Genel Energy (GENL) was only formed last year after Turkey's Genel Energy International reversed into Rothschild-backed investment vehicle Vallares. The resulting entity looks well-placed to exploit energy opportunities in northern Iraq's Kurdish regions - as well as in other frontier markets - despite the long-term risks associated with such places. One of those risks reflects a dispute between the Kurdish and Iraqi authorities over production-sharing contracts (PSC) but, once resolved, the quality of Genel's resource base should drive a hefty share price re-rating.
- Impressive Kurdistan acreage
- Access to lucrative Turkish markets
- Strong exploration programme
- Promising assets in Malta and Morocco
- Kurdish-Iraqi dispute over production sharing
- Operating in high-risk frontier areas
That quarrel reflects the Iraqi government's belief that it has the sole right to grant PSCs and export licences to foreign oil companies working within Iraq. Unsurprisingly, the largely autonomous Kurdistan Regional Government (KRG), representing Kurdish northern Iraq, disagrees and has already negotiated PSCs with a number of foreign oil majors - on considerably better terms than they could expect from the Iraqi Oil Ministry.
That PSC-related dispute reached a head in April when the KRG imposed a temporary oil export embargo after claiming it was owed $1.5bn (£920m) in payments by the Iraqi government. But the ban was lifted in August as a gesture of goodwill ahead of legislation intended to clarify responsibilities in the region - add that to the growing commercial need for a resolution and catalysts for progress are on the horizon. It's a view shared by Genel's chief executive and former BP boss, Tony Hayward: "Kurdistan production capacity will grow towards 1m barrels a day; that's too much oil to be shut in as a consequence of a political dispute."
What' more, the Iraqi government's leverage - through its control of export pipelines from Kurdistan - is diminishing. That's because the Turks are now building two major oil and gas pipelines into Kurdistan that will provide direct access to lucrative Turkish and European markets. That should add a further boost to a pragmatic solution to the dispute - and Genel would be a big beneficiary. It already has strong Turkish representation on its board and it's well-placed to exploit its Turkish links.
GENEL ENERGY (GENL) | ||||
|---|---|---|---|---|
| ORD PRICE: | 761p | MARKET VALUE: | £1.63bn | |
| TOUCH: | 760-770p | 12-MONTH HIGH: | 1,020p | 586p |
| DIVIDEND YIELD: | nil | PE RATIO: | 12 | |
| NET ASSET VALUE: | 1,108p | NET CASH: | $1.83bn† | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2011 | 24.0 | -57.7 | -72.3 | nil |
| 2012* | 278 | 110 | 39.3 | nil |
| 2013* | 414 | 224 | 79.8 | nil |
| 2014* | 619 | 284 | 101 | nil |
| % change | +50 | +27 | +27 | - |
*Investec Securities estimates Normal market size: 800 Matched bargain trading Beta: 0.62 £1=$1.63 †Does not reflect acquisitions since end-June 2012 | ||||
Exploiting Turkish demand certainly makes sense. Turkey is dependent on foreign energy supplies to fuel its fast-growing economy and imports around 40bn cubic metres of natural gas from Russia, Iran and Azerbaijan every year. But it's estimated that Turkey could replace between 25 per cent and 37 per cent of those imports through Kurdish production, and at a significantly reduced cost. But the Turks and Kurds also have a fractious political relationship, so success isn't guaranteed.
Genel's operations in the region are also becoming gradually less risky as the world's oil and gas majors commit to the region. Total, Chevron and, most importantly, Russia's Gazprom have finalised agreements since July, joining such players as ExxonMobil, Chevron and Hess.
Moreover, Genel complemented its existing Kurdistan operations through a $450m deal in August to secure Heritage Oil's huge Miran gas discovery. The group is also accelerating development at its Taq Taq and Tawke sites in Kurdistan, with net daily production capacity of 140,000 barrels a day targeted for 2014 - up from the current 76,000 barrels. There's also a busy exploration and appraisal programme through to the second half of next year, which involves drilling seven high-impact wells targeting over 650m barrels of oil equivalent. According to Genel, this represents "by far the largest and most widespread exploration programme being conducted by anyone in Kurdistan".
Genel isn't just a Kurdistan play, either. It has also diversified into other frontier markets through a $40m farm-in deal in August for offshore interests in Malta, run by Mediterranean Oil and Gas and signed an agreement, also in August, with Serica and San Leon whereby Genel will eventually pay up to $51m for 60 per cent of the Sidi Moussa block, offshore Morocco.
