These two Kurdistan-focused oil and gas producers were once the darling stocks of the City. Fast forward a few years and both shares are trading at prices lower than ever before. At these low levels, do the Kurdistan pair offer good value?
The Assets
Genel Energy (LSE: GENL) and Gulf Keystone (LSE: GKP) own some of the best assets in the world. Gulf Keystone discovered the Shaikan field in 2009 and in December 2014 reached the daily production of 40,000 bopd. Genel has a position in the two world-class fields Taq Taq and Tawke: these fields produce a combined 258,000 bopd (86,100 bopd net to Genel). Extraction costs in Kurdistan are some of the lowest in the world, which is great for both companies at an operational level.
Political Instability
Political instability is the main problem facing both companies. The Kurdistan Regional Government (KRG) owe both companies large sums of money as payment for exported oil. The expensive war against Isis and lower crude prices have slashed the KRG’s income, and payment for crude has been held. Towards the end of this year, the KRG have begun making payments and are paying companies regularly but still in small amounts. They currently owe billions in past revenue so expect full payment of all revenue to take years. The KRG know that if they don’t start paying on time and in full, then the oil companies will simply stop investing in the region. For this reason, I believe the KRG will get their act together next year.
Debt
The main problem facing both companies is debt. Due to lack of payment for oil, cash balances have declined and debt has been raised. Both companies mentioned have raised money by offering bonds as revenues have dried up and balance sheets need strengthened. This high debt is certainly a serious worry for Gulf Keystone: cash balances are dangerously low after last week’s interest payment on the bonds and the company is in a precarious position. I still believe that further money could be raised by issuing new bonds if the cash position was too low, but it would make the balance sheet even weaker than it already is. The more likely strategy is that both companies would just hold cash and stop investing in operations until payments came in.
The Verdict
The key value driver for both companies is the political landscape in the region. If the KRG could guarantee full and regular payments then both companies should see huge increases in value. At an operational level both companies have large reserves and production, but both need stable revenue to have the confidence to invest and scale up production. Genel and Gulf Keystone’s respective share prices have taken a hammering in the last year, but if the KRG improve the payment schedule then both companies should rise up quite significantly.
If you look at historic share price charts for both companies then I see no reason why in the next two years the previous highs can’t be tested again.
