Genel Energy's shares drop as Canaccord cuts rating to 'hold'

Genel Energy’s shares fell on Tuesday as Canaccord Genuity cut its rating to ‘hold’ from ‘speculative buy’ and reduced the target price to 75p from 140p, saying the tough conditions of 2016 continue.

The oil company’s overall production is expected to fall in 2017, following a continued decline at the Taq Taq field in Kurdistan.

Output at Taq Taq averaged 61,000 barrels of oil per day at the first half of 2016 before falling to 60,000 bopd at the full year results. In 2017 production at the project is estimate to drop further to between 24,000 to 31,000 bopd.

In comparison the Tawke prospect continues solidly above production of 100,000 bopd and is forecast to rise to 115,000 bopd after 107,000 bopd in 2016.

Total net production guidance for 2017 is set at 35,000-43,000 bopd, compared to 53,000 bopd in 2016.

Canaccord said: “The poor Taq Taq performance continues to weigh heavily. We now anticipate a further reserves write down, which we expect is now priced in by the market to some degree. Based on the revised end 2015 reserves and post 2016 production, gross 2P reserves would be around 150mmbbls, but a further reduction of 25% now looks likely to us.”

The broker said its previous target price was based on a net present value of 142p, which it has lowered to 119p.

Genel still offers 20% potential upside despite the fully pared back valuation, Cannaccord said.

“Normally that would be enough to keep a ‘speculative buy’, but Genel's own circumstances, aside from key risk indicator issues, suggest further caution.”

“We think it will take some time - starting with clarity on Taq Taq reserves and a well-founded field (re)development plan, together with tangible delivery - before the market is likely to recognise even our 'low end' 81p per share valuation.”

Shares dropped 1.75% to 67.30p at 1021 GMT.