Genel Energy – I am looking for a 60% price increase over the next 18 months
Last Thursday’s AGM for Genel Energy (LON:GENL) saw the issue of a very positive Chairman’s Statement – reporting a successful start for 2019 for this Jersey registered resources group.
Now, I may not know enough about the technicalities of the exploration and then the production of crude oil and natural gas, but I do get excited when I see companies building up their cash flows.
And that is exactly what is happening with Genel.
The company, which is headquartered in London and with offices in Ankara and Erbil, is the largest holder of reserves and resources in the Kurdistan Region of Iraq. It has been operating over there since 2002 and, what is more, it is now one of the largest oil producers on the London market.
Genel has interests in two producing fields, Taq Taq and Tawke, in the KRI, both of them generate material free cash flow. The company has estimated net proven and probable reserves of 150 million barrels of oil net to Genel Energy. Net working interest production in 2018 averaged 33,700 barrels of oil per day and that figure is set to rise this year.
The Taq Taq licence area is 60km northeast of the Kirkuk oilfield, it covers a gross area of some 951sq.km. The field, which has been producing since 2006, has produced well over 215 MMbbls to date, generating well over $12bn in sales revenue.
The Tawke field is a steady producer, whilst its Peshkabir discovery area to Tawke’s west reported production having exceeded expectations in 2018.
Taq Taq and Tawke remain low-cost oil fields by any global benchmark and are set to be highly cash generative going forward.
On Genel’s KRI development side, the Miran and Bina Bawi fields are set to unlock significant value. There is the potential for early oil at Bina Bawi, and the gas assets can assist the Kurdistan Regional Government in satisfying domestic gas demand and its obligations under the KRG-Turkey Gas Sales Agreement.
The development of the fields is a unique opportunity. The fields are 300km from Turkey, and they provide Turkey with the opportunity of materially reducing their gas import costs. They could develop into being a world-class resource with a committed government buyer for the gas in place.
At the start of this year the company acquired a 40% stake in the Chevron operated Qara Dagh appraisal licence and became the operator through a carry arrangement, covering activity for the QD-2 well, estimated to cost circa $40m and is set to be drilled in the first half of 2020. Genel considers this an exciting opportunity.
At the same time the company also acquired a 30% equity stake in the Chevron operated Sarta block in the KRI. First oil is expected in the middle of next year, with a total cost to Genel of some $60m by the end of 2020.
Away from the KRI Genel is targeting resources in Somaliland, a relatively unexplored region. It has interests in blocks totalling over 40,300 sq.km – which is almost the same area of the whole of the KRI. After a farm-out a well is expected to be spudded next year.
In Morocco the company has a 75% interest in the Sidi Moussa offshore licence, however, it has yet to show any commerciality.
Oil production from the Tawke, Peshkabir and Taq Taq fields generates significant free cash flow, and will continue to do so as the company continues to maximise that flow through efficient reservoir management and disciplined capital allocation.
Whilst the Sarta, Qara Dagh, Bina Bawi and Miran interests provide material upside opportunities, with an attractive mix of near-term production and long-term growth potential.
With some 280m shares in issue the company is currently valued at only around £580m, whilst its free cash flow last year was $164m.
It has a number of professional names in its equity including Davy Asset Management (23.1%), Majedie Asset Management (4.56%), JP Morgan Asset Management (UK) (1.01%), Artemis Investment Management (0.91%), and Goldman Sachs Asset Management International (0.70%).
Nathaniel Rothschild and NR Holdings each have a 7.92% interest, the Ankara based Bilgin Grup Dogal Gaz holds 15% and so too does Hassan Gozal’s Daax Corp with another 15%.
Estimates suggest that this current year could see $283m of revenue produce around $112m of pre-tax profits, with earnings of 42p per share covering a 3.5p dividend. That puts the shares out on a prospective pe of a miniscule 5 times.
Genel’s strategic ambition is to become a world-class independent exploration and production creator of shareholder value. Its highly cash-generative portfolio, its low leverage together with its disciplined and value driven capital allocation gives it a very robust and resilient financial base.
Its production and net cash position are both rising fast and its portfolio is set for material organic growth.
The shares of Genel Energy, at around the current price of 207p, look to me to be of very good value.
The upside is massive and although the average Target Price, of the 13 broker’s analysts that follow the company, is 300p I set an even higher figure of 350p by the end of 2020.