Electrification And Tieback Projects Will Extend Field Life And Support Stronger Long-Term Cash Flows

Catalysts

About OKEA

OKEA is a Norwegian oil and gas company focused on unlocking value from mid and late life fields on the Norwegian Continental Shelf.

What are the underlying business or industry changes driving this perspective?

• Ramp up of low breakeven, near infrastructure discoveries such as Talisker and Garn West South, which are expected to be brought onstream quickly via existing Brage and Draugen facilities, should lift production volumes and sustain revenue growth while limiting upfront capital intensity.
• Bestla and other tieback projects scheduled toward 2027 will progressively add around 10,000 barrels equivalent per day net to OKEA and extend the productive life of Brage, supporting a higher long term production base and improving operating leverage and earnings.
• Power from shore to Draugen is advancing on schedule and is designed to provide more predictable and potentially lower long run power costs, which can help extend field life toward 2040 and beyond and support structurally stronger net margins.
• Systematic infill drilling and increased oil recovery programs at fields such as Ivar Aasen, Gjøa and Nova, supported by new seismic and low pressure production conversions, are expected to raise recoverable reserves and enhance field productivity, underpinning medium term production and cash flow resilience.
• A stronger balance sheet with net cash, normalized bond maturities out to 2028 and fully funded major projects provides financial capacity to capture upside from new barrels coming online, which can translate into higher free cash flow and, over time, improved earnings visibility and potential distributions.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming OKEA's revenue will decrease by 11.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.9% today to 7.6% in 3 years time.
• Analysts expect earnings to reach $50.2 million (and earnings per share of $0.48) by about December 2028, up from $-28.0 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 7.5x on those 2028 earnings, up from -8.0x today. This future PE is lower than the current PE for the NO Oil and Gas industry at 10.2x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.51%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Large noncash impairments at Statfjord and Hasselmus highlight uncertainty over recoverable reserves and cost reductions, and further reserve downgrades or cost overruns on mature fields could structurally lower long term production and revenue.
• The business model is concentrated in mid and late life Norwegian fields where natural decline, earlier than expected water ingress and shorter asset lives can erode operating leverage over time, putting sustained pressure on net margins and earnings.
• OKEA is committing substantial capital to Bestla, power from shore and infill drilling during 2025 and 2026, and if oil and gas prices weaken or project returns disappoint, the company could face weaker free cash generation that delays dividends and weighs on earnings.
• Unit production costs have been trending above twenty dollars per barrel of oil equivalent during periods of intensive maintenance, and if efficiency improvements on assets like Statfjord continue to lag, structurally higher operating costs could compress net margins and reduce earnings despite stable volumes.
• High decommissioning obligations and reliance on Norwegian tax and regulatory stability mean that adverse changes in fiscal terms, carbon related costs or electrification economics could reduce the value of mature assets and trigger additional impairments that negatively impact reported earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of NOK24.0 for OKEA 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 NOK28.0, and the most bearish reporting a price target of just NOK20.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $659.3 million, earnings will come to $50.2 million, and it would be trading on a PE ratio of 7.5x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of NOK21.75, the analyst price target of NOK24.0 is 9.4% 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.