US Edition Genel Energy
987p+13
Questor says BUY
GENEL Energy, the Kurdistan-focused oil explorer, yesterday announced a new oil well that breaks previous production records.
The company is the largest oil producer in the semi-autonomous Kurdish region of Iraq. Run by former BP chief executive Tony Hayward, Genel also owns oil and gas assets in Morocco, Malta and Somaliland. The London-listed oil group holds a 25pc stake in the Tawke oil field. Norwegian oil major DNO International, which is Tawke’s majority owner and operator, said that a new well on the site was producing oil at a record 32,500 barrels of oil per day.
Exploration in the Kurdistan region produces some of the lowest cost oil in the world. Analysts estimate that the break-even cost to produce oil is about $30 (£18.90) per barrel. So, with oil prices remaining above $100 per barrel, the new well at Tawke is clearing a profit of about $70 per barrel.
Genel said the new well – Tawke-23 – cost $12m to drill. In terms of shareholder returns, analysts estimate the well will pay back the capital investment in just over five days. The company added that drilling is under way at two further wells, with results expected in the next two months.
Less than a decade ago Turkish tanks were lining up along the border with Kurdistan. However, relations with its neighbour, the Kurdistan Regional Government (KRG), have since thawed, even becoming cordial now.
Turkey is a major consumer of oil and gas and is seeking to become less reliant on existing imports from Iran and Iraq. A new pipeline under construction by the KRG has been connected to the Turkish network. The pipeline is expected to be fully operational within the next four months once engineering tests are completed.
Julian Metherell, chief financial officer, said that Genel’s oil production could almost double and higher prices should be achieved once the pipeline is fully operational. The pipeline will allow the group to access more lucrative world commodity markets rather than receive lower priced regional oil prices.
Mr Metherell added that a contract with Turkey to export gas from the Miran field is expected to be signed by the end of the year. Once the gas contract with Turkey has been signed then construction will begin on infrastructure at the Miran gas field. Genel will also seek to “farm out” – where the group sells the rights to gas income – some of the production, leading to a further cash windfall for the company.
Genel announced pre-tax profits of $109m, from $22.3m in the six months to June. It also had a net cash position of $867m. Mr Metherell repeated the claims that a fully operational pipeline and Turkish gas deal will open the way for returns of capital to shareholders as soon as next year.
Investors need to be fully aware of the fluid nature of politics in the Kurdistan region. Relations may be improving with Turkey, but they are becoming strained with Iraq, which feels threatened by the new pipeline. Iraq refuses to accept the legitimacy of gas contracts which the KRG agreed directly with Turkey. Just over the border, Syria remains in turmoil and is a source of arms and a theatre of operations for Kurdish separatists.
That said, Genel remains an interesting proposition. Of the current share price, analysts estimate 392p is supported by assets already producing oil, with around 300p of the current share price made up by oil assets under development. That gets you to 692p and then, depending on how successful new developments are – the majority of which are at Miran – analysts estimate you can add between 250p and 500p.
The investment case here is really all about the successful delivery of that new production. The shares trade 22.5 times forecast earnings. However, that falls sharply to 17 times next year, and 11 times by 2015. To achieve these price-earnings ratios, pre-tax profits have to jump from $76m in the year ended 2012, to $376m by the end of 2015. This remains a risky investment but everything is in place to deliver those ambitious targets. Buy.