In Focus: Genel – A high regional premium; initiate with a Buy
We initiate coverage of the GENLLN 22s with a Buy recommendation. Our view is based on the company’s strong cash flow generation, resilience to cost inflation and oil price volatility, abundant liquidity and low leverage. We estimate that, as long as 1) Brent stays above US$40 per barrel, 2) the dividend policy is not in conflict with creditor interests and 3) timely payments from the Kurdistan Regional Government (KRG) keep coming, Genel will likely maintain its net cash position in 2022. The GENLLN 22s (YTM -8.47%, +656bps z-spread) have lagged the recent sovereign rally and, in spread terms, are indicated close to their widest levels over the IRAQ 23s in the past 12 months. The recent underperformance of the GENLLN 22s strengthens our view that this is a buying opportunity for investors comfortable with Kurdistan risk.
A pure-play Kurdistan exposure. Genel is an independent oil and gas company that has operated in the Kurdistan Region of Iraq (KRI) since 2002. It is at the forefront of the exploration and development of the region’s vast hydrocarbon reserves and has benefited from the lucrative terms of the production-sharing contracts (PSCs) for its key assets – the Tawke (operated by DNO) and Taq Taq oil fields. The company’s proved and probable (2P) reserves stand at 155mmboe and could secure another 11 years of production at the 2019 lifting rate of 37kboepd. The company has a portfolio of licenses at different stages of exploration and appraisal that should allow to replace its reserves (replacement rate >100% in 2018).
High cash flows at low cost. Genel is highly profitable at the current Brent price. We estimate the company’s production costs – including liftings, capex, interest and corporate overheads – amounted to US$43 per entitlement barrel, allowing the company to retain some US$29/boe in 2018. Incorporating management production and capex guidance into our financial model, we estimate that, in 2019, Genel could retain cUS$18 from each barrel of oil entitlement, generating cUS$126mn of free cash flow. This margin gives the company a degree of protection from oil price volatility and allows for potential cost increases from capex or dividends.
High liquidity and low debt. Genel’s only debt is the US$300mn of bonds due at end-22. The company had accumulated US$334mn cash by end-18 and, according to our estimates, will continue to build up cash reserves in 2019. If 2019f-22f capex remains at US$150mn and Brent is US$40-60/bbl, we estimate that, by end-22 (when the bonds are due), the company could repay debt from its US$340mn-580mn of accumulated cash reserves and should have no problems refinancing it.
Risks. There are some uncertainties around our forecast: 1) the newly introduced dividend policy requires a minimum of US$40mn annually – an increase in dividends above the minimum level could reduce the liquidity pool; 2) higher-than-projected capex could take a toll on cash balances; and 3) Iraqi politics (specifically, the KRG-central government relationship) and the regional security situation could undermine the assumption that oil and gas companies operating in the KRI will continue to receive regular payments from the KRG.
Read the full report here.
Recap of the week’s key credit developments
Greece (GGB): Kyriakos Mitsotakis was sworn in as the new Greek prime minister on Monday. His centre-right New Democracy (ND) party won an absolute majority in the snap general election on Sunday, called by incumbent Alexis Tsipras following his party’s defeat in the European Parliament election in May. Mitsotakis will now seek to ease austerity measures, promising tax cuts and privatisation. While the latter may be welcome, unfunded tax cuts risk derailing the EU’s fiscal targets, although Mitsotakis believes that he can persuade creditors to ease fiscal targets with a ‘comprehensive reforms package’. Greece overachieved its fiscal targets since 2016. Currently, there is a primary budget surplus target of 3.5% of GDP, effective until 2022, but ND believes this stifles growth and may seek a lower target. Yet, with public debt of 181% of GDP in 2018, and projected to fall to 168% this year, there is limited room for manoeuvre.
Trinidad and Tobago (TRITOB): S&P downgraded Trinidad’s long-term foreign currency rating to BBB from BBB+ on Tuesday, the third consecutive downgrade. A negative outlook had been applied on 28 April. The outlook is now stable. Meanwhile, Moody’s affirmed its junk rating of Ba1 on 26 June (Fitch has never rated Trinidad). S&P’s downgrade reflects the agency’s view that Trinidad’s resilience to external shocks has been weakened by a lower government revenue base and delayed reform implementation. Energy production has been lower than S&P expected, weakening the government’s revenue base, while institutional reforms to improve tax collection have faced delays.
Turkey (TURKEY): President Erdogan explained why he dismissed central bank governor Murat Cetinkaya on Saturday, nearly a year before his term was due to end. He was replaced by his deputy, Murat Uysal. Erdogan said, “We believed that the person who was not conforming to instructions given on the subject of monetary policy, this mother of all evil called interest rates, needed to be changed… you will soon see how our interest rate policy will be reshaped, because interest rates are the mother of inflation.” Contrary to Erdogan’s preferences, Cetinkaya raised the policy rate by 625bps in September 2018, attempting to ease the currency crisis.
Togo: The small west African country is planning a EUR500mn debut bond offering, according to media reports on Thursday. This comes after the country had its first sovereign ratings assigned within the last few months, with a B from S&P on 31 May and B3 from Moody’s on 5 June. Shortly after receiving its ratings, President Gnassingbe revealed plans to take on debt, in the form of a eurobond, syndicated loan or by borrowing from multilaterals such as the World Bank. The reports on Thursday of a bond issue are also timed after the IMF approved the latest review of its programme. Togo looks set to follow many other issuers and take advantage of supportive global liquidity conditions. Demand for SSA bonds in particular looks strong.
Nigerian banks: The Central Bank of Nigeria (CBN) has issued a circular lowering the maximum remunerable daily placement at the Standing Deposit Facility (SDF) to NGN2bn from NGN7.5bn. The changes to another SDF facility are part of efforts to boost lending. As we discussed in a previous piece, it is not clear that these measures will be effective.
African Bank (AFRIBK): The South African Reserve Bank (SARB) intends to sell half of its 50% stake in African Bank within the next two years. According to S&P, this decision shows that the SARB is confident that African Bank’s profitability has improved, and the lender is more stable. If the SARB stake is sold to the PIC or to one of the banks in the consortium that also owns part of AFRIBK, it could be seen as positive. On the ZAR-denominated bond sale, this marks further progress in African Bank’s turnaround. We have Buy recommendations on the two US$-denominated African bank 2020 bonds.
National Bank of Greece (ETEGA): National Bank of Greece has returned to the unsecured bond market with a EUR400mn 10NC5 Tier 2 security, issued to yield 8.25%. The IPT was 9% area. The new subordinated bond is expected to be rated Caa2, CCC and CCC- at Moody’s, S&P and Fitch, respectively.
QNB Finansbank (QNBFB): Qatar National Bank (QNB) published figures for the first half/second quarter of the year, including select figures for QNB Finansbank, its Turkish subsidiary. QNB Finansbank expects to disclose its results for Q2 on 29 July.
TSKB (TSKBTI): The bank has secured a EUR97.5mn and USD67.5mn 367-day syndicated loan at €L+2% and US$L+2%, respectively. The rollover ratio was 80%, which we do not think is a reason for concern. Less favourable pricing and decreased demand for foreign currency loans have led to lower rollover ratios at a number of Turkish banks, including Akbank.
Russian Standard Bank/Russian Standard Ltd (RUSB): Moody’s has withdrawn the ratings assigned to Russian Standard Bank, including the Caa1 long-term local and foreign currency Counterparty risk rating. The ratings were withdrawn for ‘business reasons’. Russian Standard Bank is now rated by just one major international rating agency – S&P (B-, stable outlook). The RUSB 13% 2022 bond, which was issued by Bermuda-based Russian Standard Ltd, is not rated, and therefore wasn’t impacted by Moody’s comment.