Numis Securities finds much to like in the improved performance of Kurdistan-focused Genel Energy PLC (LON:GENL) but has downgraded the shares, nevertheless.
The shares have shot up this year from 107.75p to 259p, prompting the broker to crank up its target price to 290p from 185p, although the rating is shifted down to âaddâ from âbuyâ.
READ:Â Genel âcontinues to build momentumâ in Kurdistan
On the plus side, Numis sees substantial potential to derisk its earnings estimates if Genelâs projects proceed to development.
âA stand-alone development of Bina Bawi oil could, on an un-risked basis, see our NAV [net asset value] rise to 370p/sh, offering ~40% upside to the current share price. Bina Bawi gas could further increase this to 424p/sh, offering ~60% upside, and Miran gas could increase this to 484p/sh, offering ~80% upside. The 30% chance of success we currently attribute for these projects reflects both the technical and commercial uncertainties of development, which Genel aims to tackle over time,â Numis said.
The broker believes Genel could fund an oil development at Bina Bawi without resorting to farming out some of its interest.
Britainâs Genel Energy announced that the Kurdistan Regional Government paid $62.19 million to Tawke partners for crude oil deliveries in Marchhttps://t.co/1W5IPkklew #Iraq
â Iraq Daily News (@IraqDaily) June 21, 2018
âUnlike the gas project, execution for the oil is not reliant upon farm-outs. This makes a Bina Bawi oil development a potentially valuable catalyst over the next 12-18 months, the timing of which can be within Genel's control once any necessary contract revisions are agreed,â Numis said.
The broker sees the separation of the Bina Bawi contract into oil and gas portions as crucial to enabling the development to proceed and thinks this is likely to be the first key stage in de-risking the project.