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Commentary: Oil price, Genel, Trinity

06/08/2024

WTI (Sep) $72.94 -58c, Brent (Oct) $76.30 -51c, Diff -$3.36 +7c
USNG (Sep) $1.95 -2c, UKNG (Sep) 88.55p, -1.2p, TTF (Sep) €36.18 +€0.25

Oil price

After the shenanigans of the last few days, markets across the world along with most commodity prices have rallied albeit from a bit of short closing. Indeed the infamous ‘Yen carry’ which after the Tokyo rate rise created such trauma in the Nikkei was easily forgotten after the two Japanese markets regained 10% and 9.3% respectively. 

And as for oil, the idea that it would stay down strikes me as rather odd, a number of things are in the stars for a rise, including renewed trouble in Libya which has taken Sharara off,  a warning by Secretary of State Blinken and more hurricanes blowing in the wind. 

Genel Energy

Genel Energy plc – Unaudited results for the period ended 30 June 2024

Paul Weir, Chief Executive of Genel, said:
“We have continued to progress our priority workstreams, each of which can be transformational for the business, whilst maintaining our balance sheet strength by strict discipline on spend and capital allocation.

Cash generative production continues from our flagship Tawke licence, where domestic sales demand has shown resilient consistency in the past 6 months and some recent price improvement.  We have efficiently closed down our unprofitable operated licences in the Kurdistan Region of Iraq (‘KRI’) and minimised our in-country footprint, while keeping people safe and continuing to act as a trusted partner to all our stakeholders. Significant cost reductions have been made across all aspects of the business wherever appropriate, and our organisational spend in the second half of the year will reduce further. The business has the potential to deliver significant shareholder value, well above the current market value of the business. The Tawke PSC is a world class asset with a long life ahead of it, and when exports restart can deliver over $100 million of entitlement free cash flow per annum to Genel, more than double the current level.

In association with our industry peers and other stakeholders, we continue to lobby regional and federal governments to break the current political impasse so that international exports of Kurdistan oil can resume in a manner that properly rewards IOCs that have chosen to invest in Kurdistan.  While progress is sporadic, recent participation by stakeholders in tripartite talks demonstrate that negotiations continue and support the view that a negotiated solution can be found.

We continue to prioritise the acquisition of new assets to materially diversify our cash generation and reinvigorate our organic portfolio. Adding new assets to achieve geographical diversification is a strategic objective, but we will only buy an asset on terms that are clearly beneficial for our shareholders.

Regarding the London-seated Miran and Bina Bawi oil and gas assets arbitration, the written and evidentiary stages have now concluded. The timing of the award is not certain, but is expected before the end of 2024. Our view on the merits of our case remains unchanged since the arbitration process was initiated by the KRG in 2021.”

Today’s results from Genel show pretty much more of the same, political irritation with little sign of immediate relief but a highly committed sales efforts which have demonstrated commendable revenue gained from existing and now a new local client albeit at discounted rates. 

Whilst there has been a degree of conversation between Erbil and Baghdad, political movement is a slow old beast and whilst a deal could probably be done, the chances of the budget amendments necessary before crucial elections must be a long shot. The good news is that the assets at the Tawke PSC have performed very well operationally and with limited investment are in good shape. 

The arbitration case is trundling along, written evidence is finished and Genel remain very confident about the result but are also aware that anything can happen in these things. A result by the end of the year would be pleasing but don’t stand on one leg waiting. 

Acquisition policy remains the same, the company have assessed a number of deals and just haven’t succeeded but remain vigilant, confident that something can be found. They are doing a tidy-up on the bonds to trim the bond exposure and they are aware of next years’ 2025 maturation. 

Steady as she goes the CFO said to assembled analysts and I agree, Genel have a live, interesting future with a very strong balance sheet and a positive attitude to both the pipeline and the arbitration which are upcoming features in their future.

Results summary ($ million unless stated)

  H1 2024 H1 2023 FY 2023
Average Brent oil price ($/bbl) 84 80 82
Production (bopd, working interest) 19,510 13,440 12,410
Revenue 37.6 48.0 84.8
Opex (8.2) (14.7) (21.3)
EBITDAX1 11.1 22.9 32.8
Operating loss (15.8) (11.2) (19.2)
Cash flow from operations 36.4 39.2 55.1
Capital expenditure 15.9 47.5 68.0
Free cash flow2 8.5 (35.1) (71.0)
Cash 370.4 425.0 363.4
Total debt 248.0 273.0 248.0
Net cash3 125.5 158.2 119.7
Basic LPS (¢ per share) (7.9) (14.6) (22.0)
  1. EBITDAX is operating loss adjusted for the add back of depreciation and amortisation, net write-off/impairment of oil and gas assets and net ECL/reversal of ECL receivables
  2. Free cash flow
  3. Reported cash less debt reported under IFRS

Summary

  • We continue to sell domestically with the route to exports suspended
  • Consistent production from the Tawke PSC, with minimal investment, has delivered average working interest production of 19,510 bopd in H1 2024 (H1 2023: 11,740 bopd)
  • Domestic sales price has averaged $34/bbl for the period (2023: $35/bbl), with the last two months priced at $37/bbl, with all cash due for domestic sales received before the end of the period
  • Net cash of $126 million (31 December 2023: $120 million)
    • Significant cash balance of $370 million (31 December 2023: $363 million)
    • Bond debt of $248 million (31 December 2023: $248 million)
  • A socially responsible contributor to the global energy mix:
    • Zero lost time injuries (‘LTI’) and zero tier one loss of primary containment events at Genel and TTOPCO operations
    • Three million work hours since the last LTI

Outlook

  • Continued consistent production from the Tawke PSC at similar levels to the first half
  • Organisational spend around $3 million per month
  • Interest income $1-2 million per month, with one bond interest payment of $11.5 million due in October
  • Our cash generation has been above expectations in the first half of the year, and we reiterate our previous guidance that we expect closing net cash balance at the end of the year to be well above $100 million
  • We continue to seek progression towards building a business that delivers resilient, reliable, repeatable and diversified cash flows that support a dividend programme by:
    • maintaining a strong balance sheet
    • working, together with our peers, towards the restart of exports and access to international pricing
    • seeking diversification of our income through the purchase of new assets
  • The process for the London-seated international arbitration regarding Genel’s claim for substantial compensation from the KRG following the termination of the Miran and Bina Bawi PSCs has now been concluded, with closing submissions exchanged in May and reply reports exchanged in June. It is now for the panel to deliberate and then make an award. The timing of the award is not certain but is expected before the end of the year.
  • Reverse tender offer to buy back bond announced todayGenel Energy Holding Company Limited (the ‘Company’) is hereby announcing a reverse tender offer (the ‘Buy-Back Offer’) to holders of Genel Energy 4 Finance plc’s (the ‘Issuer’) USD 300 million senior unsecured callable bonds with ISIN NO0010894330 (the ‘Bonds’). All bondholders, subject to legal constraints, are invited to offer Bonds to the Company, being the sole shareholder of the Issuer and guarantor of the Bonds. The Company intends to select one price (the ‘Maximum Accepted Price’) and buy Bonds offered at and below this Maximum Accepted Price at the price offered by each bondholder.

    The Company is targeting around USD 25 million or more in nominal value of Bonds for cash management purposes. The Company retains the full discretion to adjust the buy-back volume.

    Nothing to add here, a little tidying up of peripheral debt.

Trinity Exploration & Production

Statement from the Trinity Directors regarding the Lease Operators Acquisition and the Touchstone Offer

The Trinity Directors note the update statement released by Touchstone Exploration Inc. on 5 August 2024 regarding the status of its offer for Trinity.

On 2 August 2024 Lease Operators Limited (“Lease Operators”) announced a recommended cash offer for Trinity at a price 68.05 pence per Trinity Share (the “Lease Operators Acquisition”) pursuant to Rule 2.7 of the Takeover Code (the “Rule 2.7 Announcement”). Capitalised terms used but not defined in this announcement have the same meaning given to them in the Rule 2.7 Announcement unless the context requires otherwise.

The Trinity Directors consider that the Lease Operators Acquisition provides Trinity Shareholders with an opportunity to realise a certain valuation in cash at a significant premium to the unaffected prevailing price, which reflects the current strength and future potential of Trinity. The Trinity Directors also consider that the Lease Operators Acquisition is a material improvement for Trinity Shareholders over the Touchstone Offer and accelerates, without further capital investment, time or operational risk, the delivery of fair value to Trinity Shareholders.

Accordingly, the Trinity Directors intend unanimously to recommend that eligible Trinity Shareholders vote in favour of the Lease Operators Scheme at the Court Meeting and in favour of the Resolution to be proposed at the General Meeting or, subject to the consent of the Takeover Panel, in the event that the Lease Operators Acquisition is implemented by way of a Takeover Offer, to accept or procure the acceptance of such Takeover Offer.

The Trinity Directors withdrew their recommendation of the Touchstone Offer with immediate effect on 2 August 2024 and have postponed indefinitely the Court sanction hearing in respect of the Touchstone Offer.

The Trinity Directors are intently focused on seeking the best outcome for Trinity Shareholders through this process, and encourage Touchstone to engage with them in pursuit of this aim.

Irrevocable Undertakings in respect of the Touchstone Offer

The Trinity Directors note the statement by Touchstone regarding the Irrevocable Undertakings it has in support of the Touchstone Offer.

The Trinity Directors also note that whilst the Irrevocable Undertakings currently remain binding, they will lapse in specified circumstances, in particular if the Touchstone Offer lapses or is withdrawn or does not become effective by the Long-stop Date.

As previously highlighted by the Trinity Directors and by Touchstone, Touchstone will have the ability to invoke Condition 2.3 (ii) of Part A of Part Three of the Touchstone Scheme Document and lapse the Touchstone Offer on 22 August 2024, being the 22nd day following the date of the original Court Hearing of 31 July 2024, if it so chooses. In such circumstances, the Irrevocable Undertakings would cease to have effect.

A further announcement will be made by Trinity in due course, as and when appropriate.

Nick Clayton, Chairman of Trinity, commented:
“Whilst unusual, the competitive nature of this situation is welcomed by the Trinity Directors as we endeavour to secure the best possible outcome for Trinity Shareholders through this process. We believe that the Lease Operators Acquisition is a material improvement for Trinity Shareholders over the Touchstone Offer and accelerates, without further capital investment, time or operational risk, the delivery of fair value to Trinity Shareholders.”

Good old Trinity who are now in a bit of a pickle, they obviously want Touchstone to increase the bid but it seems that they are playing hardball, all credit to them as it gives them the put and the call. As for Trinity they have to try and invalidate the TXP acceptances which will take them a while. 

So what do Trinity shareholders do right now at 58p? Well, they could actually just hang on until January when the 68p bid gets approval and that gives them a clear 20% return in 5 months with the chance of another bid from someone else. Some shareholders could and would tell you that it is a long time that the shares made a return like that, now who has the put and the call?

There is no guidance here thanks to the Panel so we wait for activity, maybe a raised bid or a battle between the two bidders, some commentators are even suggesting a new entrant into the situation which maybe a dream scenario for Trinity shareholders from which they should surely soon wake up.

KeyFacts Energy Industry Directory: Malcy's Blog

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