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Kurdistan oil & gas: KRG resumes monthly payments – positive

  • Oil & gas companies received payments for March sales from the Kurdish Regional Government...

  • ...But settlement of November 2019-February 2020 oil receivables postponed

  • New payment schedule to support liquidity in the sector; upgrade HKNENG 24s to Hold, other recommendations unchanged

Kurdistan oil & gas: KRG resumes monthly payments – positive
Tellimer Research
20 April 2020
Published byTellimer Research

Oil & gas companies operating in the Kurdistan Region of Iraq received payments last week for March 2020 oil shipments, according to Genel, Gulf Keystone and ShaMaran. This indicates a change of the payment terms, reducing the period between shipment and payments to two weeks from about three months in 2019. However, oil receivables for November 2019-February 2020, the period when oil price was roughly twice as high as its current level, will not be settled at least until the end of year, with the Kurdistan Regional Government (KRG) willing to put a settlement schedule in place if oil prices recover to US$50/bbl, according to Genel. 

We view the news as positive for oil & gas producers operating in Kurdistan. The KRG has demonstrated its willingness to find a solution, which allows the operators to pay their costs and ensures uninterrupted oil exports even if the proceeds from oil sales have reduced, reflecting a c50% decline in oil prices since 6 March 2020. In our report published on 30 Mar 2020, we analysed the potential consequences of severe payment delays as low oil prices reduce Kurdistan budget revenues and identified: (i) the more resilient players – Genel, DNO and Gulf Keystone, and (ii) more vulnerable – HKN Energy and ShaMaran. Now, the new payment schedule proposed by the KRG with invoices settled within 15 day after the end of the month, is positive for the sector, particularly for companies with relatively small liquidity reserves and high costs such as HKN Energy. However, it won't help those with tight liquidity much and those with essential costs not covered at the current US$25-US$30/bbl Brent price (eg ShaMaran).

Figure 1: Minimum oil price required to cover opex, G&A and interest

Source: Company reports, Tellimer Research calculations

The delay in settlement of the November 2019-February 2020 receivables is a small price to pay, given the current circumstances and the risk that further payment disruptions will remain as long as oil prices remain below US$30/bbl. We reiterate our view that companies that have accumulated high cash reserves (assessed relative to their monthly outgoings) are the most resilient in the low oil price environment and risk of payment delays. We reiterate our Buy recommendation on GENLLN 22s, Hold on GULFKY 23s, DNONO 20s, 23s and 24s and Sell on SNMCN 23s. We upgrade HKNENG to Hold as it benefits the most from the new payment arrangements.

Figure 2: Indicated mid prices and their change since 30 March 2020


Source: Bloomberg

  • Genel (GENLLN). The company received US$11mn for March oil sales. We estimate that in 2020, Brent price of US$21/bbl could cover Genel’s opex, G&A and interest expense and at US$35/bbl the company could break even on a free-cash-flow basis, assuming the KRG continues making monthly payments. To recap, Genel had cUS$390mn of cash at the end of 2019 and has received cUS$98mn for Aug-Oct 2019 oil sales from the KRG in 2020. We estimate that Genel’s cash reserves could cover opex, G&A, capex and interest for about 2.5 years even if receivables continue to accumulate. The KRG suspended override payments at least until the end of the year. This implies that Genel will not receive an additional 4.5% of Tawke gross revenues. This is a negative cash flow event, but we believe it is far more important now that the KRG continues making its regular payments supporting the oil producer's liquidity. Genel remains the strongest credit in the Kurdistan oil & gas space largely because of its low costs and substantial liquidity buffers. 

  • DNO (DNONO). We estimate DNO’s March sales receipt at US$26mn taking the total payments made to the company by the KRG in 2020 to cUS$210mn, according to our calculations. We estimate that in 2020, Brent price of US$27/bbl could cover DNO’s opex, G&A and interest expense and at US$35/bbl the company could break even on a free-cash-flow basis, assuming the KRG continues making monthly payments. We estimate that cash reserves (US$486mn at the end of 2019 plus payments received in 2020) could cover opex, G&A, capex and interest for over a year even if receivables continue to accumulate. With the KRG making regular monthly payments, DNO’s cash burn will slow down substantially as current Brent price is high enough to pay for operating costs, while capex and debt repayment will have to be funded from cash reserves. With Tawke override payments suspended, DNO will not receive 3.5% of the license gross revenue at least until the end of the year.

  • Gulf Keystone (GULFKY) received US$4.6mn for March oil sales taking the total receipts from the KRG to cU$40mn in 2020, according to our calculations. We estimate that in 2020, Brent price of US$25/bbl could cover Gulf Keystone’s opex, G&A and interest expense and at US$31/bbl the company could break even on a free-cash-flow basis, assuming the KRG continues making monthly payments. We estimate that cash reserves (US$154mn as of 23 March 2020 plus payments received in April) could cover opex, G&A, capex and interest for more than a year even if receivables continue to accumulate.

  • HKN Energy (HKNENG) has not yet disclosed the amount received from the KRG for March oil sales. We estimate that the KRG paid cUS$8mn to HKN Energy for March shipments taking the total receipts in 2020 to US$47mn. According to our calculations, Brent price of US$27/bbl could cover HKN Energy’s opex, G&A and interest expense in 2020, while all discretionary capex was suspended from the end of Q1 20. We estimate that cash reserves (US$56mn as of 23 March 2020 plus cUS$24mn received in April) could cover opex, G&A, substantially reduce capex and interest until the end of 2020 even if receivables continue to accumulate. With the KRG making regular monthly payments HKN’s cash burn rate will slow down substantially as current Brent price is high enough to pay nearly all operating costs and interest, while capex has effectively been suspended. Because HKN’s liquidity cushion was relatively smaller than that of Genel, DNO, and Gulf Keystone, and operating costs per barrel are sufficiently low (unlike those of ShaMaran), the benefits of the new payment mechanism are significantly higher for HKN than to its regional peers. We upgrade HKN Energy to Hold.

  • ShaMaran (SNMCN) received US$3.5mn for March sales taking the total payments made to the company by the KRG in 2020 to cUS$22mn, according to our calculations. We estimate that in 2020, Brent price of US$37/bbl is required to cover ShaMaran’s opex, G&A and interest expense assuming the KRG continues making monthly payments. Unlike other companies discussed in this report, ShaMaran doesn’t not have cash reserves to fall back on and, according to our estimates, is burning cash. For ShaMaran, therefore, the current situation is not only a question of receiving timely payments from the KRG, but also of oil prices. According to our estimate the company is on the brink of running out of cash.