Flash Report /

Downgrading Kurdistan E&P bonds

    Tellimer Research
    12 December 2019
    Published byTellimer Research

    We downgrade SNMCN 23s, HKNENG 24s to Sell, GENLLN 22s, DNONO 23s, DNONO 24s and OILFLO 22s to Hold and reiterate Hold on GULFKY 23s, following the news that the Kurdistan Regional Government (the KRG) will delay until January 2020 the payments to oil companies that were originally due in November-December.

    Unsettling news from Iraq, including: 1) violent popular protest; 2) rocket attacks in and near Baghdad; 3) the resignation of the Prime Minister; and 4) the Iraqi Oil Minister commenting that Kurdistan will deliver 250,000bopd to Iraq’s oil marketing company in line with prior agreements between the KRG and Federal government, which Kurdistan did not meet in 2019, have already created negative sentiment around the bonds of E&P companies. But a delay in payments could pose real liquidity risks to some of the names.

    ShaMaran Petroleum (SNMCN), which has very low cash reserves on its balance sheet, is most vulnerable to the delays in payments for oil, in our view. HKN Energy has adequate but significant capex, which if delayed could prevent the company from reaching production targets and, as a result, weaken its cash flow generation in the near term.

    DNONO, Genel and GulfKeystone could suffer from the overall negative sentiment, but their high accumulated cash reserves should enable them to cope comfortably with a temporary payment delay, without materially affecting operations or financials.

    OILFLO 22s will start amortising in 2020, with the money for repayments coming from export revenues from Kurdistan oil sold by Glencore. We estimate that at current oil prices, the scheduled monthly amortisations of US$20.8mn can be met with c13kbopd vs c115kopbd contracted to be exported through Glencore, suggesting that the bonds have a certain degree of protection if Kurdistan reduces it export through Glencore.