Lundin Petroleum (LUPE, Financial) is an exploration and production company listed in the Stockholm Exchange. In the last year, the stock has gained 11.3%; these are excellent returns, considering the pain the oil and gas industry has witnessed.
I am not looking at a short-term perspective as the uncertainty in the energy industry is likely to continue. However, in the long term, the demand for oil and gas will trend higher, and oil will be significantly higher than current levels. Rising geopolitical tensions will contribute to oil upside in the long term.
Coming to Lundin Petroleum, the Johan Sverdrup oil field asset is the single biggest reason to own the stock for the next five years. The Johan Sverdrup is one of the largest oil discoveries in the NCS in decades, and the asset is expected to have 1.7 billion to 3 billion barrels of oil equivalent with nearly 50 years of reserve life.
With first oil from Johan Sverdrup expected in 2019, the asset cash flow is still some distance away. However, this is the best time to buy stocks with exposure to Johan Sverdrup as the energy industry remains depressed. Further, first oil of 315,000 to 380,000boepd is exciting with peak production at 550,000 to 650,000boepd. The important point to note is that the field has a break-even of $41 per barrel, and oil is likely to be meaningfully higher by 2019. Therefore, the asset will provide robust EBITDA margin.
Statoil (STO, Financial) is the biggest stakeholder in Johan Sverdrup with a 40% stake followed by Lundin Petroleum with a 22.6% stake in the field. Considering first oil production at 315,000boepd, the net to Lundin Petroleum is likely to be at 71,000boepd. Even at $80 per barrel oil by 2019, the production would imply annual revenue of $2.0 billion for Lundin Petroleum.
At peak production in the asset at 550,000boepd, the stake would imply revenue of $3.6 billion at $80 per barrel oil. Clearly, the asset would provide very attractive cash flows from 2019. This asset is the key reason why Lundin Petroleum stock has remained strong even in challenging times for the industry.
Of course, Johan Sverdrup is not the only asset that Lundin Petroleum owns. For 2015, the company reported average production of 32,000boepd, and the company’s exit rate guidance of 75,000boepd was achieved in January with the third Edvard Grieg well commencing production.
With the Edvard Grieg asset likely to be a major source of cash flow in the near term, the asset will ensure that there is enough cash flow to take care of the capital expenditure requirements for Johan Sverdrup. In addition to cash flow from significant increase in production, Lundin Petroleum is also likely to divest or reduce stakes in noncore assets for cash.
In January the company announced a farm-out agreement of its working interest across three production-sharing contracts in Malaysia. From a liquidity perspective, Lundin Petroleum also secured reserves-based financing of $5 billion in February with initial committed amount of $4.3 billion. With the facility maturing in 2022, the Johan Sverdrup asset cash flow will be sufficient to repay the facility or easily refinance.
For 2015, the company’s 2P reserves increased by 292% to 685.3mmboe. If the company’s 2P reserves growth remains robust, there can be further revisions to reserves-based financing. The company’s financing needs for Johan Sverdrup will be met with relative ease.
In another January development, Statoil bought a 12% stake in Lundin Petroleum for $540 million. This transaction underscores the attractiveness of Lundin Petroleum at current levels. For Statoil, it provides increased exposure to Johan Sverdrup.
With these points in consideration, Lundin Petroleum is indeed an excellent stock to consider for the long term. If investors are willing to hold with a three- to five-year investment horizon, the stock is promising enough to provide robust returns and be a portfolio catalyst.
Disclosure: No positions in the stock.
