Genel's big plans hit Covid-19 block

Unfortunately, while cash generation at $40 (£34) per barrel (bbl) is a great achievement, it is not likely to be enough. That's because the impact of the falling demand and Saudi oversupply could take oil much lower.

Genel has the additional hurdle of losing some production and relying on Kurdish authorities to keep paying it during a downturn. Delayed payments from the governing body have been an issue even with oil above $60/bbl, although this has been put down to an oil trader being temporarily unable to access cash. The last payment was made in January for oil delivered in September. 

Despite the volatile backdrop, Genel announced a 10¢ a share dividend for 2019 at a time when many other companies are holding onto this cash.

The fall in the company's shares from over 150p to 50p (and then back up to 80p) was fairly constrained compared with other London-listed oil and gas companies. This was possibly because 2019 was a banner year for the company. It swung from an operating loss of $255m in 2018 to a profit of $132m, brought in the dividend and increased net cash by 151 per cent to $93m. Meanwhile, average net production was 8 per cent higher at 36,250 barrels of oil per day (bopd) at a cost of $2.90 per barrel (bbl). 

It isn’t all good news operationally, though. In a trading update before the 2019 results, Genel said the number of exploration rigs at its key (25 per cent-owned) Tawke project will go down from four to one as a result of the outbreak, and operator DNO (Nor:DNO) said production had started to slide because of cuts. 

In this tricky environment, Genel chief executive Bill Higgs has flagged going on the attack by looking for cheap acquisitions, using the company’s cash balance of almost $400m. The picture of Genel coming out of 2020 with extra production, net cash and in a position to keep paying dividends is enticing. It is also possible $40 a barrel was a likely average price for the year.

DNO is less bullish than Genel. “The company has... initiated staff reductions, cancelled the first-half 2020 dividend, discussed modalities for cost reductions with its suppliers and contractors and frozen new ventures,” DNO said.

The company’s chief executive, Bijan Mossavar-Rahmani, also raised the Kurdish payments as a major issue, saying the timing and regularity of them would determine whether DNO could maintain oil production. At the same time, industry experts see low prices sticking around. 

Rystad Energy, a Norwegian consultancy, says oil supplies and lack of storage mean the worst is yet to come.  “At the current storage filling rate, prices are destined to follow the same fate as they did in 1998, when Brent fell to an all-time low of less than $10 per barrel."

Fellow industry analyst Wood Mackenzie said the current situation was far worse than the 2015-16 downturn, because companies could survive then without cutting production because oil managed to stay at a $45/bbl average for a year.