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Genel Energy PLC – Capital Network: Good Time to Revisit the Equity Story

Genel Energy PLC (LON:GENL) is a London-listed oil and gas production company with assets in the Kurdistan region of Northern Iraq (KRI), Somaliland and Morocco. Political instability in Iraq and the rise of ISIS created a particularly challenging stock market sentiment for companies active in the region, such as Genel Energy PLC (LON:GENL), with concerns about security compounding those from irregular oil sales payments. More recently, sharp production declines and subsequent reserves downgrades at one of Genel Energy PLC (LON:GENL) main oil asset increased the pressure on the company already suffering from the collapse in the oil price. We believe that after recent reserves downgrades and with potential progress anticipated for the Miran/Bina Bawi gas development, it might be a good time to revisit the equity story, with a view on the mediumterm development of these assets.
Genel Energy PLC – Capital Network: Good Time to Revisit the Equity Story

Genel Energy PLC (LON:GENL) was created in 2011 through the reverse take-over of Genel Enerji, a Turkish company with oil and gas assets in the KRI, into Vallares an LSElisted investment company. Genel has shareholding interests in two producing fields: DNO-operated Tawke (25%) and jointly-operated (with Addax Petroleum) Taq Taq (44%) oil fields; two development assets: Miran (100%) and Bina Bawi (100%); one discovery under appraisal: Peshkabir (25%) contained within the Tawke PSC; all located in the KRI. Genel also has interests in exploration assets in Somaliland and Morocco (Figure 1).


In the past 18 months, Genel reported a reserves downgrades for the Taq Taq field (in early 2016) with 2P reserves now down to 59MMbbl (McDaniel & Associates, Feb-17) from 172MMbbl in Dec-15, following higher than anticipated production declines and increasing water cut.

Current production of just below 15kbopd is down from 85kbopd in Dec-15, while water cut went from 13% to 50% during that period.

In contrast, the Tawke oil field has continued to perform according to expectations and Genel does not expect the issues encountered at the Taq Taq field (and resulting declines) to be repeated at Tawke due to differences in field morphology and drive mechanism. However, Genel abandoned previous 2017 guidance for gross production at Taq Taq of 24-31kb/d, saying it would announce output on a monthly basis. Jun-17 production was 14.7kb/d resulting in a 2017 average of 21.0kb/d, compared to 2016 net average production of 53.3kb/d.

Our valuation uses an oil price of $50/bbl flat in real terms and a discount rate of 12%. We include the value of the KRG receivable, albeit with a 20% discount to account for the delayed payment.
We believe that Genel’s current share price of c115p represents a material discount to our estimate of the risked value of the company. In addition, we believe the possibility of progress on the development of the KRI gas assets represent real upside – as such we reckon that now could be a good time to revisit the equity story with a view on the medium-term development of these assets.

Full report is available via Capital Network website
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Genel Energy PLC Timeline

Related Researches

December 13 2017

Green Dragon Gas Ltd (LON:GDG) announced its plans to list its production subsidiary on the Hong Kong Stock Exchange as a dividend in specie. This operation requires shareholders’ approval and a vote will take place at the AGM to be held on 20/12/17 at 11:00 am. We expect the details of the listing, in particular the shareholding structure of the listed entity as well as the amount of capital increase, to be released on this occasion. However, the intention is for the company to be debt free as a result which we take as a positive; we keep our 221p valuation unchanged.

September 20 2017

Green Dragon Gas Ltd (LON:GDG) announced that it has finalised agreements with CUCBM, a subsidiary of CNOOC and Green Dragon Gas Ltd (LON:GDG) partner in the GSS and GSN Blocks, which conclude eight years of discussions regarding Green Dragon Gas Ltd (LON:GDG) interest in the wells historically drilled by CUCBM in the two Blocks. These agreements confirm the respective interests of the partners as well as the amount of costs recovery resulting from CUCBM’s work programme for the period 2007-2014. Although we welcome this announcement, it is unclear from the RNS whether these agreements have an immediate impact on either GDG’s gas reserves or on future production, revenue and cash flows. We suspect most of the positive impact to be expressed in a closer future cooperation between the two partners focussed on the monetisation of gas resources, which should be positive for investors’ sentiment and have a positive impact on the share price. However, we keep our 221p valuation unchanged.

This announcement follows an earlier announcement by GDG (15/09/17) of the approval of a Project Code for the Overall Development Plan (ODP) on the GCZ block by the China National Development and Reform Commission (NDRC), confirming its final approval. The Block is jointly operated by CNPC and GDG through a joint management team based in Jincheng, Shanxi. The development cost for GCZ will be c.US$53.8m over 2017 and 2018. CNPC will invest US$28.5m according to its 53% participating interest and GDG US$25.3m based on its 47% participating interest in the Block.


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