Kurdistan Export Resumption And Tawke Restart Will Transform Long Term Cash Generation

Catalysts

About Genel Energy

Genel Energy is an independent oil and gas company focused on cash generative production and high impact growth opportunities in the MENA region and East Africa.

What are the underlying business or industry changes driving this perspective?

• The expected restart and gradual ramp up of Tawke and Peshkabir production after repair and reconfiguration, combined with very low operating costs below 4 dollars per barrel, is expected to restore and then expand cash flow leverage as volumes normalize, supporting higher free cash flow and net margins.
• Potential resumption of Kurdistan exports through the ITP at international pricing would more than double realized revenue per barrel versus current domestic sales, which could drive a step change in revenue, EBITDA and earnings once a durable export and payment framework is agreed.
• Planned appraisal activity on Oman's Block 54, located adjacent to existing infrastructure in a prolific basin, offers low cost incremental barrels that can quickly translate into new production streams, diversifying cash generation and underpinning medium term revenue growth.
• The company’s strong balance sheet, increased cash position and extended bond maturity to 2030 provide funding flexibility to secure value accretive producing assets in preferred jurisdictions, enabling acquisition led growth that can materially increase production, earnings and dividend capacity.
• The highly prospective Toosan area in Somaliland, de risked by proven petroleum systems across the border in Yemen, provides long dated optionality on a frontier discovery that could transform the production base and significantly uplift long term revenue and net asset value if exploration drilling is successful.

Assumptions

This narrative explores a more optimistic perspective on Genel Energy compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Genel Energy's revenue will grow by 33.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -66.0% today to 4.3% in 3 years time.
• The bullish analysts expect earnings to reach $7.5 million (and earnings per share of $0.03) by about December 2028, up from $-48.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $-20.1 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 60.7x on those 2028 earnings, up from -4.4x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 10.0x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.12%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company remains heavily reliant on a single producing asset, the Tawke PSC. Short term shocks such as the recent drone attacks highlight how concentrated operational risk in one geopolitical region can interrupt output, which would constrain revenue and free cash flow if disruptions become more frequent or prolonged.
• Long running political and fiscal uncertainty between the Kurdistan Regional Government and Federal Government of Iraq, including the lack of a binding export and payment framework and unresolved receivables of around 50 million dollars, could lead to structurally weaker realized pricing or non payment for production, which would pressure revenue and net margins over time.
• The strategy to diversify cash generation depends on acquiring value accretive, cash generative production assets in a competitive MENA deal market. If suitable assets remain scarce or are only available at high prices, the company may deploy its enlarged cash and bond-funded balance sheet into low return projects, which would dilute returns on capital and weigh on earnings.
• Frontier and early stage projects such as Block 54 in Oman and the Toosan prospect in Somaliland require multi year investment before potential commercialisation. If appraisal results disappoint or security, regulatory or partner issues delay drilling, these projects could consume capital without adding meaningful barrels, limiting medium term production growth, revenue diversification and margin improvement.
• The unresolved arbitration cost award and large current trade and other payables, much of which relate to KRG disputes, create ongoing legal and counterparty risks. These may crystallize into cash outflows or write downs, which would reduce net cash, constrain dividend capacity and negatively impact earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Genel Energy is £1.0, which represents up to two standard deviations above the consensus price target of £0.82. This valuation is based on what can be assumed as the expectations of Genel Energy's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £1.0, and the most bearish reporting a price target of just £0.51.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $173.7 million, earnings will come to $7.5 million, and it would be trading on a PE ratio of 60.7x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of £0.57, the analyst price target of £1.0 is 43.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.