chairman of Gulf Keystone, said:

"Despite the recent security crisis in Iraq, which clearly affected the lives of many people in the Kurdistan Region and refugees from elsewhere in Iraq, I strongly believe that Gulf Keystone's footprint as one of the key oil producers in this strategically important area is assured. With the continued support of the Ministry of Natural Resources, we are positive about increasing our production to the stated goal of 40,000 bopd, receiving payment for all entitlement barrels produced to date and entering a new phase of value generation."

John Gerstenlauer, Chief Executive Officer of Gulf Keystone, commented:

"Our operations in the Kurdistan Region, where we have been present since 2007, are progressing well with the two existing Shaikan production facilities producing in the range of 20,000 to 25,000 bopd and crude oil export deliveries continuing essentially uninterrupted since late November 2013 to date. We are currently discussing with our hosts and stakeholders in the Kurdistan Region the plan for monetizing all past and future Shaikan production through achieving a stable payment cycle to progress in line with the approved Shaikan Field Development Plan."

The management team will host a conference call for analysts at noon UK time today. Shortly after the call, an audio webcast will be made available on the Company's website www.gulfkeystone.com.

Enquiries:

 
 Gulf Keystone Petroleum:           +44 (0) 20 7514 1400 
 John Gerstenlauer, Chief Executive Officer 
 Anastasia Vvedenskaya, Investor 
  Relations 
 
 Bell Pottinger                     +44 (0) 20 3772 2500 
 Mark Antelme / Henry Lerwill

or visit: www.gulfkeystone.com

Notes to Editors:

-- Gulf Keystone Petroleum Ltd. (LSE: GKP) is an independent oil and gas exploration, development and production company focused on exploration in the Kurdistan Region of Iraq.

-- Gulf Keystone Petroleum International (GKPI) holds Production Sharing Contracts for four exploration blocks in Kurdistan, the Shaikan, Sheikh Adi, Ber Bahr and Akri-Bijeel blocks.

-- GKPI is the operator of the Shaikan Block, which is a major commercial discovery, with a working interest of 75% and is partnered with MOL Kalegran Limited (a 100% subsidiary of MOL Hungarian Oil and Gas plc.) and Texas Keystone Inc., which have working interests of 20% and 5% respectively. Texas Keystone Inc. holds its interest in trust for Gulf Keystone, pending transfer of its interest to the Company.

-- Gulf Keystone is moving into the large-scale phased development of the Shaikan field targeting 100,000 bopd of production capacity during Phase 1 of the Shaikan Field Development Plan following its approval in June 2013.

Disclaimer

This announcement contains certain forward-looking statements. These statements are made by the Company's 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 uncertainties, including both economic and business factors, underlying such forward-looking information. 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.

This communication and the information contained herein is not an offer of securities for sale in the United States. Securities may not be offered or sold in the United States unless they are registered or are exempt from registration. Any public offering of securities to be made in the United States would be made by means of a prospectus that would contain detailed information about the company and its management, as well as financial statements. The company does not intend to register any portion of this offering in the United States or to conduct a public offering in the United States or any other jurisdiction. Any public offering of securities to be made in the United States would be made by means of a prospectus that would contain detailed information about the Company and its management, as well as financial statements. Copies of this communication are not being, and should not be, distributed in or sent into the United States.

GULF KEYSTONE PETROLEUM LIMITED

Chairman's Statement

The first half of 2014, and the period since, has been another chapter of good progress for Gulf Keystone, both from an operational and corporate perspective. Despite the recent escalation of the security situation in Iraq, our operations in the Kurdistan Region remain secure, which is a testament to the work of our strong team on the ground. We continue to monitor the situation in close cooperation with the Kurdistan Regional Government ("KRG") whose continued support is paramount for our efforts to continue and increase production in 2014 and beyond.

We are privileged to be at the helm of one of the world's most significant development projects today. With an oil in place number for our acreage of 12.5 billion barrels, the Shaikan field remains the prize oil asset of the Kurdistan Region. Its ongoing development is of great importance to the region and the Company alike. We are focused on moving ahead from our initial production targets towards the full field development for the mutual benefit of the people of the Kurdistan Region and our shareholders.

Perhaps the clearest measure of our continuing progress is that over the period we have significantly ramped up Shaikan production, achieving average rates in excess of 20,000 gross barrels of oil per day ("bopd") in June, more than twice the level seen at the start of the year. Given that we commenced commercial production from Shaikan field as recently as July 2013 and had no production for a number of months before then, this is real progress. As you will read, our experienced team in the Kurdistan Region are working tirelessly to develop Shaikan, bring further increases in production and ensure that Shaikan crude oil export sales remain continuous. I would like to thank the management team and everyone on the ground who helped maintain the pace of the Company's production operations despite the recent challenging circumstances.

Today, we are producing from two new production facilities, which are capable of handling 40,000 gross bopd. With the continued support from the KRG's Ministry of Natural Resources ("MNR"), we will progress towards this production target and contributing to the MNR's overall near term goal of 400,000 bopd of oil export sales from the Region. We are encouraged that first payments for the Shaikan crude oil export sales have now been made. The Company is currently in discussions with the MNR seeking to establish a stable and predictable payment cycle for past and future Shaikan crude oil export sales.

Followers of the Company will have seen a number of further announcements at a corporate level. The Board changes over the period reflect the growth in the business. The ability to attract Non-Executive Directors of the calibre of Dr Joseph Stanislaw and Mr V Uthaya Kumar, our two most recent additions to the Board, is a clear endorsement of the Company and its significant potential.

Earlier in the summer, we welcomed John Gerstenlauer to the role of CEO. Having joined the Company in 2008 as Chief Operating Officer, John has played a critical role in the success of the business, having supervised the drilling of every well since we commenced operations in the Kurdistan Region and being the leader of the team that made one of the largest on-shore discoveries in the last 20 years.

As I write, the geopolitical situation across Iraq is dominating the news and our thoughts are with the people of the Kurdistan Region and those thousands of refugees who fled their homes elsewhere in Iraq to seek shelter and support in the region. The Board remains extremely confident in the ability of the KRG, with the full support of the international community, to ensure that the security situation is controlled, our production can be increased, the integrity of our assets preserved and international export routes remain open for the sale of Kurdistan oil.

Gulf Keystone is committed to continuing to play its part in ensuring that the natural resources of the Kurdistan Region are successfully developed and to support the KRG in this shared goal.

On behalf of the Board I would like to reiterate my thanks to the government and people of the Kurdistan Region, and all of Gulf Keystone's team for their levels of professionalism and dedication to our business.

Simon Murray

Non-Executive Chairman

Chief Executive Officer's Review

For Gulf Keystone, the first half of 2014 has been marked by two significant events on the operational front. Firstly, we have successfully achieved the initial ramp-up of production from the Shaikan field, our key asset in the Kurdistan Region of Iraq, to above 20,000 bopd on average, reaching 25,000 bopd for the first time on June 4(th) , 2014. Since the commencement of early production operations in October 2010, Shaikan total gross production is now fast approaching 5.5 million barrels.

Secondly, we commenced export sales of Shaikan crude oil through trucked deliveries to Turkey, thus tapping international markets for the first time. With over 3.5 million barrels of Shaikan crude oil trucked and fifteen cargoes lifted from Turkish ports on the Mediterranean coast for sale to international buyers since January, through to August 28(th) , we are optimistic about market appetite for Shaikan crude oil. Our current task is to reach a comprehensive agreement with the MNR on the monetization of all our production for the benefit of the Kurdistan region, as well as our shareholders and other stakeholders.

On the corporate front, we completed the Company's transition from AIM to the Official List, by way of a Standard Listing, and to trading on the Main Market of the London Stock Exchange plc. in March. This move was followed in April by a successful debt offering of US$250 million in three-year senior unsecured notes due April 2017, privately placed in accordance with Reg S/144A with institutional investors in Europe, the US and Asia. In August 2014, we appointed Deutsche Bank AG, London Branch the Company's corporate broker.

Shaikan Block (75% working interest; Operator)

Production and sales

Since the beginning of 2014, Shaikan production has seen a substantial increase from 10,000 gross bopd in January to average rates well in excess of 20,000 gross bopd in June. This has been achieved through the tie-in of an additional producing well, Shaikan-4 to the first Shaikan production facility (PF-1) and the commencement of production operations at Shaikan PF-2, currently producing from two wells, Shaikan-2 and -5. The ramp-up of production to 40,000 bopd will continue in a stepped manner once three additional wells, Shaikan-7, -8 and -10 have been tied into the existing production facilities. In order to achieve this, a number of flowlines, including two 15 km long twin lines to connect Shaikan-10 and eventually the new Shaikan-11 well to PF-2, will have to be laid. The flowlines for Shaikan-10 and -11 have recently arrived at the PF-2 location and the flowlines for Shaikan-7 and -8 are currently in transit and expected to arrive in country in the near future.

While we are confident with respect to the gradual ramp-up in Shaikan production and of achieving our current average production guidance for 2014 of between 20,000 and 25,000 gross bopd, we are conscious that a number of consequences of the recent security crisis in Iraq may affect the pace of the increase in production. These include the availability of international contractors to conduct debottlenecking work at PF-1 and -2 and to drill Shaikan-11, an additional PF-2 well.

Further development

We remain committed to implementing the approved Phase 1 of the Shaikan FDP, which will take us from the near-term production target of 40,000 bopd to 66,000 bopd before progressing to the Phase 1 target of 100,000 bopd. This step up in production will require additional production facilities, development wells and infrastructure. While we are planning to drill our next development well, Shaikan-11 by early 2015, a steady flow of revenues needs to be established in order for the Company to make a decision to invest in PF-3 and its associated development wells drilling and infrastructure. Similarly, plans to drill a deep exploration well into the deeper Triassic and the Permian, side-track and re-test the Shaikan-6 well and prepare a review of the Shaikan FDP to include Cretaceous, Triassic and potentially Permian developments, will be reassessed in 2015.

Sheikh Adi Block (80% working interest; Operator)

Sheikh Adi-3, the second appraisal well, was drilled earlier this year in order to investigate the presence of hydrocarbons in the footwall of the Sheikh Adi Structure, where hydrocarbons had previously been discovered in the hanging wall by the Sheikh Adi-2 appraisal well. The well reached a total depth of 3,520 metres in the Triassic Kurre Chine B reservoir where oil was flowed in a DST but with high water-cut. Further appraisal work will determine whether there are more favourable locations for any future Triassic production wells. Meanwhile, a DST in the lower Jurassic Butmah formation produced water and a DST in the upper Jurassic Mus interval produced dry oil. The rig has now moved back to Shaikan and a work-over rig is expected to return to complete the testing of both the main prospective Alan and Mus interval in the upper Jurassic and also the overlaying Cretaceous sequence. Sheikh Adi-3 is then expected to be completed as a Jurassic producer. Appraisal of the Sheikh Adi discovery will be completed in 2015 and a decision on early development and production will be made then.

Ber Bahr Block (40% working interest)

Genel Energy plc., the operator has reported that a 170km(2) 3D seismic survey is currently underway on the Ber Bahr Block. The results of the new seismic and the Ber Bahr-2 appraisal well, currently scheduled to spud in H1 2015, will help determine the resource potential and forward activity plan.

Akri-Bijeel Block (20% working interest)

MOL Kalegran Limited, the operator reported that the FDP for the Akri-Bijeel Block based on the Bijell and Bakrman discoveries has been agreed by the MNR in August 2014. The operator currently has four rigs in operation on the block drilling Bijell-2, -4, -6 and Bakrman-2 wells, as well as an extended well test facility on the Bijell discovery, which is currently producing with the production expected to increase to 10,000 bopd. The operator expects to increase production from the discovery areas to 35,000 bopd in 2015 and 50,000 bopd by 2017-18. We continue to explore options regarding Gulf Keystone's 20% working interest in the block and this recent development is encouraging as it provides the market with an indication of the commercialisation of this asset.

With the support of and cooperation with the MNR and KRG, we are doing our utmost to ensure that all our personnel and contractors on the ground are safe and our operations continue around the clock. I would like to thank my experienced and always reliable teams in Erbil and at each production location as without them this effort to continue and increase production and load between 150 and 200 trucks of Shaikan crude oil every day would not be possible. As a company, our strategy for the near term will be to focus on Shaikan, our flagship project and a key development for the Kurdistan Region, to get a steady stream of revenues, which in turn will allow us to invest in Shaikan's further development and other exploration, appraisal and development activities across our portfolio in the region.

John Gerstenlauer

Chief Executive Officer

Financial Review

The first half of 2014 has been a period of progress and change for Gulf Keystone. The Group has continued its journey from oil explorer to producer, changing the focus of financial results from a Group driven solely by capital expenditure to one where revenue, operating expenditure and production are of critical importance.

Income statement

Gross production for the first six months of 2014, all from the Shaikan field, totalled 2.3 million barrels with average daily production being just under 13,000 bopd. Gross liftings for the period also totalled 2.3 million barrels, of which 2.2 million barrels were lifted for the export market and 0.1 million barrels for the domestic market.

The Group continues to recognise revenue on a cash receipts basis for sales to the export market and revenue from domestic sales on an accruals basis, consistent with our producing peers in the region. Revenue realised for the period was $18.7 million (1H13: $nil; FY13: $6.7 million), of which, $16.2 million arose from export sales (1H13: $nil; FY13: $nil) and $2.5 million from domestic sales (1H13: $nil; FY13: $6.7 million).

The realised price for domestic sales was $42/bbl (2013: $41/bbl) and in accordance with the terms of the Shaikan PSC, domestic sales are recognised gross of royalty. The Group has received its full entitlement for these sales during the period.

The price realised for export sales recognised has been estimated as $51-56/bbl. This price is the price achieved at the Shaikan facility and stated after deductions for trucking and port storage costs as well as the discount to Brent associated with the quality of the Shaikan crude. Export sales for the period have been recognised net of royalty with the KRG deemed to have taken the royalty "in-kind". The policy of recognising export revenues on a cash receipts basis has resulted in export sales in the region of $35 million, based on GKP's current 80% working interest in the field, being owed but not recognised. Based on the Group's current working interest and its associated 42% entitlement (i.e. excluding royalty) to gross oil sales, the Group has received $21-23/bbl per gross barrel lifted. The revenue recognition policy of export sales will be re-evaluated once the payment process is better established. Further details on revenue, and the related judgements and assumptions, can be found in note 4 to the half year report.

Cost of Sales for the period was $16.5 million (1H13: $nil; FY13: $11.9 million). This includes production costs, royalty costs and the Shaikan asset depreciation charge for the period. On an entitlement basis, including all export production, cash operating costs per barrel excluding royalty, production and capacity payments due to the KRG were $8.9/bbl (FY13: $27.2/bbl). For 1H14, gross production costs per barrel for the Shaikan field are approximately $5/bbl (FY13: $19/bbl).

The unit of production method, based on entitlement production, reserves and costs for the Shaikan Phase 1 development, has been used to calculate the depreciation, depletion and amortisation (DD&A) charge for the period. Production and reserves entitlement associated with unrecognised export sales have been excluded from DD&A calculation until such time as cash is received and sales recognised. Further details on cost of sales are to be found in note 5 to the half year report.

The six months period to 30 June 2014 is a key milestone in the Group's operations as it is the first time a gross profit has been recognised from the Shaikan field. Until such time as payments become regular and predictable, gross profit will be variable. The Company is continuing to work with the KRG to achieve a regular and predictable payment cycle. Export infrastructure improvements are continuing to come online as planned in the region and the KRG is continuing to advance its export plans.

General and administrative expenses during the period were $23.5 million (1H13: $19.3 million). The increase in administrative costs of $4.2 million results from an increase in staff and other overhead costs as the Group continues to expand operations in Kurdistan. Notably, the capitalisation of Erbil office administrative and overhead costs has reduced following the commencement of operation of PF-1 and PF-2. Other additional costs in 1H14 include listing fees of $3.2 million (1H13: $ nil). These increases are partially offset by a reduction in share based payment charges (1H14: $2.3 million; 1H13: $5.5 million) and a reduction in adviser costs incurred in relation to the Group's defence against the Excalibur claims, which were still ongoing as at 30 June 2013.

Other losses of $0.8 million (1H13: $0.5 million loss) comprise foreign exchange losses of $0.8 million (1H13: $0.1 million loss). The 2013 comparative also includes a mark-to-market valuation loss of $0.5 million on forward exchange contracts. Interest revenue has decreased to $0.1 million (1H13: $0.5 million) due to lower cash balances during the period and lower interest rates achieved on deposits.

Finance costs of $6.0 million (1H13: $6.5 million) relate to the accretion charge on the decommissioning provision (1H14: $0.2 million, 1H13: $0.2 million), interest payable in respect of the Convertible Bonds of $13.3 million (1H13: $11.2 million) and interest payable in respect of other borrowings of $8.3 million (1H13: $nil), offset by capitalisation of borrowing costs associated with qualifying assets under development of $15.8 million. The cash coupon paid on the convertible bonds in 1H14 amounted to $10.2 million (1H13: $8.6 million).

The tax expense of $1.7 million (1H13: $0.5 million) is related to UK activities and comprises $1.0 million of corporate income tax and $0.7 million change in deferred tax asset associated with share-based payments.

The results for the first half of 2014 show an increased loss after tax of $29.8 million (1H13: $26.4 million) reflecting the increase in administrative and tax expense discussed above.

Cash flow

Net cash inflow from operating activities after general and administrative expenses was $21.3 million (1H13: $22.3 million outflow). The loss from operations of $21.3 million (1H13: $19.3million) was adjusted for non-cash expenditure of $11.7 million (1H13: $5.9 million), which included share-based payment and depreciation and amortisation charges as well as an increase in provision for abandonment costs in Algeria. The working capital adjustments totalled to a $30.9 million cash inflow (1H13: $8.9 million outflow) increasing the operational cash inflow.

The significant decrease in receivables is primarily attributable to the receipt of outstanding court costs of GBP17.5 million, net of GBP0.6 million outstanding legal fees, payable to the Group following the dismissal of all claims asserted by Excalibur Ventures LLC against the Group. Tax paid in 1H 2014 was $nil (1H13: $0.4 million) and interest received was $0.1 million (1H13: $0.2 million). Net cash inflow from operating activities after tax and interest, including the $10.2 million semi-annual coupon payment for the convertible bonds, was $11.2 million (1H13: $31.1 million outflow).

Cash used in investing activities totalled $109.7 million (1H13: $81.5 million), which comprises $52.4 million spent on intangible assets (1H13: $90.0 million) and $57.3 million (1H13: $0.1 million) spent on property, plant and equipment. The majority of the spend on property plant and equipment relates to expenditure on the Shaikan asset, which was reclassified from intangible assets to property, plant and equipment at 30 June 2013. Additions include work on the completion and commissioning of PF-2 and the drilling and completion of the Shaikan-7 well.

Intangible expenditure primarily comprises additions to Sheikh Adi, Akri Bijeel and Ber Bahr assets. This includes the drilling of the Sheikh Adi-3 well, a number of wells drilled on the Akri Bijeel block as well as construction of surface facilities, and geological studies and the commencement of seismic acquisition over the Ber Bahr block. Further information on oil and gas assets can be found in notes 9 to 11 to the half year report.

The Company raised $240.1 million in net proceeds from the issue of debt securities consisting of $250 million three-year senior unsecured loan notes (the "Notes"), carrying a coupon of 13% per annum payable on a biannual basis and freely tradeable and detachable warrants relating to 40 million common shares in the Company. Further details can be found in note 12 to the half year report.

The net overall increase in cash and cash equivalents during the period was $141.7 million (1H13: $110.4 million decrease). Foreign exchange losses on cash balances were $0.1 million (1H13: $2.1 million loss). Cash and cash equivalents totalled $223.5 million at 30 June 2014 (30 June 2013: $141.2 million; 31 December 2013: $82.0 million). As at 26 August 2014, cash and cash equivalents totalled $177.1 million.

Financial strategy and outlook

Our medium and long term strategy remains to fully realise the potential of our assets through the funding of high-impact exploration, appraisal and development programmes so as to generate value and returns for our stakeholders. At this time, the primary focus of the Company is to continue to work with the KRG to secure a regular and predictable payment cycle as well as to achieve our stated production target of 40,000 bopd gross from the Shaikan field. Receipt of cash revenues from export sales is critical to the on-going business. Achieving these aims will enable us to make considerable progress towards our goal of fully financing our activities from production cash flows and to support the Company's growth strategy with a robust, well-funded business. Allied to this, we will work to manage our cost base prudently and responsibly and review and control capital commitments as we continue to build our organisational capacity.

As part of our discussions with the KRG, we are seeking clarification of the status and exercise of the Shaikan Government and Third Party Participation Options, which the Group is currently carrying, and the associated reimbursement of costs that if received would enhance cash resources. The Group also continues to explore options for its 20% working interest in the Akri-Bijeel block and additional funding options available. Further details regarding our current funding strategy can be found in note 2 'Going concern'.

The Company continues to affect an orderly exit from its Algerian operations and is continuing the discussions with Sonatrach regarding the withdrawal from Block 126a (GKN and GKS oilfields under the Ferkane Permit).

Gulf Keystone plans to consolidate its current position by reaching production of 40,000 bopd gross from the Shaikan field and establishing regular and stable cash payments for liftings. The Company will then look to grow the value of the business through further field development and/or corporate transactions.

Mary Hood

Interim Chief Financial Officer

Principal risks and uncertainties

Gulf Keystone's business may be impacted by various risks leading to, among other possible impacts, failure to meet shareholder expectations and to achieve strategic targets for growth, loss of financial standing and reputation. Not all of these risks are wholly within the Company's control and the Company may be affected by risks which are not yet manifest or reasonably foreseeable. The Board determines and reviews the key risks for the Group on a regular basis. For all the known risks facing the business, Gulf Keystone attempts to minimise the likelihood and mitigate the impact.

The Group has identified its principal risks for the next 6 months as being:

   -       political and regional risk; 
   -       liquidity and credit risk; 
   -       capital availability; 
   -       meeting shareholder expectations; 
   -       organisational capability; 
   -       risks associated with infrastructure and export market; 
   -       business conduct and bribery act; 
   -       field delivery risk including a successful delivery of the Shaikan Field Development Plan; 
   -       health, safety environment and security; and 
   -       prohibition on flaring and undeveloped options for monetising natural gas discoveries

Further information detailing the possible impact of these risks and the ways in which these risks are mitigated is provided on pages 34 to 37 of the 2013 Annual Report and Accounts. The political and regional risk has increased since 31 December 2013 as a result of the insurgency in Iraq, which has impacted on the Kurdistan region. The Company's operations have not been significantly disrupted to date, and the Company continues to produce and truck oil, but the current situation significantly increases the risk to the Company's physical assets and personnel. A widening of the conflict could potentially pose a threat to the Company's entire operations and its ongoing viability.

Responsibility statement

The Directors confirm that to the best of their knowledge:

(a) the condensed set of financial statements, which has been prepared in accordance with IAS 34 "Interim Financial Reporting", gives a true and fair view of the assets, liabilities, financial position and loss of the Group as a whole;

(b) the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months of the year and a description of principal risks and uncertainties for the remaining six months of the year; and

(c) the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

By order of the Board,

John Gerstenlauer

Chief Executive Officer

27 August 2014

Condensed Consolidated Income Statement