Genel operations update ~ still waiting for export payments

Genel’s trading statement has been over-shadowed to some extent by the unexpected departure of its Chairman (Rodney Chase) with Tony Hayward stepping up to Chairman and Murat Özgül taking over as CEO. While Mr Hayward’s position as Chairman of Glencore always suggested that he eventually to step back from his CEO role at Genel, the timing seems a little surprising/sudden. He is replaced by Murat Özgül , who has been at Genel since 2008 and was formerly Chief Commercial Officer, so he knows the business extremely well. His capital markets experience is reasonably limited, but we expect he will be ably assisted by new CFO Ben Monaghan, whom we met a few weeks ago. Genel now has a new management team, but we do not expect any material change of strategy in coming months – it will remain Kurdistan, Kurdistan, Kurdistan.

Operations ticking along The operations of the company continue, with record volumes of over 100mbd (net) on peak days from its Taq Taq and Tawke fields. Gross surface processing capacity at Taq Taq is now 150mbd, with Tawke gross wellhead, processing and pipeline capacity is 200mpd. Production guidance has been maintained at 90-100mbd with revenue guidance of $350-400m at $50/bbl.

Along with many other E&Ps, Genel has tightened its belt with the falling oil price, reducing both its G&A and capex. The company has re-focussed on Kurdistan development and has taken a step back from exploration and as a result, capex guidance has been reduced to $150-200m (from $200-250m).

No payments for oil exports in H115
The key issue with Genel (and other KRG-producers E&Ps such as DNO and Gulf Keystone and to a lesser extent non-producing companies such as Western Zagros and Shamaran) is payment for exports. Kurdistan is incurring material additional expense by fighting against the ISIS forces, while not receiving steady payments for its oil production from Baghdad. As a result, the oil contractors are not being paid in full for their production. Genel’s trade receivables at 30 June 2015 stood at $378m (vs $230m in Dec 2014), an increase of $148m. Given H115 revenues are estimated at $200m, this implies that 75% of production (by value) has not been paid for. Volumes sold to domestic buyers and the Bazian refinery (together making up 28% of volumes) are probably being paid for, so Genel has received no compensation for its export volumes. This needs to change.

The KRG government is keenly aware that oil companies cannot continue to produce oil without being paid and is seeking to resolve the payments issue, with some reports suggesting that it will seek to market the oil independently outside the existing framework of SOMO (the central Iraqi oil marketing organisation). While this would deliver more reliable payments for the KRG and therefore contractors, it also brings up the possibility of a break-up of federal Iraq.

Elsewhere, the company continues to progress its gas projects in the portfolio; Miran and Bina Bawi (Kurdistan), with planning on mid-stream development. Discussions on FEED, EPC tender and financing options continue.

Indexed share performance for KRG-based companies since mid-2014. Producers have done best, and balance sheet strength has dominated