Tyra Ramp Up And Long DUC License Tail Will Support Steady North Sea Cash Flows

Catalysts

About BlueNord

BlueNord is an oil and gas company with a 36.8% non operated interest in the Danish Underground Consortium, focused on long life North Sea production and cash distributions.

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

• Although Tyra is now inaugurated and contributing higher gas volumes into a region that still imports close to 90% of its gas, the hub remains constrained by water treatment and compressor capacity. As a result, any prolonged technical bottlenecks could cap production rates and temper revenue growth.
• While Denmark currently provides a clear regulatory framework with a 2050 production end date and a tax stability mechanism, the finite DUC license that runs to 2042 limits the economic window. This can restrict future project sanctioning and the longevity of earnings.
• Although tieback projects like Tyra North, Halfdan North and Valdemar Bo South benefit from existing infrastructure and sub US$20 per barrel unit technical costs, each project needs to pass strict economic hurdles before sanction. This means that planned resource conversion from 2C to 2P may be slower than hoped, delaying incremental production and cash flow.
• Despite an annual production decline of less than 4% on base assets and infill wells with unit development CapEx below US$13 per barrel, ongoing maintenance and reservoir management spend can keep operating costs elevated. This may limit the pace of improvement in unit costs and net margins.
• While the hedging program and material tax loss position currently support visibility on cash generation and distributions, a high commitment to return 50% to 70% of operating cash flow through 2026 could reduce flexibility to fund additional developments or delever more quickly. This may constrain future earnings growth and balance sheet strength.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on BlueNord compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming BlueNord's revenue will decrease by 5.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.9% today to 7.3% in 3 years time.
• The bearish analysts expect earnings to reach $69.5 million (and earnings per share of $2.7) by about June 2029, up from $66.7 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $227.1 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.1x on those 2029 earnings, up from 19.8x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 14.1x.
• The bearish analysts expect the number of shares outstanding to decline by 3.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.91%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Continued ramp up at Tyra and sustained high output from base assets such as Dan, Halfdan and Gorm, supported by an annual production decline on base assets of less than 4%, could lift group production well above current levels for a prolonged period, which may support higher revenue and earnings than implied by a flat share price view.
• The long production profile shown out to the DUC license expiry in 2042, with volumes staying above 50,000 barrels per day beyond the end of this decade and remaining meaningful in 2042, points to a long revenue tail that could support cash flow and net margins for much longer than a static share price would suggest.
• Near term and longer term projects such as Tyra North, Halfdan North, Valdemar Bo South and multiple infill wells, with unit technical costs below US$20 per barrel and development CapEx below US$13 per barrel, provide low cost incremental barrels that can support production, widen net margins and lift earnings over time.
• The combination of lower unit operating costs as Tyra volumes increase towards the US$13 per BOE target, a material tax loss position, hedging that supports price visibility through 2026 and a policy to distribute 50% to 70% of operating cash flow, could support higher free cash flow and earnings than consistent valuation assumptions would imply.
• Supportive long term energy security and transition themes in the EU, with gas still viewed as a critical transitional fuel and Denmark positioned as a net exporter with relatively low CO2 gas from Tyra, may underpin sustained demand and pricing for BlueNord’s gas volumes, which could support revenue and net margins more than a flat share price thesis allows for.

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Valuation

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

• The assumed bearish price target for BlueNord is NOK515.0, which represents up to two standard deviations below the consensus price target of NOK600.0. This valuation is based on what can be assumed as the expectations of BlueNord's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK710.0, and the most bearish reporting a price target of just NOK515.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $953.6 million, earnings will come to $69.5 million, and it would be trading on a PE ratio of 21.1x, assuming you use a discount rate of 6.9%.
• Given the current share price of NOK509.0, the analyst price target of NOK515.0 is 1.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.