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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 (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).

PRODUCING ASSETS

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.

Executive summary

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.

Quick facts: Genel Energy PLC

Price: 140 GBX

LSE:GENL
Market: LSE
Market Cap: £388.74 m
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Financial results and forecasts
Growth drivers
Management
Market conditions
Milestones & inflection points

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