City heavyweights give verdict on Genel Energy

With the dust settled following Genel Energy's full-year results, City heavyweights have crunched the numbers and continue to back the Kurdistan-focused oil producer. However, Genel had already flagged up key items in a lengthy update in January, so catalysts for an immediate share price recovery were limited.

Admittedly, revenue of $520 million was ahead of consensus estimates and in line with company guidance for "low-end" of $500-600 million. Both a 58% increase in production to 69,400 barrels of oil equivalent per day (boepd), and a gross cash balance at year-end of $489 million were as predicted in January.

Genel booked a $233 million receivable for Kurdistan export sales, and receiving the cash clearly remains a major issue. The Kurdistan Regional Government (KRG) this week received its first monthly payment from Iraq of just $208 million, well below the budget allocation of $1 billion.

"We see the delayed payments not as Iraq deliberately reneging on the budget deal, but merely a function of the oil-price crash severely hampering its ability to pay," says UBS. "The inaugural payment and increase in Kurdish exports (from 145,000 barrels per day (bpd) in January to 304,000bpd in February) does suggest willingness from both Baghdad and Erbil to work cooperatively."

Authorisation from the KRG for sales into the local market during the transition to regular payments is something at least. UBS thinks it could be worth about $175 million of annualised revenues for Genel at $40 a barrel, "enough to operate near cash neutrality".

Genel also believes it can still hit a production target of 90,000-100,000 barrels per day, sales of $350-400 million - assuming Brent crude at $50 - and a 70% cut in capex to $200-250 million.

"Stuck between two financially stretched governments, it is becoming apparent that an increase in cashflows is more likely to be a 'drip-feed' than the 'inflection point' investors have been waiting for," says UBS. "Some are losing patience. But with the export route via Turkey established, regular sales, and alignment between the IFG and KRG we are, in many ways, closer than ever to a scenario whereby contractors can sustainably scale up production and access international markets."

"This de-risking was reflected in last week's news that Gulf Keystone 'is in discussions with a number of parties regarding a sale of the company'. A transaction could ignite interest in the sector."

According to the Swiss broker, its 850p price target is set at 0.9 times commercial net asset value (NAV) of 959p per share.

"A solid set of results that should reassure that Genel's balance sheet and ability to generate cash in the domestic market is capable of absorbing a period of uncertainty over export payments," is Deutsche Bank’s summary of the figures, which underpin its 'buy' rating and 800p price target.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.