Fixed Income Analysis /

Kurdistan oil & gas: Upgrading HKNENG and SNMCN to Hold

    Tellimer Research
    5 February 2020
    Published byTellimer Research

    Independent oil & gas companies operating in Kurdistan have received their second payment from the government in 2020, according to disclosures made by Genel, Gulf Keystone and Shamaran Petroleum. This further eases concerns about Kurdistan’s payment discipline that arose at the end of 2019, when the region delayed payments to oil companies for August-September shipments. Although Iraqis continue to protest in Baghdad, Basra and other cities, the risk of further escalation between the US and Iran has subsided. We upgrade HKNENG 24s and SNMCN 23s to Hold and maintain our Buy recommendation on GENLLN 22s and our Holds on OILFLO 22s, DNONO 21s, 23s and 24s.

    Upgrading HKNENG to Hold on resumption of timely payments for oil from Kurdistan. In November 2019, we initiated coverage of HKN Energy with a Hold recommendation, underpinned by the company’s high 2P reserves, high operated interest, high quality of oil (resulting in the smallest discount to Brent among peers) and a well-funded capex programme, albeit it is not without debt. However, high investments are required to unlock a substantial cost pool, and, moreover, restricted HKN Energy’s free cash flow generation in 2019 and, according to our forecast, will also constrain it in 2020. This makes the company more exposed to the risks of an oil price decline and Kurdistan’s payment discipline. With the disruptions in payments that caused us to downgrade to Sell in December proving to be temporary, we reinstate our Hold.

    Upgrading SNMCN to Hold on anticipated higher payments for oil. According to our assessment, Shamaran’s credit profile is weaker than those of its peers operating in the region. What is good about the company is that it delivered a spectacular increase in production in 2019, both organically and through an increase of its share in Atrush Block. However, because it is relatively small, the company’s cash generation is small while its expansive investment programme continues. In 2019, Atrush production nearly doubled, peaking at the end of Q4. If Kurdistan maintains its payment discipline, higher checks corresponding to higher production in Q3 should start coming in February-April. We expect Shamaran to receive US$30mn-40mn this quarter, restoring its deteriorated cash position.

    FCF-breakeven in 2020: Genel scores best. Five oil & gas companies we cover in Kurdistan have yet to report their FY 19 financial results, but most have already disclosed average production volumes for the year and shared guidance for 2020. We believe the free-cash-flow breakeven oil price is one of the most important indicators of financial resilience in the industry. When combined with other characteristics such as the size of the business – which we assess based on current WI production and 2P reserves, reserve life, leverage (debt/EBITDA) and liquidity (cash on hand) – a detailed picture of the companies’ relative financial standing emerges. Assessed along these lines, Genel yields the highest score and Shamaran the lowest.

    Company ranking by factor – from stronger (green) to weaker (red)



    R/P ratio



    Source: Tellimer Research