Othello Discovery And Trym Restart Will Expand North Sea Operations

Key Takeaways

• Strategic focus on North Sea operations and gas resources positions DNO to capitalize on high market prices and grow future earnings.
  
• Reopening of strategic pipelines and a strong financial position enable further acquisitions, driving long-term revenue and margin improvements.
  
• DNO faces revenue and margin challenges from pipeline uncertainties, local sales, asset impairments, commodity price fluctuations, and high exploration expenses.

Catalysts

Engages in the exploration, development, and production of oil and gas assets in the Middle East, the North Sea, and West Africa.

• DNO anticipates production growth in the North Sea, driven by strategic acquisitions and the restart of the Trym gas field. These actions are expected to positively impact future revenues by increasing production capacity.
  
• Exploration success in the North Sea, particularly the Othello discovery, presents potential for significant resource additions. This could enhance DNO's revenue prospects and increase future earnings as discoveries are developed.
  
• DNO's strategic focus on gas within the North Sea portfolio positions the company to benefit from current high gas prices, potentially improving revenue and overall earnings in response to market conditions.
  
• The potential reopening of the Iraq-Turkey pipeline (ITP) and restored exports from Kurdistan could resolve payment issues and significantly increase revenues, enhancing DNO's ability to improve its net margins.
  
• DNO's robust balance sheet and cash position provide financial flexibility to pursue further M&A opportunities and investments in exploration and development, which could drive long-term revenue growth and strengthen earnings.

DNO Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DNO's revenue will grow by 9.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -4.1% today to 13.8% in 3 years time.
• Analysts expect earnings to reach $120.4 million (and earnings per share of $0.13) by about May 2028, up from $-27.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.9x on those 2028 earnings, up from -41.3x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 4.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.52%, as per the Simply Wall St company report.

DNO Future Earnings Per Share Growth

Risks

• The uncertainty surrounding the reopening of the export pipeline in Kurdistan presents a risk, as DNO may face challenges in securing a reliable payment mechanism for exported oil, impacting future revenues and potentially delaying the resumption of higher production levels.
  
• The ongoing need to engage in local sales in Kurdistan due to the pipeline shutdown has resulted in lower realized oil prices and could continue affecting revenue growth and net margins if export channels remain inaccessible.
  
• The substantial impairments related to the Baeshiqa license and other North Sea assets highlight risks in asset valuation and could impact net earnings negatively if similar future impairments occur.
  
• Lower oil and gas prices despite higher production in both Kurdistan and the North Sea contributed to stable rather than increased revenues in 2024, suggesting potential vulnerability to future commodity price fluctuations affecting overall earnings.
  
• High exploration expenses, including expensing dry wells in the North Sea, indicate a risk of future revenue not materializing from new discoveries, thereby impacting long-term financial forecasting and operational expenses.

Valuation

• The analysts have a consensus price target of NOK16.375 for DNO based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK20.0, and the most bearish reporting a price target of just NOK12.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $871.0 million, earnings will come to $120.4 million, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 7.5%.
• Given the current share price of NOK11.91, the analyst price target of NOK16.38 is 27.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.