Kurdistan oil producers Genel Energy (LSE: GENL), Gulf Keystone Petroleum (LSE: GKP) and Norwegian firm DNO ASA are collectively owed around $1.4bn by the Kurdistan Regional Government (KRG) for unpaid oil production, according to recent updates.
The majority of this is owed to DNO, which said today that it was owed $829m for export sales and $118m for domestic sales.
The Kurds recognise this problem. Although they are desperate for cash to fund the fight against ISIS, the KRG recently issued a statement indicating that in September they would begin to make regular payments for oil exports.
Applying more pressure
DNO is the largest of these three producers. It reported working interest production of 99,613 barrels of oil per day (bopd) for the second quarter, slightly more than Genel and at least double that of Gulf Keystone.
DNO’s flagship asset is the Tawke field, in which Genel has as 25% stake. Tawke is Kurdistan’s largest oil field by both production and reserves, and production hit 153,346 bopd in the second quarter. This makes DNO’s operations a key source of revenue for the Kurdish authorities.
However, DNO appears to be running out of patience. The firm issued a stock market statement today stating that if DNO does not start to receive regular payments for oil production, it will cease investing in Tawke.
According to Bijan Mossavar-Rahmani, DNO’s executive chairman, “without further investments, production from the Tawke field will decline”.
Time for hardball?
DNO, Genel and Gulf Keystone collectively account for the vast majority of exports from Kurdistan. Is today’s statement from DNO a sign that these firms could start to act deliberately to throttle production until regular payments are established?
With oil prices low and unpaid bills mounting for oil exports, it’s not as if cutting production would cause a cash flow crisis. All three of these companies are already relying on their own cash reserves to fund most of their operations.
My view is that while DNO and Genel, which have plenty of cash, might feel able to do this, cash-strapped Gulf Keystone won’t.
Gulf has already switched most of its production to the domestic market in order to guarantee prompt payment. The firm simply cannot afford to do anything which might threaten its revenue, or its relationship with the Kurdistan Ministry of Natural Resources.
Today’s best buy?
Including debt, Genel Energy is now valued at just $3.60 per barrel of proven and probable oil and gas reserves.
That seems very cheap to me, given how low production costs are in Kurdistan.
Genel chairman Tony Hayward said recently that he fully expects the KRG to fulfil its promise to begin making regular monthly payments. Genel’s balance sheet remains strong and along with DNO, it remains a key player in Kurdistan.
If regular payments start, then Genel shares could rise sharply and the firm could come into focus once more as a potential takeover target.
Shares in Genel Energy have now fallen by 55% this year to just 308p. I don’t know if this will be the bottom for the firm’s stock, but it could be a good buying point.
