Genel Energy PLC (LON: GENL): Low-cost business model with a focus on lucrative investment opportunities.

Genel Energy Plc is a FTSE listed holding company that operates in oil and gas exploration and production in Iraq. The Company's segments include Kurdistan and Africa. GENL has interests in approximately two producing fields with access to local and international markets. Its fields have an estimated reserve of approximately 800 million barrels of oil and possible reserves of approximately 1.2 billion barrels of oil.

Recent trend of dividend payments

The Company has a progressive dividend policy, and due to the recent rise in prices over the last quarter, the management expects strong cash flow. Accordingly, the management increased its interim dividend to 6 cents per share in H1 FY21 from 5 cents per share in H1 FY20. The dividend will be paid on 10 December 2021 and has an ex-dividend date of 11 November 2021.

Crude Oil Market Outlook

In the recent report published by OPEC, for FY21, the Oil demand is still estimated to increase by around 6.0 mb/d to average 96.6 mb/d. For FY22, world oil demand to increase by 3.3 mb/d y-o-y, and the total world oil demand is projected to surpass the 100 mb/d thresholds in H2 FY22 and reach 99.9 mb/d on average for the whole of FY22.

On the supply side, the non-OPEC liquids supply growth forecasts in FY21 and FY22 have been revised up by 0.27 mb/d and 0.84 mb/d, respectively. The main drivers for FY21 supply growth are anticipated to be Canada, Russia, China, the US, Norway, and Brazil, with the US now expected to see y-o-y growth of 0.12 mb/d. For FY22, the liquids supply is expected to grow by 2.9 mb/d following new incremental production adjustments by non-OPEC members.

Growth Prospects

• Low-cost production: Genel is the only multi-licence producer in the region, with the production of 32,100 bopd in H1 FY20 from four fields, with an asset level breakeven of USD 30/bbl. The Company has a low cost per barrel of USD 2.8/bbl. The low-cost and high margin producing assets are the prime reason for the success of the Company, with material asset-level cash generation even at a low oil price.
• Strong portfolio with an attractive mix of assets: The Company’s low-cost producing fields provide the capital to rapidly develop assets with material potential, generating more cash to invest in the next investment opportunity.
• A strong balance sheet supports the resilient business model: The Company prioritizes capital allocation on assets with near-term cash generation. As a result, its business model optimizes capital exposure and payback. In addition, the Company follows a prudent approach to capital allocation with targeted investment in key growth areas.
• Returns to the shareholders: The strong balance sheet and favourable net cash position allow Company to pay out a material dividend to its shareholders. In FY20, the Company paid a total dividend of USD 41.30 million.

Key Risks 

• Financial risk: The Company aims to retain a strong balance sheet and flexibility; however, failure to make payment for sales or lack of finance could impact the operations of the Company.
• Failure to properly evaluate oil reserves: If the Company fails to correctly estimate oil reserves, it could have a material impact on the Company's financial outlook.
• Geographical risk: A change in the situation of the KRG (Iraq), Turkey or of Baghdad (Iraq) and the wider region could adversely affect operating environment and the payments by the Company.
• Covid-19 pandemic: Rising cases of the delta variant could slow the global economic recovery, which could impact the crude oil demand and price, thus affecting the business of the Company.
  

Now we will analyze some critical fundamental and shareholders statistics of Genel Energy PLC.

Recent Development 

On 20 August 2021, Genel Energy PLC received a notice from the Ministry of Natural Resources of the Kurdistan Regional Government ('KRG') to terminate the Bina Bawi and Miran PSCs. However, the management believes that KRG has no grounds for issuing notices of intention to terminate. They wish to continue operations under the PSCs and work with the KRG to develop these fields.

Financial and Operational Highlights (for the six months ended 30 June 2021 as of 3 August 2021)

(Source: LSE Website)

• Production in H1 FY21 increased by 2% on a YoY basis, following the additional production at Sarta and the robust performance of Peshkabir.
• The revenue in H1 FY21 was USD 152 million, which is close to FY20 full-year revenue. The margin per barrel increased from USD 6/bbl in FY20 to USD 19/bbl, benefitting from the override resumption, which contributed to USD 9/bbl.
• The cash proceeds in H1 FY21 was USD 123 million against H1 FY20 cash proceeds of USD 110 million, mainly due to high crude oil prices during the period.
• The Company maintained the FY21 production guidance of 31,980 bopd, slightly above FY20 production.
• The Capex in the period was of USD 58 million, and the activities are expected to increase in H2 FY21. The total capex guidance for FY21 will be in the middle range of USD 150 million to USD 200 million, following delays in approvals from the KRG and ongoing challenges relating to COVID-19, causing some planned activity to move to Q1 2022.
• Despite material investment in growth, the Company expects to generate free cash flow in FY21.
  

Financial Ratios (H2 FY2020)

 Share Price Performance Analysis

(Source: Refinitiv, Research done by Kalkine Group)

On 25 August 2021, at 8:05 AM GMT, GENL’s shares were trading at GBX 129.20, up by 1.38% against the previous day closing price. Stock 52-week High and Low were GBX 194.80 and GBX 109.20, respectively.

On a daily chart, GENL's price is sustaining at the lower Bollinger band. Hence, there could be an uptick in the stock price in the near term.

In the last five years, GENL’s stock has delivered a decent positive return of ~21.91%. Also, it has outperformed the FTSE All-Share Energy index with a negative return of about 27.03%.

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Business Outlook Scenario

GENL delivered an excellent performance in H1 FY21, with revenue rising to USD 152 million. The margin per barrel increased from USD 6/bbl in FY20 to USD 19/bbl, benefitting from the resumption of overrides. As per recent OPEC reports, the outlook for FY22 and onwards looks positive as the world recovers from the Covid-19 pandemic; however, the rising Delta variant cases still pose concerns the world over. The Company has robust capex plans for FY21, with expected expenditure between USD 150 million to USD 200 million, and the management remains optimistic about generating positive free cash flows despite material investments in growth.

Considering the Company’s low-cost production business model, lucrative investment strategies, improved global outlook, strong balance sheet and liquidity, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Genel Energy Plc at the current price of GBX 129.20 (as on 25 August 2021 at 8:05 AM GMT), with lower-double digit upside potential based on 1.86x NTM Price/Cash flow (approx.) on FY21E cash flow per share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

*All forecasted figures and Peer information have been taken from Refinitiv.

*The dividend yield is subject to change as per the stock price movement.

*The reference data in this report has been partly sourced from Refinitiv.

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