As long as you are prepared to accept a degree of geo-political risk, then I find it very hard not to like Genel Energy (GENL) at the current share price. In my opinion this company has been consistently undervalued for a number of years now, having been hit by the conflict in Iraq/Kurdistan, along with oil prices crashing, and this seems to have made people very wary of the potential for future problems in the region which could impact on its operations – currently the situation with Iran certainly isn’t helping matters. But when it comes to investing in resource stocks, this is often the case and is reflected in a discounted share price. If all actually goes well for these types of companies, then this can offer far more upside potential to investors than you would see with a similar company operating in a part of the world that is considered to be ‘safe’.
Currently Genel is valued at around £590 million with the shares at 212p, and I believe that leaves a lot of room for upside from this level, given the potential of its assets and the way in which it is growing production and generating free cash flow from its assets. Tawke is currently its biggest asset with a 25% share of the 1P reserves of 348mmbbls as at the end of 2018 – and it actually saw no reduction in reserves over the prior 12 months due to upwards technical revisions matching the depletion of 41mmbbls which were produced during that period. The latest update from the company showed that Tawke is producing at a rate above expectations, with net production of 126,800bopd. It is also still bringing in revenue from its Taq Taq field, where it has a 44% interest, and production is slightly up on 2018, with around 13,000bopd currently. It also has the Peshkabir asset, where it holds a 25% interest, and this one is particularly exciting at the moment given the rate at which production is growing, given that it had an output of 12,000bopd last January, and that has now increased to over 55,000bopd. Despite the money spent on the work to increase production, the asset still managed to generate around $50 million of free cash flow for the company, and looks an exciting prospect going forwards.
Overall the company is now producing 37,600bopd net and is ahead of its forecasts, so as long as oil prices stay buoyant and there are no regional problems that impact on its operations, then I would expect it to have another strong year. It is expecting that during 2019 it will generate over $100 million in free cash flow (this will be lower than 2018 but reflects the money being invested into the assets to continue growing production), and recently announced a maiden dividend of $0.1 per share, with nearly $28 million being returned to shareholders. In terms of the yield it is certainly nothing special but does show a step in the right direction. It certainly has the free cash flow to support it, and with $81 million in the bank at the end of February which I would expect to have further increased by now.
The only real negatives have been the lapsing of the agreements with the government on its gas assets, with Bina Bawi already having lapsed, and Miran due to follow the same path at the end of this month. But the company is in the process of negotiating new deals for both, so we could eventually still see both developed by Genel over the longer term. As long as the oil price stays strong then I can see no reason why shares in Genel shouldn’t be trading at a higher price, and longer term there looks to be plenty of growth potential, as aside from its existing producing assets its also has the Sarta and Qara Dagh fields to come online in the future and is partnering Chevron on these. So for me it is a buy at current levels, both in terms of expecting to see shorter term share price upside, as well as more sustained growth over the longer term.
Filed under: Genel Energy, Staffline, Blur, Maistro, easyJet, Bonmarche, E24, Origo, Chris Rynning
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