Fixed Income Analysis /
Iraq

Genel: Upgrade to Buy on recent underperformance

    Tellimer Research
    21 January 2020
    Published byTellimer Research

    Genel’s FY 2019 operating update confirms our view that the company is able to deliver strong cash flow generation, maintain a solid balance sheet and fund expansionary capex at prevailing oil prices, laying the foundations for future production growth. After a spike in regional risks which caused us to downgrade some of our recommendations, the market has regained confidence in DNONO 23s and 24s, the most liquid bonds in the Kurdistan Oil&Gas universe. But GENLLN 22s lagged the recovery, with the GENLLN 22s-DNONO 23s spread widening from an average of 30bps in December to c114bps now. We think that relative risk profiles of Genel and DNO have not changed substantially since the start of 2020 and we upgrade GENLLN 22s to Buy as we expect the bonds to catch up with DNONO. Turbulent regional politics remains the key element of uncertainty for the bonds of international oil companies operating in the region.

    FY 19 results largely in line with management guidance. In 2019, Genel reported average working interest production at 36,250bopd, slightly missing the most recent production guidance, but posting 8% yoy growth. Tawke (operated by DNO) remained the main producing and cash generating asset, having contributed c85% to Genel’s working interest production. The company’s cash flows were affected by delayed payments for oil shipped in August-September amounting to US$54mn, of which US$26mn was settled in January. Genel does not expect payment disruptions to continue.

    Headline FY 19 financials in line with Tellimer research forecasts. In 2019, Genel’s working interest production was in line with our 2019 forecast, while FCF adjusted for delayed payments was higher than our estimate. The difference most likely reflects our more aggressive cost estimates, cautious assumptions about cost recovery and movement in working capital. In 2019, Genel collected US$317mn in cash proceeds, spent US$161mn on capex, and earned US$99mn in free cash flow before dividends. If August-September payments had been made on time, Genel’s FCF would have reached US$153mn. In 2019, Genel maintained a net cash position, having accumulated US$387mn in its bank accounts. 

    2020 outlook: capex and first Sarta barrels to stabilise production. In 2020, Genel plans to allocate US$160-200mn to capex, a potential 25% yoy increase in investment, to manage declining production at mature fields, Tawke (ex. Peshkabir) and Taq Taq, and to launch commercial production at Sarta, a new asset in Kurdistan expected to go on stream in summer. Production guidance of 35,410bopd with an exit rate of c39,000bopd suggests that Genel will have to wait until 2021 to monetise its 2020 capex. Despite increasing investment, management expects to generate US$100mn in free cash flow before dividends.