Power From Shore And Tiebacks Will Support Long Term Value Creation

Catalysts

About OKEA

OKEA is a Norway focused oil and gas company that operates and develops mid and late life fields on the Norwegian Continental Shelf.

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

• Ongoing infill and development drilling around existing hubs, such as Garn West South at Draugen and new production wells at Brage and Statfjord, is set up to keep using installed infrastructure more intensively, which can support field life and capital efficiency, with potential to benefit revenue and earnings.
• The Talisker oil discovery near Brage, with estimated recoverable volumes of 16 million to 33 million barrels and a breakeven below US$20 per barrel, can supply relatively low cost barrels through existing facilities, which can support future cash flow and net margins when production begins.
• Tieback projects like Bestla to Brage and gas projects tied into Draugen concentrate new volumes into already depreciated platforms and pipelines, which can lower unit development cost for incremental barrels and help support operating margins and earnings quality.
• The power from shore project at Draugen, which is progressing both onshore and offshore, is intended to give more predictable power costs over time and support an extended field life toward 2040 and beyond, which can help sustain production levels and improve visibility on future revenue and operating costs.
• Focused exploration around existing assets, such as Talisker and other prospects near Brage and Ivar Aasen, targets resources that can be tied back quickly to current hubs, which can shorten lead times from discovery to production and support future revenue and cash generation.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on OKEA compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming OKEA's revenue will grow by 6.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -0.5% today to 12.6% in 3 years time.
• The bullish analysts expect earnings to reach $137.7 million (and earnings per share of $1.33) by about July 2029, up from -$4.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $60.6 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 4.9x on those 2029 earnings, up from -84.7x today. This future PE is lower than the current PE for the NO Oil and Gas industry at 11.1x.
• The bullish 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 6.95%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Large, non cash impairments on assets such as Statfjord and Hasselmus show that earlier expectations for recoverable reserves and cost reductions did not hold up. Further reserve cuts or higher long term cost assumptions could reduce asset values again, putting pressure on future earnings and book equity.
• The business is heavily exposed to mature, mid and late life fields where production depends on high uptime and successful infill drilling. Underperformance on complex wells like the long Talisker development or weaker production from key wells such as Sognefjord East would directly affect production volumes, revenue and cash generation.
• Unit production expenses were recently referenced around $24.5 per barrel of oil equivalent with higher maintenance across several assets. If ongoing work on aging fields and projects like Bestla and Statfjord does not deliver lasting cost efficiencies, structurally higher operating costs could cap net margins and reduce earnings resilience.
• The large multi year investment program, including Bestla and Draugen power from shore, is being funded without an announced dividend plan and under tax rules that require frequent installments. Any weaker macro conditions or project delays could tighten funding headroom and limit flexibility for future shareholder distributions, affecting free cash flow.
• Asset retirement obligations of US$969 million, only partly offset by US$465 million in receivables, reflect substantial long term decommissioning liabilities. If reserves are revised down again or production tails off faster than expected, a smaller revenue base would need to support these obligations, which could weigh on long term earnings and equity returns.

Valuation

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

• The assumed bullish price target for OKEA is NOK51.0, which represents up to two standard deviations above the consensus price target of NOK46.2. This valuation is based on what can be assumed as the expectations of OKEA's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK51.0, and the most bearish reporting a price target of just NOK40.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $1.1 billion, earnings will come to $137.7 million, and it would be trading on a PE ratio of 4.9x, assuming you use a discount rate of 6.9%.
• Given the current share price of NOK35.8, the analyst price target of NOK51.0 is 29.8% 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.