Genel Energy: autonomous drive

But a strong recent run in the group’s shares this year is not only due to higher crude prices. As we recently wrote, operational issues have abated, and both cash flows and the balance sheet continue to improve. Despite this, based on broker Stifel's forecasts, the shares trade at a mere six times this year's free cash flow (FCF), dropping to only five times by 2020.

As well as cash-producing assets, there is considerable potential from gas assets in Genel's Miran and Bina Bawi fields, which are estimated to contain 14.8 trillion cubic feet (tcf) of raw gas on a contingent (2C) basis. That resource, 100 per cent-owned by Genel, has long been a source of huge optimism, only partly reflected by Stifel’s $297m (£201m) risked net present value, equivalent to 79p a share (263p for anyone gung-ho enough to ignore the considerable execution risk). Sitting just 300km from the Turkish border, the fields could – if developed – both satisfy domestic gas demand and provide Turkey with a far cheaper source of energy than the gas it currently buys from Russia.

Yet despite a defined resource and guaranteed buyers, Genel needs financing or a farm-in partner with deep pockets – a prospect that is “still seems some way off”, in the eyes of Canaccord Genuity. The possibility that Russia’s Rosneft might extend a recent pipeline deal with the KRG and step into the mix could prove to be a saving grace, or a complication.

Either way, we agree with analysts at RBC Capital Markets that Genel’s current business case is all about oil production. Most important is Tawke, in which Genel has a 25 per cent stake and where operator DNO has recently signalled its intention to fast-track output at the Peshkabir field. By summer, Peshkabir should be producing more than 30,000 barrels of oil per day (bopd), more than offsetting any declines from the wider Tawke licence. At Taq Taq, in which Genel owns a 44 per cent working interest, 2018 output should sit at or just below the 13,200bopd seen so far this year. And ahead of any development of the gas fields, Genel may move to develop oil at Miran and Bina Bawi, collectively home to more than 55m barrels on a proven and probable basis.

All of this assumes consistent payments from the KRG, although this has not been an issue since late 2015. The issue of outstanding receipts has also been resolved by last year’s (somewhat complicated) receivable settlement agreement with the KRG. In exchange for unpaid crude deliveries worth $425m, the KRG has granted Genel a 4.5 per cent gross overriding royalty on all production from Tawke until August 2022, and a waiver on a separate capacity-building payment. In 2017, this would have bolstered Genel’s entitlement under its production sharing agreement from $179m to $286m.

That means free cash flow now exceeds $10m a month, and that Genel should move to a net cash position before 2019 – a major turnaround since the end of 2016, when a $1.2bn impairment led to net debt and gearing surging to $241m and 18 per cent, respectively.