Bondholders in Persian Gulf energy companies with oil and gas production in Iraq are succumbing to concern that the conflict wracking the nation since June risks disrupting operations in OPEC’s second-biggest member.
Yields on the debt of Abu Dhabi National Energy Co. (TAQA) and Dana Gas PJSC, United Arab Emirates-based companies active in Iraq, have risen since June 9, a day before Islamist militants seized the country’s second-largest city, Mosul. The spread for Middle East sovereign debt to U.S. Treasuries surged last month and widened to an eight-month high relative to an emerging-market index, according to JP Morgan Chase & Co. data.
Dana Gas and the Abu Dhabi-based utility known as Taqa have so far escaped disruptions in Iraq because they operate in the country’s semi-autonomous Kurdish region, which has remained outside the main area of hostilities between government forces and an al-Qaeda offshoot called Islamic State. Militants control territory from the Syrian border in the west to Kurdish positions in the northeast and are battling efforts by the army to recapture towns it abandoned earlier to the insurgents.
“Yields on names like Taqa and Dana Gas would go up further if the situation in Iraq worsens in the near to medium term,” Amol Shitole, a credit analyst with SJ Seymour Group, said by phone yesterday from Bangalore, India. “There won’t be many takers for bonds unless yields on such paper go up to a level which provides an attractive entry point given the prevailing risks.”
The yield on Dana Gas’s 2017 Islamic bond, at a 12-month low in March, rose 134 basis points in June and traded at 9.63 percent today, according to data compiled by Bloomberg. Yields on Taqa’s 2023 bond gained 29 basis points from a one-year low on May 15 and were at 3.64 percent today, the data show.
“We view the uprising against Iraq’s central government as disruptive to the investments and longer-term growth plans of the major oil companies operating in the country,” David Staples, Dubai-based managing director for Moody’s Investors Service corporate finance group, said in a June 7 report.
Companies such as BP Plc and OAO Lukoil, which work in southern Iraq where the bulk of the nation’s crude output and exports originate, are large and internationally diverse enough to support earnings even if production is damaged, Moody’s said.
The future of Iraq, a founder of the Organization of Petroleum Exporting Countries, is uncertain, with the central government, the Kurdish administration and Sunni militants each controlling chunks of the nation. Federal lawmakers have been unable to form a governing coalition, dimming the outlook for oil and gas companies counting on Iraq for future growth.
Taqa plans to use cash flows from its Kurdish project and from oil deposits it’s developing in the North Sea to repay future debt, Chief Financial Officer Stephen Kersley said on a conference call in November. The company spent about $600 million to buy a stake in Iraq’s Atrush oil field in 2012 and is investing an additional $300 million to start pumping crude next year at a rate of 30,000 barrels a day. A further outlay of $300 million will double daily output in 2016, Taqa said in December.
The company’s operations in Iraq have been unaffected by the recent fighting, and it remains committed to its plans there, a Taqa official said yesterday, asking not to be identified due to corporate policy.
Dana Gas is a partner in two Iraqi natural gas fields, which together accounted for about 40 percent of the company’s first-quarter production. The fields are less than 100 miles (160 kilometers) from Kirkuk, an oil-rich area where Kurdish forces have dug in to defend against militants.
“Operations in the Kurdistan Region of Iraq continue uninterrupted in light of recent events,” Robinder Singh, the investor relations director for Dana Gas, said by e-mail yesterday. “All our facilities and people are safe, and there have been no incidents” affecting business, he said.
Dana Gas has struggled to get paid for fuel sold in Iraq, and together with partner Crescent Petroleum Co., it’s in arbitration with the Kurdish Regional Government. Dana Gas was owed $583 million from the Kurdish region at the end of the first quarter, the gas producer said in May.
The KRG and Iraqi government have been at loggerheads over Kurdish oil exports. Federal authorities claim sole rights over crude sales and revenue.
The main issue for the KRG “is whether they can put exports on sustainable footing,” Richard Mallinson, an oil analyst at Energy Aspects in London, said by phone yesterday. “If the Kurds resolve the issue and start selling greater volumes, this will present the region’s prospects as very exciting.”
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