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Faisal Humayun
Faisal Humayun
Articles (681) 

This Energy Stock Delivered 50% Returns in 1 Year

Undervalued with quality assets and big long-term cash flow potential

February 24, 2016 | About:

I recently discussed Lundin Petroleum (LUPE) as a stock that can potentially be an outperformer in the long term. The key factor discussed was the company’s stake in the giant Johan Sverdrup field that will deliver first oil in 2019.

There is another stock that has immense long-term potential with a stake in Johan Sverdrup and a few other quality assets. Det Norske Oljeselskap (DETNOR) is a Norwegian oil and gas exploration company with exploration, development and production activities on the Norwegian Continental Shelf. Besides the stake in Johan Sverdrup, Det Norske is the operator of the producing Alvheim field and for the Ivar Aasen field development.

Starting with the company’s stake in Johan Sverdrup, Det Norske has an 11.57% stake in the giant field and considering initial production estimate of 315,000boepd from the asset, the company’s share of production is likely to be 36,500boepd. Further, considering average oil price of $80 per barrel by 2019, the company’s revenue from the asset is likely to be $1.1 billion. With Johan Sverdrup peak production expected at 550,000, the company’s revenue from the asset (at $80 per barrel oil) is likely to be $1.8 billion.

Therefore, considering a long-term view, the company has bright cash flow prospects and the point that Johan Sverdrup has 50 years of reserve life; Det Norske is indeed attractively valued at a market capitalization of $1.4 billion. To put things into perspective from the company’s guidance and expectation point of view, Det Norske expects operating cash flow of $4 billion between 2020 and 2025.

What is important to note here is that the Johan Sverdrup asset is not the only asset or game changer for the company. The company has producing asset and another major asset that will commence production in 2016.

The company’s Alvheim asset has been producing since 2008 with Det Norske having 65% working interest in the field. The Ivar Aasen asset where Det Norske has 35% working interest is likely to be the next cash flow upside trigger in 2016. The Ivar Aasen asset has gross resources of 186mmboe and plateau production from the asset is likely to be at 67,000boepd.

Further, the Gina Krog asset is likely to deliver first oil in 2016, and the asset also has plateau production at 67,000boepd. While Det Norske has only 3.3% interest in the field, there are several assets that will continue to deliver cash flow for development of Johan Sverdrup.

From a financial perspective, I don’t see significant concerns with Det Norske having debt of $2.1 billion as of December 2015. For FY15, Det Norske reported EBITDA of $953 million and this implies leverage of 2x. Further, with interest coverage of 8.7 as of December 2015, the company’s credit profile is strong, and I don’t see any credit metrics-related challenges even in the current oil price environment. With quality assets, strong production upside expected in 2016 and the potential for reserves based borrowing, I see financial flexibility for Det Norske as robust.

It is important to mention here that in the last year, Det Norske has delivered 50% returns, and this underscores the attractiveness of the company. When oil trends higher, I expect Det Norske to surge considering the point that the assets have an attractive break even and higher oil prices would imply robust EBITDA margin.

For 2016, Det Norske expects production in the range of 55,000 to 60,000boepd and capital expenditure in the range of $925 million to $975 million. I expect the company’s investment to be largely financed by operating cash flow and existing cash. However, even if leverage increases, interest coverage is likely to remain in a comfortable range.

Det Norske is attractive from a long-term perspective even after considering the point that the stock has surged by 50% in the last year. The company’s valuations are still very attractive from an individual asset valuation perspective, and I expect the stock to be a big value creator in the long-term.

Disclosure: No positions in the stock.

About the author:

Faisal Humayun
Faisal is a Senior Research Analyst with ten years of experience in equity research, credit research, economic research and financial modeling.

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