There's always execution risk at these e&ps, and of course things could even turn out worse in Kurdistan. But on the latter the status quo is already pretty derisked imo, even if the pipeline doesn't reopen. Also 2023 has been a major year for discoveries in the North Sea, and DNO is very quickly pivoting away from its Kurdistan assets (% of total assets); that should improve the valuation as these assets mature
I wrote a whole write up on GKP, but couldn't bring myself to post it, and actually quickly sold my shares again. Seems to be too many moving parts. And even before closing it, GKP was trading at only 2-3x earnings, despite being an extremely high quality and long lived asset. Full cycle break even costs of <$10/barrel! So clearly there is a lot of risk there beyond the pipeline.
These two posts go in a lot more detail btw (not mine or affiliated with the writer) and are recommended reading for anyone interested in this situation:
There are a few companies that are (way) more levered to Kurdistan and should profit relatively more should it reopen. I prefer DNO from a risk prespective; it's not without risks of course but I believe it should progress well over the next few years even with no pipeline reopening. A reopening is pure gravy.
Yeah maybe I need to consider DNO. It does seem there have been some new positive developments since I last looked at it. Thanks for bringing my attention it again.
I think we have a ton of other, maybe more important, moving pieces in the region:
- Existing PSC contracts vs a new one coming? If so, what will be the terms?
- What will happen to the past due receivables form KRG? When will they be made?
- Any money received by an Oil Co in the region is a function of cost recovery + profit share.. Last two years' EBITDa and FCF all 'misleading' in a sense that cost-recovery part was an important component, i.e., it was not run rate, regular EBITDA or FCF. How do you normalize this is beyond me, unfortunately not even the mgmt coming forward with a plain language to explain it. Hence, a ton of 'receiavables" on B/S.
- profit share part is also a weird definition and not clearly broken down by mgmt teams..My understanding and guestimate is that it is a small part of cash they receive, they had been mostly receiving past due cost recovery for awhile which was beefing up cash.
Agreed, being directionally right always trumps being precisely right, yet here, many many moving parts with an unknown future of current PSC contract makes it a difficult call.
It is still cheap, probably GKP and GENL even cheaper but I guess until we have clarity, this is a small, PA trading stock, definitely not an investment, for me, at least.
Thanks, I appreciate all the points raised. Without going into many details here, I tend to take a simplistic approach. I believe that DNO has a good chance to prosper even without a return to 'normal' for its Kurdistan asset base. Their pivoting to the North Sea is at an impressive pace and if 2024 is remotely similar to 2023 that'll bode very well for the future. Also the 'murkiness' of the Kurdistan situation is the main reason for the heavy discount; waiting for clarity means less discount - but I understand many would rather prefer this trade-off.
Very interesting post...the one thing I am trying to understand is the revenue/boe issue. My back of the envelope math says that the revenue/boe when the pipeline was still flowing was similar to the revenue/boe from last quarter in that segment (Kurdistan). I get and agree with the EBITDAX uplift from the full quarter of production in Kurdistan, but are you sure there is that big of the uplift from the realized pricing on the pipeline? Thank you!
With pricing it'll depend on an eventual deal between the IOCs, the KRG and Iraq. But whatever they'll decide, pricing will be better. DNO is selling into the local markets in the low-$30s, with the pipeline this was in the $60s range. Maybe it won't be a good a deal as before March 2023, but pricing will definitely be better. Pls also understand I'm actually also happy with the status quo; $120m FCF from Kurdistan (paid in advance!) and production uplifts in the North Sea over the next few years should lead to some nice shareholder returns - even if the share price doesn't move.
I very much respect your work and you have called so many great stocks, but once I see powder keg country names like Kurdistan and Iraq flying around, am I wrong to immediately jump to: uninvestable due to geopolitical risk conclusion? The issues that say Baba valuation has had over the last couple of years due to geopolitical risks seem almost like a trifle in comparison to what you are likely to face as an investor in places like these. Besides there are many other names in the sector operating in respectable mature markets with the rule of law that come to mind, with valuations that are not too far off this one.
😀 I perfectly understand your position and one should of course size accordingly here. Though I like DNO because its pivoting to the North Sea is progressing extremely well but heaviliy discounted given the Kurdistan situation. That alone should improve the valuation going forward. I also think that the status quo is actually not that bad, and the optionality of a pipeline reopening is in no way priced in. Even if DNO stays cheap and cash flow continue improve, divs and bb can go a long way.
Closing the pipeline for the longer-term is a lose-lose-lose situation as it's a major vein to international oil markets. Volumes sold locally are much less and at much lower prices. Also, in a few years it'll be up to Turkey to decide on the pipeline's fate as the contract with Iraq will expire. Iraq is clearly leveraging the situation to improve its positioning, but an outright steal would be detrimental to all involved. (also see the first reply re your first question).
Have you published an update with the recent news from Iraq regarding the works on the original pipeline? Do you still expect the exports of Kurdish oil to resume in the short term?
Typically outstanding post and research, thank you!
Aside from Bijan Mossavar-Rahmani, what are your views on the level on insider ownership, if any? They seem incredibly low to me (per TIKR), and that is peculiar given all that you've outlined.
Great post, what is the main risk, could management waste cash flow or could North Sea assets have lower than expected reserves?
There's always execution risk at these e&ps, and of course things could even turn out worse in Kurdistan. But on the latter the status quo is already pretty derisked imo, even if the pipeline doesn't reopen. Also 2023 has been a major year for discoveries in the North Sea, and DNO is very quickly pivoting away from its Kurdistan assets (% of total assets); that should improve the valuation as these assets mature
I wrote a whole write up on GKP, but couldn't bring myself to post it, and actually quickly sold my shares again. Seems to be too many moving parts. And even before closing it, GKP was trading at only 2-3x earnings, despite being an extremely high quality and long lived asset. Full cycle break even costs of <$10/barrel! So clearly there is a lot of risk there beyond the pipeline.
These two posts go in a lot more detail btw (not mine or affiliated with the writer) and are recommended reading for anyone interested in this situation:
https://zerogcos.substack.com/p/pipelines-courts-and-politics-opportunities
https://zerogcos.substack.com/p/pipelines-courts-and-politics-opportunities-ce9
Some interesting data points, HKN has purchased a block in Kurdistan since closing:
https://www.hknenergy.com/wp-content/uploads/2024/01/HKN-Gemini-Press-Release-012224.pdf
And Forza was bought out by its controlling shareholder for 1x 2022 EBIT recently.
There are a few companies that are (way) more levered to Kurdistan and should profit relatively more should it reopen. I prefer DNO from a risk prespective; it's not without risks of course but I believe it should progress well over the next few years even with no pipeline reopening. A reopening is pure gravy.
Thanks for the links!
Yeah maybe I need to consider DNO. It does seem there have been some new positive developments since I last looked at it. Thanks for bringing my attention it again.
I think we have a ton of other, maybe more important, moving pieces in the region:
- Existing PSC contracts vs a new one coming? If so, what will be the terms?
- What will happen to the past due receivables form KRG? When will they be made?
- Any money received by an Oil Co in the region is a function of cost recovery + profit share.. Last two years' EBITDa and FCF all 'misleading' in a sense that cost-recovery part was an important component, i.e., it was not run rate, regular EBITDA or FCF. How do you normalize this is beyond me, unfortunately not even the mgmt coming forward with a plain language to explain it. Hence, a ton of 'receiavables" on B/S.
- profit share part is also a weird definition and not clearly broken down by mgmt teams..My understanding and guestimate is that it is a small part of cash they receive, they had been mostly receiving past due cost recovery for awhile which was beefing up cash.
Agreed, being directionally right always trumps being precisely right, yet here, many many moving parts with an unknown future of current PSC contract makes it a difficult call.
It is still cheap, probably GKP and GENL even cheaper but I guess until we have clarity, this is a small, PA trading stock, definitely not an investment, for me, at least.
Thanks, I appreciate all the points raised. Without going into many details here, I tend to take a simplistic approach. I believe that DNO has a good chance to prosper even without a return to 'normal' for its Kurdistan asset base. Their pivoting to the North Sea is at an impressive pace and if 2024 is remotely similar to 2023 that'll bode very well for the future. Also the 'murkiness' of the Kurdistan situation is the main reason for the heavy discount; waiting for clarity means less discount - but I understand many would rather prefer this trade-off.
simplistic approach works fine.
1. how do you size this position?
2. how do you approach this from portfolio management perspective (rebalancing or adding etc) ?
Very interesting post...the one thing I am trying to understand is the revenue/boe issue. My back of the envelope math says that the revenue/boe when the pipeline was still flowing was similar to the revenue/boe from last quarter in that segment (Kurdistan). I get and agree with the EBITDAX uplift from the full quarter of production in Kurdistan, but are you sure there is that big of the uplift from the realized pricing on the pipeline? Thank you!
With pricing it'll depend on an eventual deal between the IOCs, the KRG and Iraq. But whatever they'll decide, pricing will be better. DNO is selling into the local markets in the low-$30s, with the pipeline this was in the $60s range. Maybe it won't be a good a deal as before March 2023, but pricing will definitely be better. Pls also understand I'm actually also happy with the status quo; $120m FCF from Kurdistan (paid in advance!) and production uplifts in the North Sea over the next few years should lead to some nice shareholder returns - even if the share price doesn't move.
I very much respect your work and you have called so many great stocks, but once I see powder keg country names like Kurdistan and Iraq flying around, am I wrong to immediately jump to: uninvestable due to geopolitical risk conclusion? The issues that say Baba valuation has had over the last couple of years due to geopolitical risks seem almost like a trifle in comparison to what you are likely to face as an investor in places like these. Besides there are many other names in the sector operating in respectable mature markets with the rule of law that come to mind, with valuations that are not too far off this one.
😀 I perfectly understand your position and one should of course size accordingly here. Though I like DNO because its pivoting to the North Sea is progressing extremely well but heaviliy discounted given the Kurdistan situation. That alone should improve the valuation going forward. I also think that the status quo is actually not that bad, and the optionality of a pipeline reopening is in no way priced in. Even if DNO stays cheap and cash flow continue improve, divs and bb can go a long way.
Prefer dno over GKP or GENL?
Think Kurdistan producers have leverage over Iraq central govt? Why wont Iraq demand a riduculous royalty?
Closing the pipeline for the longer-term is a lose-lose-lose situation as it's a major vein to international oil markets. Volumes sold locally are much less and at much lower prices. Also, in a few years it'll be up to Turkey to decide on the pipeline's fate as the contract with Iraq will expire. Iraq is clearly leveraging the situation to improve its positioning, but an outright steal would be detrimental to all involved. (also see the first reply re your first question).
Have you published an update with the recent news from Iraq regarding the works on the original pipeline? Do you still expect the exports of Kurdish oil to resume in the short term?
Typically outstanding post and research, thank you!
Aside from Bijan Mossavar-Rahmani, what are your views on the level on insider ownership, if any? They seem incredibly low to me (per TIKR), and that is peculiar given all that you've outlined.