This week, Genel, Gulf Keystone, ShaMaran and HKN hosted site visits in Kurdistan. The days included management presentations, site visits at several key locations (production and developments) and a meeting with energy advisor Dr Ashti Hawrami, the former oil minister in Kurdistan. Our key impressions were:

Taq Taq (Genel 44%): Before 2016, Taq Taq was Genel’s most important field in terms of production (50-60% of total working interest production). However, in 2016 and 2017 both production and reserves declined dramatically. In recent quarters the production has stabilised and was 11,500 boe/d gross from approximately 15 wells the day we visited the field. That is slightly down from approximately 13,000 during H1 19. We have included the field at GBp 21/share in our Genel SOTP valuation, or ~6% of our NAV estimate. We learned that the processing facility is very efficiently operated by only five people and there had been close to 100% uptime over the past few months. One issue with the processing facility is the fact that is designed for substantially higher production than the current production and that only 10-15% of the total capacity is utilised. As far as we understand, there is a scenario to truck the Bina Bawi oil to the Taq Taq plant and use the pipeline from Taq Taq to Fishkabour (close to the Turkey border) as the export route for the oil to international markets.

Bina Bawi (Genel 100%): The oil and gas field was acquired by Genel from OMV in 2015. The resource potential is enormous (above 1bn boe) but the lack for 1) an oil development plan and 2) gas infrastructure have implied that the stock market has not assigned any value to the field (our interpretation). We have included the field at GBp 29/share in our SOTP valuation (21 for oil and 8 for gas). A key issue with Bina Bawi is the fact that the PSA expires in April 2020. It is our clear impression that Genel management is close to make a deal with KRG for an extension of the PSA and that we should expect an announcement for Bina Bawi future and PSA status before or around year end 2019. We guess the most important risk factor for the PSA terms is whether or not Genel may use the entire USD 400m tax balance (=cost pool) that followed the license when Genel acquired it.

Sarta (Genel 30%): Genel’s 30% share was acquired from Chevron a few quarters ago. Chevron retained the operatorship and a 70% working interest. Phase 1 is designed for 20 kboe/d gross and first oil in Q3 2020. While the first phase includes 34 mmboe reserves, both operator Chevron and Genel management indicated that the field may hols as much as 500 mmboe recoverable resources in the scenario with several more phases. We did not discuss with management, but our gut feeling that the 500 mmboe estimate is very sensitive to assumed recovery rate. Generally, heavy oil fields in Kurdistan have low recovery factors and only a few percentage points changed recovery rate assumption changes recoverable resources materially. We have included Sarta at GBp 5/share in our SOTP valuation and must admit we see significantly upside to this estimate as 1) its looks like first oil with 1-2 years is realistic (we observed intensive ground work at the early production facility), 2) we have only includes reserves related to phase 1 and 3) our risked USD/boe estimate looks conservative. If we assume that phase 1 has successfully ramped up by end 2020 and we include some upside potential for additional resources, we see GBp 15-50/sh valuation upside potential. Our gut feeling is that se have undervalued Sarta.

Shaikan (Gulf Keystone 80%): Gulf Keystone is s single asset company with 80% share in the Shaikan field. Our visit at the field included a tour of the PF-2 well which is about to initiate the 25-day planned shutdown for maintenance and debottlenecking to bring total capacity at Shaikan to 55 kboe/d. Our forecasts assume around 55 kboe/d by end 2020 and further ramp up to 75 kboe/d by mid-2022. Official guidance for the 55 and 75 target is slightly more aggressive and there may therefore be some upside potential to our production forecast. At the Shaikan there is currently ongoing civil works needed to lay the PF-1 pipeline to the Kurdistan Export Pipeline, which is expected to be operational in the coming weeks.

Atrush (ShaMaran 27.6%): Atrush comprises the entire GAV of our ShaMaran valuation. A few quarters ago, the company’s owner share in Atrush increased from 20.1% to 27.6% after Marathon’s decision to exit Kurdistan. The deal was in our view made at very attractive multiples. Our impression from the Atrush field was well run operation that has a significant potential to expand. The field is operated by Taqa, perhaps a not well know name in a capital markets context. However, we were impressed by the operations that focused on involving and training local Kurdish workers, which contributes to lowering costs and brings positive effects for the local community. The day we visited the field, the production was 38 kboe/d, above our forecast of 34 kboe/d for H2 19. We also got the impression that 50 kboe/d is reachable within year end 2019, highlighting the scalability of the operations.

Sarsang (HKN Energy 62%): HKN has been present in Iraqi Kurdistan since 2007 and is backed by strong and experienced oil and gas investors Ross Perot Jr. and Kerogen Capital. US-based HKN Energy holds a 62% participating interest in the prolific Sarsang block, with Total being the partner. We got impression of a well-run operation with significant security presence. The next phase of Sarsang is well underway with civil works and more currently being carried out in the site.

Other impressions and comments from our week in Kurdistan:
•   Good meeting with Ashti Hawrami (under Chatham rules, we do therefore not include any summary or comments from that meeting.
•   Security in focus everywhere, as expected. For example, at our trip to Bina Bawi suddenly 2-3 jeeps with Peshmerga special forces unexpectedly showed up. Despite presence of Peshmerga and private security forces (or maybe just because of that), Erbil is a safe town for Western companies. 
•   No gossip around DNO’s Baeshiqa drilling (which we had hoped for).
•   Erbil airport busier compared to last time we visited Kurdistan in 2011/12.
•   A lot of construction work going on everywhere (buildings, roads etc). However, we also observed a number of empty buildings where construction work had ceased (due to lack of financing?)
•   High-profile Chinese companies had meetings at the hotel we stayed at. Historically, Russian companies have funded projects in Kurdistan. Is China intensifying its efforts in Kurdistan?

General comments for the Kurdistan focused companies in our coverage universe:
We like the investment cases for the Kurdistan companies. Several (at least DNO, Genel and Gulf Keystone) have reported very strong cash flows over the past years, they have moved from a net debt to net cash position and stated to pay dividends. For companies with uncertain cash flows (goes for all non-OECD countries, but particularly Kurdistan due to the history of lack of payments from KRG) we believe the signalling effect from dividend payment is more important than the potentially lack of investment opportunities. Lack of investment opportunities is probably the theoretically strongest argument in disfavour of dividend payments, we view that as less relevant for all the Kurdistan companies. We often get question around how we think around the regional risk for Kurdistan (non-OECD, IS, etc). For all Kurdistan players we use 12% WACC, which is well above the 8% we use for medium sized North Sea players. For long cash flows, such as most E&Ps are exposed to, 12% vs 8% WACC actually makes a big difference. For example, NPV8 for a steady state (flat) 20-year cash flow is 31% higher compared to the NPV12 for the same 20-year cash flow. For a 30-year cash flow, the difference is 40%.

We rate DNO Buy/tp NOK 19, Genel Buy/tp GBp 280, Gulf Keystone Buy/tp GBp 350 and ShaMaran Neutral/tp SEK 0.7.