Genel Energy 799p-3 Questor says BUY
Genel Energy has some very significant oil reserves and some exciting exploration licences but its share price has been dogged by political issues between Iraq’s central government and the semi-autonomous Kurdish region.
However, these issues should be resolved in time and its African exploration programme has significant upside. The company also has $1bn (£662m) of cash sitting in the bank.
Genel is the largest oil producer in Iraq’s Kurdish region. The company was formed by the reversal of private Turkish group Genel Enerji into cash shell Vallares, which raised $2bn on listing. It has an experienced management team, with former BP (LSE: BP.L - news) boss Tony Hayward in the chief executive’s seat and former senior Goldman Sachs (NYSE: GS-PB - news) banker Julian Metherell in the finance director’s chair.
There is no doubt the oil assets controlled by the company are significant and relatively easy to extract. However, wrangling between Baghdad and the Kurdish Regional Government (KRG) over the mechanism for sharing revenues has rumbled on for quite some time.
It is in the interests of all parties involved to resolve this issue and start exports, so oil can be sold in international markets at international rates. Until then, Genel is selling oil at lower prices into the local market and shipping some out in trucks via Turkey.
Hopes are rising that a deal can be struck, and Mr Hayward recently told Questor he expected the issue to be sorted out sooner rather than later.
A major catalyst for Genel’s share price would be an agreement that will allow a proposed pipeline to be built between Turkey and Kurdistan.
The bilateral deal has been under negotiation between the two countries for some time and includes pipeline construction, a gas sales agreement and the awarding of exploration licences in Kurdistan to a Turkish company.
Of course, this is out of the control of Genel’s management. But the factors they have under their control appear to be going well. Genel swung to a $76m profit in 2012, its first full year as a listed company, and, in order to diversify out of Kurdistan, the company has bought exploration licences in Morocco, Somaliland, Malta and Ivory Coast.
The oil group’s “proven, probable and possible” reserves have risen from 1.6bn to 5.4bn barrels.
Oil output is expected to edge higher to between 45,000 and 55,000 barrels per day (bpd) in 2013 from 44,500 barrels in 2012, should exports remain restricted.
However, if the group could export its production, output could be ramped up to 80,000 bpd in a relatively short time.
A series of four wells are scheduled to be drilled in Kurdistan, which could mean Genel booking more reserves, and there is the prospect of the first commercial oil production from Miran in Kurdistan this year.
Genel is also securing a rig to drill a multi-well campaign on its African licences, although we should not expect significant news flow on this until next year. Should no more suitable acquisitions be found, a substantial part of the $1bn cash pile will be returned to shareholders, probably this year or next.
Although the share price over the next six months is likely to be driven by politics, the African licences will become a significant catalyst for the share price next year. There is also the prospect of consolidation in the region, with major players including ExxonMobil, Chevron and Total (NYSE: TOT - news) . This will highlight the value. Things have always been interesting at Genel, but it now looks like a series of market-moving announcements could be in prospect over the next year. Trading on a 2013 earnings multiple of 21.6 falling to 12.8, Questor upgrades to buy from hold.