Oil Producers Jump as Kurdistan Output Seen Safe From Battle

Aug 14, 2014 12:38 pm ET

(Updates with closing share price.)

Aug. 14 (Bloomberg) -- Oil producers in Iraqi Kurdistan are an attractive investment after falling at least 25 percent since early July on fears that violence in the region would disrupt operations, analysts said.

It’s unlikely that the northern semi-autonomous Kurdistan region will be overtaken by Islamic State fighters, and that risk has been reduced as the U.S. and France moved to arm Kurdish forces, analysts from Swedbank AB, Pareto Securities AS, and RBC Capital Markets said.

Swedbank today raised its recommendation on Oslo-based DNO ASA to buy from neutral, and the shares rose 8.3 percent in Oslo trading. Genel Energy Plc began a share buyback, repurchasing 155,000 ordinary shares and sending its stock rallying 7.6 percent.

“It’s worth betting on,” Swedbank analyst Teodor Sveen Nilsen said in a phone interview, referring to DNO. “The discount is big, and the values we’re basing it on already take into account that it’s not a blue-sky scenario.”

Oil companies operating in Iraq’s Kurdistan region, such as DNO, Genel Energy and Afren Plc, have plunged as Islamic State fighters who crossed the border from Syria earlier this year have battled Kurdish forces. The violence raises the prospect of the destabilization of a region that’s seen relative tranquility compared with the rest of the country since the U.S.-led invasion in 2003.

Safer Area

“There is a belief across the industry that Kurdistan will remain a safer area of Iraq,” said Al Stanton, an energy analyst at RBC Capital Markets. “The buyback shows that Genel feels that it is hugely undervalued.”

Stanton has an outperform recommendation on Genel Energy’s stock.

DNO declined to comment on security considerations and provide updated details on operations, spokesman Henrik Schwabe said in an e-mail yesterday. The company, which is the operator of the Tawke field close to Iraq’s borders with Syria and Turkey, said last week it continued operations at all its Kurdistan sites.

Genel Energy maintains that its operations are “safe and secure” and said that its outlook remains unchanged with plans to increase production in the second half of the year. The company withdrew some “non-essential staff” from its non- producing fields as a precautionary measure last week.

“No threat has been posed to DNO’s operations this far and we expect the risk of interruptions decreases as Kurdish forces are getting access to heavier weapons,” Pareto said in a note to clients yesterday. “DNO is producing at record high levels and we see the recent share price correction as a buying opportunity.”

DNO rose 8.3 percent to 17.29 kroner at close, the biggest gain in nearly six months. Genel Energy added 7.6 percent to 810.5 pence, the largest move since March 2012.