Fixed Income Analysis /
Iraq

Genel: Upbeat H1 19, Buy

    Kiti Pantskhava
    Kiti Pantskhava

    Senior Credit Analyst

    Tellimer Research
    7 August 2019
    Published by

    Genel reported upbeat H1 19 financial results underpinned by production growth. The company continued to generate strong free cash flow with additional crude volumes compensating for softer prices, higher capex and newly introduced dividends. Genel’s operations remain self-funding due to the beneficial terms of the production sharing contacts, the receivable settlement agreement (RSA) and high quality of reserves. With a free cash flow (FCF) breakeven price of cUS$41/bbl according to our estimates, Genel is both highly cash generative and resilient to oil price volatility. Low leverage and accumulated sizable cash reserves sufficient to repay all outstanding debt at once offer financial flexibility in terms of investments, dividends and debt management. We reiterate our Buy recommendation on GENLLN 22s.

    Accelerated monetisation of production growth. In H1 19, Genel’s working interest production increased 17% to 37,400boepd. Revenues were up 21% yoy at US$194mn, outpacing volumes growth, despite lower oil prices (Table 1). The reason behind it is the RSA, assigning an additional 4.5% of the gross output of the Tawke production sharing contract (PSC) to Genel until mid-2022. We estimate that revenues attributable to the RSA amounted to cUS$55-60mn.

    Low-cost barrels. The company reported EBITDA of US$167mn, an EBITDA margin of 86% and free cash flow after capex, but before dividend of US$57mn in H1 19. According to our estimates, the FCF-breakeven oil price came to US$41/bbl and covered opex, capex, discount to Brent and the difference between the working interest and entitlement production. With average Brent at US$65/bbl, Genel has substantial headroom to absorb oil price volatility, exploration capex and dividends without compromising its solid credit profile.

    High financial flexibility to invest in new assets, pay dividends and control leverage. Genel reiterated FY production guidance at c37,000boepd and adjusted capex guidance towards the upper end of the US$150-170mn range. We estimate that under management assumptions and average Brent at cUS$65/bbl, Genel could generate US$80-US$90mn in free cash flow after US$40mn dividends paid and announced in 2019. This could increase the already high cash balance to US$410-420mn, giving the company both a safety cushion and flexibility to focus on bringing Sarta an Qara Dagh on stream in time to replace extra cash flows coming from the RSA.

    Risks. Company specific risks which to some extent are within management’s control include: 1) a lack of track record of dividend distribution, making it difficult to evaluate the potential for above minimum US$40mn annual payout; and 2) future production and ability to continue to deliver low cost barrels. Iraqi political risk, and specifically the KRG-central government relationship, is outside management’s control and common for all oil producers operating in Kurdistan.