Investment Summary – Det norske is a Norwegian exploration & production company that has tremendous long-term growth prospects. I will not be surprised if the stock jumps five-folds in five years. Listed in the US OTC exchange with ticker DETNF, but investors can buy the stock on Oslo Børs where it’s listed with ticker DETNOR.
Returns In Last 12 Months – When the whole energy sector has been battered, Det norske has delivered 53% returns in the last 12 months. This is reason big enough to have a deeper look and long-term investors will find a gem in Det norske.
Brief Bull Story – For 4Q15, Det norske reported production of 54,000boepd. Within the existing portfolio, the company has enough potential to lift production to 160,000boepd after 2020. Attractive EBITDAX margin of 84% for 2015 with production cost of $6.4 per barrels of oil equivalent.
Det norske Overview
Det norske is an exploration & production company with exploration, development and production activities on the Norwegian Continental Shelf. Det norske is the operator of the producing Alvheim field and for the Ivar Aasen field development. In addition, the company is partner in the Johan Sverdrup field, which is a long-term cash spinner.
As of December 2015, Det norske had proved and probable reserves of 498mmboe. In addition, as of FY15, the company had mean contingent resources of 326mmboe.
For FY15, Det norske reported average daily production of 60,000boepd with revenue, EBITDAX and EBITDA of $1.2 billion, $1.0 billion and $953 million respectively.
The Low Production Cost Advantage
Det norske has quality assets in the Norwegian Continental Shelf with low production cost. This ensures that the company’s EBITDA margin and operating cash flow remains robust even in a low oil price environment.
The table below provides insights on the company’s production, EBITDAX margin and production cost in the last five years and the estimates for 2016.
With production cost likely to remain low, I expect 2016 to be another decent year in terms of EBITDAX and operating cash flow. Further, with oil trending higher in the recent past, a better year than 2015 is also likely if upside sustains.
Production To Accelerate
Strong growth in production in the next five years with low production cost is the key “Bull Story” for Det norske. In the near-term, the cash flow from higher production will support the company’s investment in Johan Sverdrup that is likely to deliver first oil in 2019.
The chart below provides the production growth outlook for the next few years.
The production growth in 2017 will come from Ivar Aasen where Det norske has 34.8% stake and the field has plateau production of 67,000boepd.
The next major production upside comes in 2020 with first oil expected from Johan Sverdrup in 4Q19 where Det norske has 11.5733% stake. Phase one production from Johan Sverdrup is likely to be in the range of 315,000 to 380,000boepd and I have assumed lower end of estimates.
The overall production estimate is conservative also considering the fact that Det norske has acquired few assets in the last 6 months and the impact of these assets on production upside can potentially result in company’s target of 160,000boepd production after 2020 (supported by higher oil prices).
Strong Fundamentals To Support Growth
Det norske has strong liquidity position making the company fully financed for 2016 investments. Further, the company’s debt covenants provide ample headroom for leveraging for growth.
The chart below gives the company’s liquidity analysis for 2016.
Even with $950 million in capital expenditure for the year, Det norske is likely to close FY16 with liquidity buffer in excess of $1.0 billion. I must mention here that the company’s reported OCF of $636 million for FY15 and I have considered a relatively conservative cash flow of $600 million for FY16 with production likely to remain the same as FY15.
Another important point in the financial analysis is the company’s debt related covenants and the headroom available for Det norske to leverage. For 4Q15, Det norske has leverage of 2.2 with covenant requiring leverage ratio to remain below 3.5. Further, the company’s interest coverage ratio was 8.7 with the covenant threshold being 3.5. Clearly, there is enough covenant headroom and Det norske is negotiating with creditors to further ease the threshold limit.
With a strong production bump-up coming in 2017, if oil prices recover, EBITDA and operating cash flow can be meaningfully higher for 2017 and provide additional cash support for investments.
Det norske has some quality assets and the next 5-7 years are likely to be big for the company from production upside perspective. The company’s Johan Sverdrup stake is likely to be a game changer beyond 2019 and in the foreseeable future, the production upside from Ivar Aasen will ensure that operating cash flows remain robust and allow for funding Johan Sverdrup without significant pressure on the balance sheet. Det norske is worth considering with a five year time horizon considering these key factors.