Genel Energy (LSE: GENL) and Gulf Keystone Petroleum (LSE: GKP) are falling today as investors fret about the progress the Islamic State, a breakaway al-Qaeda group, has made within Iraq.
Making progress
The Islamic State, previously known as Islamic State in Iraq and Levant, has seized two key oilfields within Kurdistan over the past few days. These gains have taken the militants perilously close to the operations of Gulf Keystone and Genel.
Two oilfields, the Ain Zala and Batma oilfields, together producing about 30,000 barrels a day are now under the control of militants. This follows the capture last months of the Qayyare oilfield north of Iraq’s capital, Baghdad.
However, while these gains are worrying, many City analysts are looking to reassure investors. Indeed, some analysts have stated that the Tawke oil field, Genel’s main asset, is unlikely to be a target for the militants.
Pressing issue
The biggest threat now facing Genel and Gulf Keystone is the security of Iraq’s biggest dam. There is currently fierce fighting going on around the Mosul dam, the largest dam within Iraq and a critical piece of infrastructure.
According to a report put together by the US Army Corps of Engineers during 2007, if the dam were to fail, up to 500,000 lives would be at risk and the city of Mosul would find itself under 60ft of water.
It’s fair to say that a catastrophe of this kind would be a setback not just for Genel and Gulf Keystone, but for Iraq as a whole.
Diversifying
Genel, at least, has been looking to reduce its dependence on Iraq over the past few years. The company now has assets across Africa, from Malta to Angola. In total, the company’s African assets have 5.5bn barrels of oil equivalent of gross prospective resources, which gives the company plenty of diversification away from Iraq if things get worse in the region.
But for Gulf Keystone, the progress made by the militants is worrying. Still recovering from the loss of its controversial CEO Todd Kozel last month, the company is now under the stewardship of John Gerstenlauer, who has served as Gulf Keystone’s chief operating officer since 2008. Unfortunately, the company has almost no diversification outside of Iraq.
Risky business
Still, recent declines have left both Gulf Keystone and Genel looking undervalued. For example, at present levels, according to City forecasts Genel is currently trading at a 2015 P/E of 12. Similarly, Gulf Keystone is now trading at a 2015 P/E of 9.
