Genel Energy: A Junior Packing a Big Punch

I've been following Genel Energy of Turkey for a while now, not least because of my obsession with the potentially catastrophic but otherwise fantastic venue that is Iraqi Kurdistan. Every week I see this moving fast in two directions: towards potential all-out conflict with Baghdad and towards an oil and gas goldmine.

There are other juniors worth looking at in this venue, but it always comes back to Genel, whose CEO is-not incidentally-former BP exec Tony Hayward.

This week, Genel's shares on the London stock exchange rose 7% on a significant new oil find in Iraqi Kurdistan. A test on Genel's Chia Surkh-10 well has yielded flow rates up to 11,960 barrels per day, plus 15 million cubic feet of gas.

The company has a market cap of £1,816.76 million, closing on the London Stock Exchange at £850.00, with 213,736,679 shares in issue.

Genel is the largest producer in Iraqi Kurdistan, and its holdings are impressive. We're talking about 7 production-sharing contracts with some nice geological diversity. Its largest producing fields in Kurdistan are Taq Taq and Tawke, which have an estimated gross proven and probable reserves of 1.4 billion barrels of oil and gross proven, probable and possible reserves of 1.9 billion barrels. By 2014, Genel is aiming for a production capacity of 140,000 net bopd.

That's just existing capacity. It gets better. Juniors in Iraqi Kurdistan have had an amazing success rate for drilling.  

Here's where it gets interesting: Genel also has access to international markets, despite the ongoing spat with Baghdad, which refers to this market access as "smuggling".

For some time, Genel has been trucking its Taq Taq production directly to Turkey in a barter deal, exchanging it for refined products for use on the domestic market in Kurdistan. Last week, however, it made its first entrance on the international market scene, trucking 30,000 barrels of Taq Taq crude to Turkey for sale via tender on the international market. This has seriously ruffled Baghdad's feathers.

But trucking will soon become history. By the end of this year, and certainly by 2014, Genel will have completed a pipeline that sends its crude directly to Turkey.

Full Speed Ahead in Kurdistan

Genel is gaining ground-fast. On 4 April, it declared commercial viability at its Bina Bawi extended well test start up, operated by Austria's OMV. Extended well test production began at this well on 20 March, showing an initial capacity of around 5,000 boe/d with the potential to increase to around 10,000 boe/d with new wells in the Bina Bawi field.

Genel holds a 44% stake in the Bina Bawi field, with operator OMV holding a 36% stake and the Kurdistan Regional Government (KRG) holding a 20% stake.  The second quarter of this year should see extended well testing at Bina Bawi 4 and 5.

A few days later, the news got even better, with a significant new oil discovery elsewhere in Kurdistan. On 10 April, the first of Genel's five exploration wells for this year (and it's only April, keep in mind) hit pay with a major oil find. Genel drilled the Chia Surkh-10 well to a depth of 1,696 meters in the OligoMiocene section and testing over several days showed a flow of up to 11,950 barrels of oil a day, plus 15 million cubic feet of gas. A second drill-stem test is now being planned. Drilling at a second well, Chia Surkh-11, began this week to appraise the discovery.  Genel is targeting production here for the first half of next year already.

This is some amazing drilling success (100%!) and again only the FIRST of five high-impact exploration wells planned for this year. The timing is important.

Chia Surkh is a 985km sq license area operated by Genel, which holds a 60% share, while the remaining 40% is held by Petoil Inc (20%) and the KRG (20%).

Portfolio of Bravado

Genel's got quite an interesting portfolio outside of Iraqi Kurdistan, as well. It's nosing around in Somalia, where the challenges are chaotic and very tribal and where getting drilling equipment in would tax the patience of the most tolerant out there. But for now, it's got acreage in Somaliland, Morocco, Cote d'Ivoire, and Malta.

Morocco and Malta are good scenes for junior companies like Genel Energy, but Somaliland and Cote d'Ivoire are significant challenges. Cote d'Ivoire is a piracy hotspot with heightened instability and a very complex and dynamic domestic political scene. Somaliland isn't even an internationally recognized country-still it's awarding exploration licenses and investors like Genel don't seem to be bothered by the legal void here. It's much like Iraqi Kurdistan, only very early days.

Genel's got one offshore block with a 24% interest in Cote d'Ivoire; three offshore blocks in Morocco (75%, 60%, and 37.5% interest, respectively); a 75% interest in four offshore blocks in Malta; and a 75% interest in two blocks and a 50% interest in three blocks in Somaliland.

We will refrain from assessing the potential of these assets for now, because Iraqi Kurdistan is enough for us to recognize the pattern of dealing with political risk, successfully.

And there is plenty of it In Kurdistan. At the same time that Genel is ramping up production, its parallel pipelines to Turkey will come on line, one connector possibly before year's end, and another by 2014.

More than any other company, Genel is fostering a future bid for Kurdish independence, and this will be a game-changing affair on the geopolitical scene. But there's one spoiler, and that is the disputed are of Kirkuk, home to Iraq's largest oilfield. The Kurds aren't likely to go it alone without control over Kirkuk, and the Iraqi central government won't let it go without a fight.

If Baghdad feels too cornered by the Kurds' pipeline ambitions and very significantly by its very first sale of crude on the international market (remember, we're not talking innocuous barter with the Turks anymore) then it may lash out.

So far, Baghdad has lashed out largely by threatening foreign oil companies with "eviction" from their contracts with the central Iraqi government-but these threats have for the most part been empty. Baghdad has also largely cut the Kurds out of the federal budget, making it more difficult for them to pay the foreign oil companies (mostly Genel) operating on their territory.

BUT, if the Kurds now have access to international markets and that access is boosted with new pipelines as early as next year, then Baghdad's budgetary warfare will fall flat.

That leaves Kirkuk, where Baghdad is also stepping up the deterrent by holding talks with supermajors to develop this oilfield without the Kurds. This will be particularly interesting for former BP exec Hayward, as Baghdad's talks are mostly with BP.

Bottom Line: We would get in on Genel now, while drilling success is amazing and while production is being ramped up and we've see the first crude hit the international market. We'd also be ready to get out probably sometime in 2014 or shortly afterwards, when the other shoe drops. 

We don't think Genel is a one-trick pony, but we like its first trick quite a lot.