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Faisal Humayun
Faisal Humayun
Articles (650)  | Author's Website |

Stay Cautious On These Companies With Iraq Exposure

June 26, 2014 | About:

As the conflict in Iraq rages, this article looks into three companies with significant oil producing and exploration stake in Iraq (including Kurdistan). My opinion is to watch closely watch the developments in Iraq before exposure to these stocks. Escalation in tensions can depress the valuations further and provide a good long-term entry point.

Total SA (NYSE:TOT) holds an 18.75% stake in the consortium that was awarded the development and production contract for the Halfaya field in Missan province of Iraq. The project came on stream in June 2012 with a capacity of 100,000 barrels per day.

Further phases are expected to raise output to 200,000 barrels per day in the second half of 2014, and a plateau production of 535,000 barrels per day in 2017. Therefore, the oil rich asset and the developments around it need to be closely watched.

Also, in early 2013, Total acquired an 80% stake and became operator of the Baranan exploration block in the Kurdistan region of Iraq. With 2D seismic survey completed, the first exploration well is expected to be drilled towards the end of this year. It remains to be seen if the Iraq crisis spills over to the Kurdistan region.

Further to this, Total also has held 35% stake in the Safen and Harir exploration blocks and a 20% stake in the Taza Block During 2013, four exploration wells were drilled and resulted in two discoveries located in the Taza and Harir Blocks.

The drilling of five new wells is planned for 2014 on three of these four blocks. In early 2014, Total increased its stake in the Safen Block to 80% and became the operator.

Therefore, Total does has significant operations in Iraq and the company has projects at critical junctures. The stock reaction needs to be watched closely on any tension escalation, before considering exposure to the company.

Chevron (NYSE:CVX) bought two blocks in the Kurdistan region in June 2012. Chevron acquired Reliance Exploration & Production 80% interest and operatorship of the production sharing contracts (PSCs) covering the Rovi and Sarta blocks. The blocks are located north of Erbil and cover a combined area of approximately 490 square miles (1,124 square kilometers).

For Chevron, the problems started with the deal as Iraq blacklisted the company for directly engaging with the semi-autonomous government in Kurdistan. While that is lesser of an issue now, the key point is the continuity of operations in the region.

Also, Chevron does not have a significant presence in Iraq as compared to Total, but any disruption in operations can impact the stock.

DNO International (DTNOF) is a Middle East and North Africa focused oil and gas entity and is at the biggest risk in my opinion.

The Company holds stakes in oil and gas blocks in various stages of exploration, development and production both onshore and offshore in the Kurdistan region of Iraq. What differentiates DNO International from the two companies discussed is the company’s overwhelming presence in the Kurdistan region of Iraq.

I have a bullish opinion on the company’s assets and its long-term prospects. However, the escalating crisis needs to be closely watched before investors consider any exposure to the stock. The company is operating in one of the largest finds in Kurdistan and attractive valuations can be a good entry point after the crisis comes to an end.

Similar to DNO International, another company with significant exposure to Iraq is Genel Energy (GEGYF) and the company also has some rich assets in the Kurdistan region of Iraq. However, investors need to watch from the sidelines before buying into the stock. The Kurdistan region remains insulated from the crisis, but a spill over can’t be ruled out.

On a concluding note, the stocks discussed are strong long-term investments. However, caution needs to be exercised in the near-term as the crisis rages in Iraq. In particular, Total, DNO International and Genel Energy need to be closely watched in terms of the impact from the crisis. These stocks become attractive investment options whenever the crisis abates.

About the author:

Faisal Humayun
Faisal is a Senior Research Analyst with eight years of experience in equity research, credit research, economic research and financial modeling.

Visit Faisal Humayun's Website

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