Det norske oljeselskap ASA (OTC:DETNF) is an exploration, development, and production company operating in the Norwegian continental shelf. The company has witnessed a relatively steep correction of 14% over the last two months. This investment research discusses the reason for the correction, the reasons to believe that the correction is a good opportunity to go long on the company and the valuation of the key asset of the company. Before proceeding, I would mention here that the stock is relatively illiquid in the US stock exchange and investors can consider exposure to the stock from the Norwegian stock exchange (DETNOR), where the trading volumes are good.
The Company And Assets
Det norske is an independent oil & gas company with four producing assets as of fourth quarter of 2013. Det norske had an average annual production of 4,463boepd from four producing assets in 2013 with two major assets contributing to 86% of the total production.
The company's Jette asset (70% stake) had an annual average production of 2,683boepd with remaining reserves of 3.2mmboe. The Atla asset (10% stake) had an average production of 1,177boepd with remaining reserves of 1.3mmboe. The remaining production for 2013 came from the Varg and Jotun assets with an average annual production of 403boepd and 191boepd respectively.
In terms of development projects, the mention of Ivar Aasen is important as it is the first major development project where Det norske is the operator with 35% interest in the field. Statoil (STO) holds 50% interest in the asset with Bayerngas Norge having the remaining 15% interest. The asset contains approximately 150mmboe of oil equivalent and is expected to produce first oil in the fourth quarter of 2016. The company's share of production is expected to be 16,000boepd with a plateau of 23,000boepd by 2019. Considering the current production levels, Ivar Aasen will be the first big game changer for Det norske. Another development project, which is expected to produce first oil in the first quarter of 2017, is Gina Krog. Det norske has a small stake of 3.3% in the asset with gross recoverable reserves of 225mmboe. The asset still adds 7.5mmboe to the company's total reserves.
Finally, the most important asset of the company, Johan Sverdrup, which will be discussed later in details, is the crux of this investment note. Johan Sverdrup happens to be one of the largest oil discoveries in the Norwegian region in decades with gross field recoverable contingent resources between 1,800 and 2,900 million barrels oil equivalents.
Reason For The Stock Price Correction
Since the stock is more liquid in the Norwegian stock exchange, I will discuss the stock price movement in that exchange. Det norske declined from Norwegian kroner 80 on December 18, 2013 to 63.4 by January 8, 2014. Since then, there has been a marginal upside in the stock with Det norske currently trading at 67. Still, the stock is 16% down from December 2013 levels.
The reason for the decline in Det norske stock has been Statoil's announcement related to the Johan Sverdrup field. Det norske has a 20% stake in the PL265 license and another 20% stake in the PL502 license in Johan Sverdrup. On December 20, 2013, Statoil announced that the resource estimate in the field has been lowered to 1.8 to 2.9 billion barrels of oil equivalent from an earlier estimate of 1.8 to 3.6 billion barrels of oil equivalent. This resulted in the negative stock reaction for Det norske, which I believe is an overreaction and I will back my point with numbers later in the discussion. The correction therefore is an attractive buy opportunity.
Elaborating on the Johan Sverdrup Asset
Johan Sverdrup was the biggest oil discovery in the world in 2011 and the biggest in Norway in decades. As mentioned above, Det norske holds stake in 2 licenses in Johan Sverdrup. What is important to mention here is the fact that the asset is a long-term value creator for the company as the first oil from the field will come only in 2019. That being said, the field's valuation can be ascertained and that can decide where the stock is headed as the field development starts.
According to Det norske's fourth quarter presentation, Johan Sverdrup's concept has been decided and the first phase production capacity is expected to be in the range of 315,000boepd to 380,000boepd. Further, the plateau production level is expected to be in the range of 550,000boepd to 650,000boepd. What is also important to mention here is that the recovery rate can improve from 60% to 70% and this can have significant upside impact on the valuations over the long-term. In the near-term, the stock will find support or upside based on the asset's current valuation. The next section will therefore focus on the reserve estimate for Det norske at Johan Sverdrup and its potential valuation.
Johan Sverdrup Reserves and Valuation
Det norske has a 20% stake in PL265, which is estimated to have gross contingent resources in the range of 900mmboe to 1,500mmboe. Considering an average resource of 1,200mmboe, Det norske's share in the license would come to 240mmboe. Det norske also has a 20% stake in the PL502 license. The reserves in this stake are not significant as PL265 and PL501 are the main licenses. In order to have a conservative estimate, I would peg the total reserves from both the licenses at 250mmboe.
In my last article on Lundin Petroleum (OTCPK:LNDNF), which also has a stake in the Johan Sverdrup field, I had discussed the valuation of the field according to Lundin's CEO's estimates. I had also mentioned the transaction of OMV's acquisition of PL338 with a transaction value of $8.7/boe. In line with Lundin's CEO's comments, the current transaction value for Johan Sverdrup should be in the range of $10/boe. This would peg the value of Det norske's share of reserves at $2.5 billion in contrast to the company's current market capitalization of $1.6 billion. The current correction was therefore an overreaction to Statoil's news of potentially lower gross resources.
I must mention here that this excludes any asset valuation consideration for Ivar Aasen, which will be the first big game changer for Det norske with a production (company's share) of 16,000boepd from the fourth quarter of 2016. The cash flows from Ivar Aasen can potentially serve as a major source of funding the Johan Sverdrup development. Also, Ivar Aasen can potentially be up for sale if the company needs funding for Johan Sverdrup.
Asset Sale In The Cards
According to a recent news article:
Det Norske may sell part of its 35 percent holding in the North Sea Ivar Aasen field. It will still retain a "major stake" and remain operator of the project, due to start output in 2016, Bratsberg said. It may also cut its 25 percent holding in the Krafla and Askja discoveries and other assets, according to the executive, who said Det Norske isn't currently in talks to sell offshore assets or speaking to Aker about selling stock.
To mention this was important as it shows Det norske conviction to remain invested in Johan Sverdrup. The proceeds from other asset sales can fund the massive development program.
The same Bloomberg article also states that the company is open to new share issuance or leveraging in order to fund the development program. Dilution of equity (in particular) can have a negative impact on the stock price.
If Det norske decides to sell complete stake or major stake in Ivar Aasen, the only big game changer for the company will be Johan Sverdrup. Any delay in first oil from Johan has the potential to negatively impact valuations.
Johan Sverdrup and Ivar Aasen are the big game changers for Det norske. The current negative stock price reaction is an attractive opportunity to consider long-term exposure to the stock. Johan Sverdrup alone can be a money spinner for the company. Also, as the development of the asset progresses, positive surprises can be in store (higher recovery rate). On the other hand Ivar Aasen can support Det norske's plans by providing cash flows from production or through stake sale. A 35% stake in Ivar Aasen can yield nearly $525 million considering the transaction at $10/boe. This is the most conservative estimate as the field is in advance development stage and can yield higher valuations. Overall, investors can position themselves in this dark horse for long-term gains.