Followers of Genel Energy will know that they spent $1.3bn on a couple of gas and oil assets in Northern Iraq. These fields are Miran and Bina Bawi. Genel had been carrying a lot of weight on its balance sheet for Miran and in the most recent financial year they wrote off $424m which is about 140% of their EBITDAX. As such they didn't make a profit last year.
The purpose of this article is to look at a price / earnings ratio that ignores this one off write down. (By the way, the gas and oil is still in Miran; just not going to be produced anytime soon.)
At the bottom of page 10 in this presentation Genel talk about making $20m per month profit at an Oil Price (OP) of $60 increasing to around $30m per month at an OP of $80.
I would say that the OP has averaged $66 or $67 this year, let's say $66.
As such this would indicate that Genel are making $23m a month profit in the first 4 months. We know that Free Cash Flow was $44m for Jan/Feb according to this announcement.
(For Jan/ Feb the average OP looks like $62 which would indicate profit of $21m a month based on the reference on page 10 above)
So what does this mean?
If we extrapolate into the rest of the year using the current $72 OP this would generate $26m profit per month x 8 = $208m. Adding in the 4 x $23m = $92m profit for the first four months and you've got $300m profit for 2019.
Let's take a more pessimistic view that average OP stays at $66 for the whole year so that's $276m profit for the year.
Both of these assume that production doesn't go up (it's forecast to go up by 10%)
When I first read that slide on p10 I took it to literally mean profit to the shareholder, but on reflection I think it is more like EBITDA.
Or to quote Genel, EBITDAX is defined as "EBITDAX is operating profit / (loss) adjusted for the add back of depreciation and amortisation ($136.2 million), exploration credit ($1.5million) and impairment of intangible assets ($424.0 million)"
As such I assume this is the same profit figure talked about on page 10 of the presentation
2018 EBITDAX was $304.1m
Take away $136.2 for depreciation
Take away $424 to write down Miran
Operating profit (254.6)
Average OP was $71.06
Let's say 2019 EBITDAX is $300m
Take away $150m for depreciation
No write downs
Operating profit $150m
Adding in the other numbers (similarly to 2018) gives earnings of 60c or 46p per share
Based on the 17th May share price of 207 this is a P/E of 4.5 or 22.2% of the share price
As such I conclude the current P/E is, 4.5 not including any increase in production this year.
(Ignoring last year's write down 2018 EPS was aprox 67c or 52p. P/E for 2018 would have been 3.98 or 25% of share price)
Given that we know Free Cash Flow was $44m in the first two months of the year, perhaps this puts operating profit/ EBITDAX even higher.
Question: is it likely that Genel will have an improving P/E (given a constant OP) or a worsening one.
Back to the important stuff, I think a price / earnings ratio of 4.5 is not too bad, as with a bit of compounding that must be: invest a dollar and double your money in 4 years. Genel can get 100% return on capex in Peshkabir in 3 months with 100% profit after 6 months, so not unreasonable to consider that a shareholder could double their money in four years.
This looks positive, why is the share price and P/E so low for Genel? What are the risks?
Here are some other Oil Companies P/E ratios for comparison.
ExxonMobil 18.03
Chevron 16.28
BP 14.66
Shell 11.76
GKP 10.85
ConocoPhillips 10.09
DNO 6.41
Genel 4.5 ?
Let's compare to a couple of other oil companies operating in the Kurdish Region of Iraq; GKP and DNO. If Genel's P/E was the same as Gulf Keystone Petroleum's (GKP) 10.85 the Genel share price would be 499p. Now I know that GKP are nearly doubling their production by this time next year, so that's probably why their P/E has gone up. Otherwise I think the two companies are quite comparable.
If Genel's P/E were the same 6.41 as DNO then the shareprice would be 295p. In both cases I'm ignoring the $424m technical writedown, which I suppose I shouldn't, but I don't think it will happen again.
The underlying figure I'm using is 46.67p EPS for Genel last year (ignoring Miran writedown). Assuming 2019 is the same (e.g. OP is a bit lower and production is a bit higher) then that's a 22.5% return on the 207p shareprice.
What feels about right for an oil company being regularly paid in Iraq? All the majors are north of 10 p/e, so let's say a max of eight. 8 x 46.67 = 373p. Didn't I see something on the shareholder FAQ that said all the 12 analysts were valuing the company well north of £3.
Next stop 7.6p ex dividend date 23rd May. (3.7% of 207p)
This is not investment advice, please do your own research. I own shares in Genel.
The purpose of this article is to look at a price / earnings ratio that ignores this one off write down. (By the way, the gas and oil is still in Miran; just not going to be produced anytime soon.)
At the bottom of page 10 in this presentation Genel talk about making $20m per month profit at an Oil Price (OP) of $60 increasing to around $30m per month at an OP of $80.
I would say that the OP has averaged $66 or $67 this year, let's say $66.
As such this would indicate that Genel are making $23m a month profit in the first 4 months. We know that Free Cash Flow was $44m for Jan/Feb according to this announcement.
(For Jan/ Feb the average OP looks like $62 which would indicate profit of $21m a month based on the reference on page 10 above)
So what does this mean?
If we extrapolate into the rest of the year using the current $72 OP this would generate $26m profit per month x 8 = $208m. Adding in the 4 x $23m = $92m profit for the first four months and you've got $300m profit for 2019.
Let's take a more pessimistic view that average OP stays at $66 for the whole year so that's $276m profit for the year.
Both of these assume that production doesn't go up (it's forecast to go up by 10%)
When I first read that slide on p10 I took it to literally mean profit to the shareholder, but on reflection I think it is more like EBITDA.
Or to quote Genel, EBITDAX is defined as "EBITDAX is operating profit / (loss) adjusted for the add back of depreciation and amortisation ($136.2 million), exploration credit ($1.5million) and impairment of intangible assets ($424.0 million)"
As such I assume this is the same profit figure talked about on page 10 of the presentation
2018 EBITDAX was $304.1m
Take away $136.2 for depreciation
Take away $424 to write down Miran
Operating profit (254.6)
Average OP was $71.06
Let's say 2019 EBITDAX is $300m
Take away $150m for depreciation
No write downs
Operating profit $150m
Adding in the other numbers (similarly to 2018) gives earnings of 60c or 46p per share
Based on the 17th May share price of 207 this is a P/E of 4.5 or 22.2% of the share price
As such I conclude the current P/E is, 4.5 not including any increase in production this year.
(Ignoring last year's write down 2018 EPS was aprox 67c or 52p. P/E for 2018 would have been 3.98 or 25% of share price)
Given that we know Free Cash Flow was $44m in the first two months of the year, perhaps this puts operating profit/ EBITDAX even higher.
Question: is it likely that Genel will have an improving P/E (given a constant OP) or a worsening one.
Back to the important stuff, I think a price / earnings ratio of 4.5 is not too bad, as with a bit of compounding that must be: invest a dollar and double your money in 4 years. Genel can get 100% return on capex in Peshkabir in 3 months with 100% profit after 6 months, so not unreasonable to consider that a shareholder could double their money in four years.
This looks positive, why is the share price and P/E so low for Genel? What are the risks?
- Whilst Genel have been paid by the Kurdish Regional Government (KRG) for 3 years there was a period before this when they weren't paid due to instability in the region. A settlement agreement is in place to pay back the money owing to Genel each month over a period of several years. This represents just over 20% of Genel's current monthly revenues and so when it ends 31/7/22 revenue will drop.
- All sales of oil in Iraq used to go through the national sales organisation - SOMO. There is a case in arbitration at the moment to decide whether revenues for oil shipments via Turkey must be paid to SOMO again as they were when Genel first did business in Northern Iraq. SOMO may tear up the agreement to repay funds owing to Genel monthly and just repay several hundred million in one go. They may adopt the agreement reached by the KRG. There could be an agreement reached later in '19.
- The Kurdish Region of Iraq has not had a sitting government for quite some years, but local parties agreed to form a government in the last few weeks. Relations between Erbil and Baghdad governments now seem to be on a stronger footing as budget payments have been made by Baghdad in the last year.
- Northern Iraq borders Syria, Turkey and Iran
Here are some other Oil Companies P/E ratios for comparison.
ExxonMobil 18.03
Chevron 16.28
BP 14.66
Shell 11.76
GKP 10.85
ConocoPhillips 10.09
DNO 6.41
Genel 4.5 ?
Let's compare to a couple of other oil companies operating in the Kurdish Region of Iraq; GKP and DNO. If Genel's P/E was the same as Gulf Keystone Petroleum's (GKP) 10.85 the Genel share price would be 499p. Now I know that GKP are nearly doubling their production by this time next year, so that's probably why their P/E has gone up. Otherwise I think the two companies are quite comparable.
If Genel's P/E were the same 6.41 as DNO then the shareprice would be 295p. In both cases I'm ignoring the $424m technical writedown, which I suppose I shouldn't, but I don't think it will happen again.
The underlying figure I'm using is 46.67p EPS for Genel last year (ignoring Miran writedown). Assuming 2019 is the same (e.g. OP is a bit lower and production is a bit higher) then that's a 22.5% return on the 207p shareprice.
What feels about right for an oil company being regularly paid in Iraq? All the majors are north of 10 p/e, so let's say a max of eight. 8 x 46.67 = 373p. Didn't I see something on the shareholder FAQ that said all the 12 analysts were valuing the company well north of £3.
Next stop 7.6p ex dividend date 23rd May. (3.7% of 207p)
This is not investment advice, please do your own research. I own shares in Genel.
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