Kurdistan woes hurt independent oil majors

Even as the battle in Mosul winds to a close, other problems still fester Special to Gulf News

retail shareholders, as well as a number of institutional ones, seeing the value of their equity collapse to nearly zero.

Therefore, do the companies that remain standing offer compelling value or are they potentially the next victims of the unfolding security and political situation and the lack of sufficient understanding of the region’s geology? Genel Energy and DNO are both in an enviable position of being interest holders in the two of the most significant producing assets in the KRI, the Tawke and Taq Taq fields. Their presence and the continued operation of those assets is fundamental to the revenue stream required by the Kurdistan Regional Government (KRG) to continue to wage its wars and defend itself from Daesh and any other hostile neighbours.

Critical asset

While the presence and support of US forces has been invaluable and, arguably, pivotal in the recent campaign, it is the sustained production from such fields which could enable the region to become financially self-sufficient on a long-term basis.

As a result, Genel Energy and DNO are far more valuable to the KRG than any other independents operating in the region. However, in terms of the pecking order for the allocation of available cash, the Kurdish forces (Peshmerga) and their military requirements must always come first. This has led to significantly delayed payments and mounting receivables.

Genel Energy and DNO remain optimistic that these outstanding sums will ultimately be paid, but history suggests that much of this production will ultimately have to been given to their host government for free.

Thus, what is the true value of these independent oil and gas companies and do they represent compelling investment opportunities? The ability to accurately place a value on the existing assets is challenged.

The visibility to receiving payments for production, while it has improved over the past 12 months, is uncertain. The potential upside opportunity from additional exploration, when there is funding available for it, could be enormous.

However, for the time being, the investment cases are, to my mind, binary. For many institutional investors, such companies are uninvestible. For many retail shareholders, such companies hold the allure of an investment that could rise substantially in value over a very short period of time. Both of these assertions are valid, but if one plumps for the latter option, then one must beware of the potential to lose the shirt off one’s own back.

The writer is Director at Hannam and Partners.