The Unexpected Winner of the U.S. War in Iraq: Turkey

The winner of the U.S. war in Iraq looks like it will be Turkey. Ironic, because Turkey opposed the war. Nonetheless, a story in the Financial Times resonated with me — as I just returned from the country:

“A new candidate has emerged as the true victor of the Iraq war. A decade after Turkey infuriated Washington by blocking the deployment of U.S. troops through its territory for the 2003 invasion, its businessmen are proving the champions in the battle for the Iraqi market.”

I heard inklings of this while I was there, that Turkey was gaining from an Iraqi revival. It’s hard to argue with the figures — which we’ll get to below — and thus, our investment theme on Turkey deepens. I also found a new idea to play the region, which I will tell you about down below.

First, those figures: Turkey’s exports to Iraq over the last 10 years have grown by 25% per year to $10.8 billion in 2012. It is now Turkey’s second-most valuable export market after Germany. As Iraq taps its rich oil reserves and its economy grows, its demand for Turkish goods also grows. Also, Turkish contractors have $3.5 billion of work rebuilding Iraq. The two biggest projects in Iraq are power projects. A Turkish company, Calik Energy, has both.

Most of Turkey’s business comes from the Kurdish-controlled northern regions of Iraq. It’s growing quickly. The FT writes about a family-owned conglomerate in Gaziantep, in southern Turkey. Sales have grown 50-60% over the last two years. The company says it has two-thirds of the market for diapers in Iraq. It also has a leading position in olives. The FT also quoted from several Turkish businessmen who gushed positively about their businesses in Iraq.

Reading this story reminded me of a conversation I had recently with Tim Steinle, a portfolio manager at U.S. Global Investors. And here we get to that idea.

Tim manages the Eastern European Fund (EUROX), which had almost 20% of its assets in Turkish companies. Tim was keen to the idea that Turkey benefits from the opening up of northern Iraqi oil fields.

“As implausible as it may sound, it is bound to happen,” Tim told me. “Few skeptics ever believed that oil from the landlocked Caspian Sea would find its way to world markets. Yet a major Baku-Tbilisi-Ceyhan pipeline now does exactly this. The Kurdish Regional Government (KRG) has been fostering a plan to build a 2 million-barrel-per-day pipeline through Turkey.”

Tim owns Genel Energy in his fund, a company headquartered in Turkey with operations in Iraqi Kurdistan. (It trades on the London exchange, ticker GENL. I haven’t done any work on it yet, but it is an interesting story.) It would be a clear winner in an Iraqi Kurdistan oil and gas boom. “Genel currently sells 40,000 barrels per day in Iraq at $70,” Tim says, “but its production capacity is 80,000 barrels per day, set to double this year with a reserve base of over 380 million barrels.”

One of the reasons I like Turkey is a matter of ggraphy. Turkey is set up well to be an energy hub. It is at a crossroads between the oil- and gas-rich lands of the Middle East/former Soviet states and the demand centers of Europe. Already, it controls one of the world’s busiest chokepoints, through which 3 million barrels flow per day.

On this, Tim told me about another great idea on the theme. “Even though Turkey imports most of its oil needs,” he said, “it is a net exporter of refined products, thanks to its sophisticated refining capacity. One of the core holdings of EUROX is the Turkish refiner Tupras.” It has an 8% dividend yield and would be another winner of increasing flows of oil and gas through Turkey.

It may be hard or impossible, for you to assemble this kind of a portfolio. This makes Tim’s fund on a region a good bet. Tim is a capable fellow. He speaks a bunch of languages, including Russian and Turkic, and was a risk manager at refining giant Valero.

And U.S. Global Investors’ Eastern European Fund (EUROX) has been a good performer over the last 10 years. If you had invested $10,000 with EUROX, you’d have $47,068 at the end of last year. This compares with only $34,165 if you had invested it in the S&P 500.

By Chris Mayer

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