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Genel Energy is a company I have followed since its IPO in 2012 and I’m sorry to say I’ve owned its shares on many occasions. I was always hoping that Genel was about to turn the corner, on a micro level the company had so much upside but it has been the macro events that have really punished Genel. Shareholders have inevitably suffered, those unfortunate people who bought into the IPO are now looking a 90% loss from the £10.00 issue price. The steady decline is charted below in fig 1, it shows a company capitalised at over $2bn at its peak to just £250m today, where shares are trading hands at just 90p. Genel does have net debt though, so the true Enterprise Value is around £500m.
What’s the background on Genel?
Genel is the operator of the Taq Taq field in Iraqi Kurdistan and non operating partner in the Tawke field in the same region. These two fields give Genel 2P reserves of 264m boe and the production from these two assets as at June 2016 was a respectable 56,000 boe per day. Genel also has two promising gas assets in its portfolio, namely Miran and Bina Bawi which have contingent resources of 4.3tcf and 7.1tcf respectively.
The company also has some sundry exploration assets, in Morocco and Somaliland. At present these are fairly uninteresting and no exploration wells are currently scheduled.
What went wrong for Genel?
Genel has suffered the perfect storm of sustained low oil prices and its host not paying for the oil, due to itself not being able balance its own books because of the same low oil price. The Kurdistan Regional Government (KRG) has been erratic in paying Genel at best, even suspending all payments for a period in 2015. As a result Genel is currently owed around $350m from the KRG. I am certainly not going to criticise the KRG here, with the Islamic State moving in next door at the same time as a collapse in the oil price – it is a difficult one to manage.
Genel’s issues were compounded when the Taq Taq wells started to go into decline in 2015. This forced Genel into reviewing the field model which ultimately led to the Taq Taq field’s reserves being cut in half in February 2016. The financial result here was a $1bn impairment charge to the December 2015 accounts.
Is the worse over with? Can Shareholders expect to make up any losses?
The short answer is – maybe. I’ve put together an overview of the material value streams, these are based on current 2P figures, i.e. reserves which can be accessed within the existing field development plan and with CAPEX which I expect to be covered by the Cash From Operations and current cash balances. I’ve also included the financing and Plc costs.
As you can see there is a 35% upside from the current share price of 91p. That said investors should be nervous about the risk of further reserve downgrades, ISIS knocking on the door, KRG payment delays and a whole host of other risks, thus the shares trading at a discount to NPV of 35% is reasonable to me.
Caveat – These are my estimates so please do your own sanity checks!
What about the Gas Assets and Other Upsides though?
There are plenty of other upsides, where we could look to identify further value. The additional possible reserves, i.e. 3P on Taq Taq are worth $595m alone per the CPR, the Gas Assets or Miran and Bina Wawi also have an NPV of over $1bn per a recent UBS broker report. There are also other exploration opportunities in the region with the potential to add value. The big issue though with all of these projects is though they require up front CAPEX, the gas project requires $2.5bn alone. Clearly Genel in a position of net debt cannot fund this, it would require a combination of equity, debt and JV partner entry to get this financing away. In a situation where the KRG are not paying Genel I can’t see this being possible nor worth proceeding with in this uncertain enviroment. This goes someway to explaining why OMV flogged their 36% share of the 7.1 tcf Bina Bawi asset for just $5m upfront, so if we take this as fair value then the figure 3 valuation is materially unchanged. It is worth noting there is up to $145m of deferred consideration to pay if Genel ever get this asset producing, but I doubt OMV are recognising this as an asset in their books!
HOLD – potential buying opportunity around 80-83p where discount to NPV looks apealing, all other things being equal.
I wouldn’t be rushing to sell at the 91p level but I wouldn’t be buying further either. There is a lot of potential upside here, but until the KRG repays all past debts and ensures that IOCs are paid reliably then the KRI simply does not represent an environment for investment for me and hence I can’t assign much value to the gas projects or the additional KRI exploration/prospective resources at Taq Taq and Tawke. If you are already invested my advice would be to hold and see how the KRG situation unfolds, oil above $55 for a period of time would help too!
Disclaimer – I have a long position equal to 2% of my net assets in Genel bought in at 105p. I have no further positions in any of the other stocks mentioned and to my knowledge nor do any close family, friends nor associates.
This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.