Genel a buy ahead of production boost with drilling excepted to start in Somaliland
Genel, run by former BP chief executive Tony Hayward, is the largest oil producer in the Kurdish semi-autonomous region of Iraq. It also has exploration acreage in Morocco, Malta and Somaliland, with drilling expected to start in the final quarter of this year.
The interim figures were in line with City expectations. Revenues in the six months to June rose 30pc to $160.6m (£106m) and pre-tax profit soared to $109.1m from $22.3m. However, the profit figure was flattered by a $54.5m one-off accounting credit after changes in the way depreciation was measured. When this is stripped out, profits rose 148pc. The group still has a net cash position of $867m and Julian Metherell, finance director, raised the possibility of a dividend next year.
The Kurdish Regional Government (KRG) has been in dispute with Iraq over revenue sharing on oil produced in the region. Genel has been trucking oil out to Turkey because the Iraqi central government has banned exports through a Baghdad-owned pipeline.
However, a pipeline built by the KRG is now just 15km from the Turkish border. Genel is likely to be granted export capacity though the pipeline by the KRG and this will allow for the efficient export of oil.
Oil production is expected to rise to between 45,000 barrels and 55,000 barrels of oil equivalent a day for the full year from 44,500 barrels in 2012. The company says this will generate revenue of between $300m and $400m.
Genel has had substantial exploration success this year and has added about 500m barrels of contingent resources. There is also a potential gas deal between Turkey and the KRG which would boost Genel following significant gas discoveries in the first half.
Yesterday Genel raised its estimates for its gas reserves at the 100pc-owned Miran and 44pc-owned Bina Bawi fields to between 8 trillion and 14 trillion cubic feet. Talks are in progress about an export deal that would see the KRG supplying up to 25pc of Turkey’s gas requirements.
The exploration programme in Africa starts in the fourth quarter in Morocco, with drilling in Malta expected in the first quarter of 2014.
Most of the world’s easy oil has been discovered and oil companiesare looking to under-explored areas for new reserves. Next year, Genel will drill its first well in Somaliland, the breakaway East African territory that declared independence from Somalia more than 20 years ago after a bloody civil war. There is talk that the geology in the country is similar to that of Yemen, where oil money generates 75pc of government revenues.
For obvious reasons, Somaliland is under-explored with little activity since the oil majors left in the 1980s. This means there is a good chance of finding oil. However, the fun will really start following any discovery. Somalia is likely to want a slice of the revenues so thrashing out an agreement may be challenging.
Political difficulties appear to be getting resolved and a gas agreement between Turkey and the KRG will be very positive for Genel following recent gas finds. Diversification away from the KRG is welcome and the company’s balance sheet remains robust. The shares are trading on a 2013 earnings multiple of 31.5 but this falls to 15.2 in 2014 and then just 9.8. Questor keeps a buy.