The semi-autonomous region of Kurdistan in Iraq has been regarded as an exciting emerging hydrocarbon province for over a decade, with a range of oil companies large and small seeking to exploit its undoubted geological potential.
Now, after some tough times in the region, one of those firms, Genel Energy PLC (LON:GENL), boosted by payments for over three and a half years, is enjoying rising production, investing in growth, and is set to pay a maiden dividend to shareholders.
Iraqi Kurdistan has endured its fair share of troubles over the past five years or so, with economic difficulties, compounded by the fight against ISIS, leaving officials short when it came to paying oil companies operating in the region what they were owed.
A slump in prices of the black stuff didn’t help matters, nor did internal disputes between Kurdish authorities and their Iraqi counterparts.
Founded by former BP boss in 2011
One of the casualties was Genel, which was founded by former BP boss Tony Hayward and City financier Nat Rothschild.
Five years ago, the business had a market capitalisation in excess of £3bn, but now it finds itself valued at less than a quarter of that.
Unsurprisingly, sentiment towards the stock has closely followed the political and economic situation in Kurdistan.
ISIS’s gradual decline means the region is increasingly stable, while increased revenues from oil sales and a series of economic reforms has helped to transform the economy.
With the relationship between the Kurdistan Regional Government and federal Government of Iraq now much improved, illustrated by budget transfers once again being sent from Baghdad to Erbil, the environment for oil companies operating in the region has improved dramatically.
In the same way investors’ interest waned in the dark years, the market is gradually starting to re-appraise Genel’s worth: shares are up by more than 40% so far in 2019, and they have quadrupled from their lows in 2016 and 2017.
Balance sheet transformed
Under former chief executive Murat Özgül, who stepped down in early April, and his successor, the company’s former chief operating officer, Bill Higgs, Genel’s balance sheet has been transformed.
From a net debt position of almost US$250mln just a couple of years ago, the company now boasts net cash of over US$80mln.
“The economic situation in Kurdistan has improved to such an extent that we’ve now been paid flawlessly for three-and-a-half years by the Kurdistan Regional Government,” says new CEO Higgs, who has only been in the role for a matter of weeks.
This reliability has more than offset a drop in production at Genel’s key asset, Taq Taq, which saw peak production of over 100,000 bopd but is now increasing from a stable base of around 14,000 bopd.
Genel’s production clocked in at 34,000 last year, boosted by the Peshkabir field on the Tawke licence, and the company is now targeting a 10% jump in production in 2019.
'Exciting' deal with Chevron
Another recent boost to the shares has been an exciting tie-up with Chevron, the US supermajor which Higgs used to work for.
In January, Genel snapped up stakes in two of Chevron’s projects in Kurdistan called Sarta and Qara Dagh, and the former is due to come online in just over a year’s time.
Higgs said 10mln barrels have already booked to his company, but these fields are estimated to host as much as 150mln barrels oil, so there is plenty of upside potential.
Sarta and Qara Dagh are convenient in that Higgs and his team know the area well, but he says the quality of a project is more important than its location.
“If Sarta had come up anywhere in the world, we would have done that deal. We’re agnostic to the location and it’s really about the characteristics of the deal. What we want is projects that are near to cash generation,” he explained.
Behind this, Genel has a “free option” on a couple of enormous oil and gas fields in its usual hunting grounds, which have often been talked up as potential game-changers.
The plan is to develop Bina Bawi first as it’s the smaller asset, before moving onto Miran further down the line.
“It’s much more likely that we can attract capital for [Bina Bawi]. More of our friends in the banking industry will be willing to put money to work on a smaller project,” said Higgs.
“Once you’ve demonstrated that you can get one running, then you can go and build another one and another one.”
Forecast to generate free cash flow of US$100mln+ in 2019
Because Miran has been pushed to the back of the queue, Genel took the decision to write down its present value in the latest accounts, although Higgs was keen to stress that the quality and potential of the asset remains unchanged.
Despite all the investment planned in 2019 and beyond, Genel still expects to generate free cash flow of well over US$100mln this year, a chunk of which will be returned to investors after the board opted to start paying a dividend.
“Given the fact that we’re making all that investment in growth and still making all this cash, we thought it was the right time to start returning some of that cash to shareholders,” Higgs said.
“That will be US$40mln initially, with an expectation that will grow as time goes on.”
That expectation isn’t just hot air, either. The US$100mln cash flow forecast is based on a conservative US$45 per barrel oil price.
Not that Genel needs high oil prices, though. One of the perks of working in Kurdistan is the low operating costs which means the company remains cash-generative even at US$35 a barrel.
“Tell me where else you can do that,” said Higgs with a grin.