Reiterate Buy. Genel remains the strongest credit in the Kurdistan oil & gas space largely due to its conservative financial policy, which over time allowed the company to accumulate significant liquidity. A combination of US$404mn in cash reserves and low costs make Genel the most resilient credit in the region. Lower capex will enable the company to reduce the breakeven oil price to US$30/bbl, suggesting that Genel could be free cash flow neutral if Brent stays at current levels. Substantial cash reserve will protect Genel from potential delays in payments for oil and finance the US$27mn dividend approved yesterday. We upgraded GENLLN 22s to Buy on 30 March 2020 after falling oil prices triggered a sell-off in Kurdistan oil & gas. The bonds have rallied c12ppts since then. We reiterate our Buy recommendation.
Low costs allow break even with Brent at cUS$30/bbl. According to management guidance, opex in 2020 is expected at US$36mn, capex at just over US$100mn and G&A at US$15mn, demonstrating a significant reduction relative to the initial guidance released before the fall in oil prices. If Brent stays low for longer, capex could be reduced further to US$60mn, but will not happen this year as the company has invested US$45mn in Q1 20. According to our estimates, if all expenses are taken together (opex, G&A, capex and interest), Genel’s breakeven oil price (the price at which revenues cover all costs) should be at cUS$30/bbl starting from Q2 20. This is slightly lower than US$34/bbl implied by the Q2 20-Q1 21 forward prices. With the oil price shock having already impaired KRG’s ability to make timely payments to oil companies, further delays cannot be ruled out despite the recently revised payments schedule alleviating pressure on KRG’s finances. This is where Genel’s high liquidity comes in handy.
Meaningful cash reserves ensure liquidity and support bonds. In January-April, Genel received US$98mn from the KRG for the oil shipped in August-October 2019 and March 2020, as well as override payments. Like all other producers, Genel has seen payments for its November 2019-February 2020 invoices delayed at least until the end of 2020, or such time as when oil recovers to US$50/bbl. The company accumulated US$404mn on its account in April. This amount could cover all outstanding debt at a ratio of 1.3:1, annual interest payments at a ratio of 13:1, 2020 opex at a ratio of 11:1 and 2020 capex at a ratio of 4:1. Significant cash reserves could pay the company’s costs for 2-3 years making Genel the least sensitive producer to KRG’s payment discipline among its peer group.
Production likely to decline towards year-end on lower capex. Most of Genel’s revenues come from two oilfields: a mature Tawke and a new Peshkabir, both operated by DNO. Tawke experiences a rather high decline rate while Peshkabir has just recently reached its current capacity. With investments in the producing assets reduced nearly two-fold compared to the initial 2020 guidance, the rate of production decline is likely to accelerate towards the end of 2020 and in 2021. Genel could be able to partially offset the decline with the new barrels from Sarta, a field which is expected to go in production in Q4 20, potentially adding c4,000bopd to the company’s output in 2021.