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Is it finally time to buy Genel Energy plc?

Photo: Petrofac Ltd . Fair Use.

Shares in Genel Energy (LSE: GENL) plunged to an all-time low on Tuesday, after the company said its key Taq Taq field is now estimated to hold a remaining 59.1m barrels, compared to 171.8m barrels at the end of 2015.

However, today its shares rose by as much as 15% in afternoon trading, after the Kurdistan-focused oil producer reported its full-year results. Although Genel’s losses deepened on falling production and a further write-down of reserves, the market responded positively to the momentum behind the development of its Miran and Bina Bawi gas fields in the Kurdish region of Iraq.

Full-year results

Following hefty impairment charges to its exploration assets, Genel’s operating loss last year widened to $1.22bn, up from $1.04bn in 2015. Revenue fell to $190.7m from $343.9m in 2015, missing its much reduced target of $200m–$230m for 2016, as Genel’s share of production fell sharply from 84,900 barrels of oil per day (bopd) in 2015, to 53,300 bopd.

Encouragingly, though, the resumption of regular payments from the Kurdistan regional government in return for oil exports helped Genel to return to positive free cash flow in 2016. The company reported free cash flow after capital expenditures of $59m, versus an outflow of $179m in 2015.

Turnaround plan

Genel has been dogged by a series of reserve downgrades and exploration failures over the past few years, but analysts still see promising prospects in the company’s gas business.

Global natural gas demand is rising due to the structural shift away from coal, and Genel is attractively positioned to benefit from Turkey’s plans to build a pipeline extension to import gas from the Kurdish region. There’s almost 1,500 million barrels of oil equivalent (MMboe) of 2C reserves in its Miran and Bina Bawi gas fields, and Genel is currently in talks with farm-out partners to help fund its development. Outside of Kurdistan, Genel also has exploration assets in Morocco and Somaliland.

However, whether Genel can actually deliver a successful turnaround is still very much up in the air. With net debt of $241m, the company does not have very much financial flexibility. Additionally, uncertainties over the production outlook for its current production assets continue to overhang the shares. As such, investors should approach Genel with caution.

Better play?

Of course, Genel is not the only stock in the energy sector with turnaround potential. Oil services company Petrofac (LSE: PFC) is set to see a significant improvement in free cash flow this year as it refocuses on its core Engineering & Construction business.

Its business model appears to be more stable than that of its sector peers and evidence of this can be seen from its strong backlog of orders and relatively stable revenues. Petrofac’s focus on the Middle East has also spared the company from recent savage cuts to capital spending in the oil & gas industry. What’s more, the scaling back its Integrated Energy Services (IES) operations will reduce its exposure to production risks and allow Petrofac to maintain a leaner capital structure.

The company recently won a $1.3bn contract to design and build a gathering centre in the Burgan oil field in Kuwait, which will give its order backlog a significant boost. And as Petrofac’s backlog already stood at $14.3bn before this latest deal, the company has excellent visibility over future revenues.

Valuations also seem attractive, with shares trading at a forward P/E of 10.0 and currently yielding 5.7%.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.