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Faisal Humayun
Faisal Humayun
Articles (681) 

Aker BP: A Potential Long-Term Portfolio Catalyst

Strong cash flows, low production cost assets and growth visibility for next 2 to 3 years

August 24, 2017 | About:

Oil prices have been in the range of $45 to $50 per barrel recently, and oil is forming a strong support base around this zone before moving higher. In the last few months, I have discussed a few quality names in the energy industry that can be considered for long-term exposure.

Aker BP ASA (OSL:AKERBP) is another name that is listed in the Oslo stock exchange and has immense potential in the next three to five years to deliver strong returns. Aker BP is an exploration and production company with focus on the Norwegian Continental Shelf.

Aker BP has been lower by 10.8% year to date, and this correction is a good opportunity to accumulate this stock.

Robust production

Aker BP had guided for production in the range of 128 to 135mboepd, but the company’s first-half production averaged 144mboepd, and the company revised full-year production guidance to 135 to 140mboepd.

It is important to note here that the company’s production cost guidance for fiscal 2017 is $10 per barrel and with low production cost, the EBITDA and cash flow are likely to be robust.

Just to put things into perspective, Aker BP reported operating cash flow of $447 million for the second quarter, and this implies annualized cash flow in the range of $1.6 billion to $1.8 billion.

The key reason for highlighting this point is the accelerated investment program.

With strong cash flows to fund further investment and with quality assets in the NCS, Aker BP is well positioned to deliver sustained growth in production.

Robust exploration activity for 2017

The chart below gives the company’s exploration activity scheduled for fiscal 2017, and it’s clear that the company has several licenses to be drilled in the third and fourth quarters.

Aker BP ASA Exploration Plan

In particular, the Hufsa asset will be interesting to watch as the asset has 186 to 403mmboe of prospects and a positive drilling surprise can send the stock higher.

Lundin Petroleum (OSTO:LUPE) is the operator in the Hufsa asset, and the stock is also worth considering for the long term.

While robust exploration activity will continue in the second half, the company has interesting projects lined up for the next 12 to 24 months. In particular, Johan Sverdrup (11.6% stake for Aker BP) aims to deliver PDO for phase 2 in second-half 2018 with robust construction activity ongoing for phase 1. Even with an 11.6% stake, the asset will be a game changer for Aker BP when first oil is delivered in 2019.

Strong fundamentals

When talking about aggressive growth or exploration investments, it is also important to discuss the company’s financial flexibility.

Aker BP had cash and undrawn facilities of $2.7 billion as of June 30; that gives the company a strong buffer for accelerated investments.

The important point to note in the company’s financials is that for the second quarter the company reported operating cash flow of $447 million and capital expenditure of $312 million. With $135 million in free cash flows, Aker BP is still investing within cash flows.

With $2.7 billion in liquidity and $1.6 billion to $1.8 billion in potential cash flows, the company is fully financed for the next 12 to 24 months.

At the same time, it’s important to point out that production cost per barrel is attractive and even if oil trades in the $50 to $55 per barrel zone, Aker BP is well positioned to report strong cash flows that will support investment in assets that will deliver growth in the next two to three years.

I am talking about a horizon of two to three years as several assets will be delivering first oil in 2019 and 2020. This includes Johan Sverdrup, Oda field and Valhall Flank West project among others.

Conclusion

Aker BP operates in a region with low geopolitical tensions, and the company’s production cost in several assets is attractive and ensures robust cash flow even at $50 per barrel oil.

With strong financial muscles, Aker BP is also likely to pursue inorganic growth opportunities as hinted in the second-quarter presentation. Projects such as Johan Sverdrup will ensure that strong production comes along with low break-even.

While I don’t expect oil to surge higher, even if oil gradually trends higher, the outlook is positive for Aker BP. Considering the developments that are lined up for the next two to three years, the stock is certainly appealing and worth considering for the long term.

Disclosure: No positions in the stocks discussed.

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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