What is the downside protection of the OKEA thesis? Have you accounted for the worst? 4 of their assets stop production in 2.2 years. Brage+Gjoa+Yme+ I. Asen=15.6MBOE of 2P. they produce 19.4 kboepd in total => 15.6/19.4*1000=804 days = 2.2 years. 2C oil is not included in worst case scenario as we should not rely on what management thinks and estimates.
So in 2026 we will have at least 19.4 kboepd cut from 42 kboepd => 22.6 kboepd. What is a fair value including this, assuming no further aquisitions until then? What happens when they milked the last drops of these assets, just write them off as worthless in the balance sheet? Impairment, depreciation?.
Im trying to figure out, what is the absolute floor level here
The business model of OKEA has always been and will remain unchanged. They are nearly solely focused on M&A. They are always doing acquisitions and will work on improving existing fields. They had remarkable success by increasing reserve life with many fields and will continue to do so. Statfjord is a gigantic opportunity for them as the field is huge and a small increase in overall efficiency or recoverable resources would lead to a lot of value creation. What the absolute floor is, is impossible to estimate, but Im pretty confident that we have already seen the bottom earlier this year. The operational performance is great, while we’ll see dividend payments as soon as next year. The cash flow generation should remain very high, as all assets are producing. Also, looking at investor confidence, the company’s perception by investors has massively improved from the low (driven by the closure of the Statfjord deal & a great operational performance). The chart also looks very good.
Thanks for the replies but this feels more like a speculation on the management team . Even if the Stratfjord deal is great, how much does this matter if they don't do another acquisition until 2026 and the production is cut by 46%? What would a fair value be then? is a 40-50NOK stock price fair if they will produce just a little bit more in 2 years than what they are doing now?
" small increase in overall efficiency or recoverable resources would lead to a lot of value creation" sure, but this doesn't matter if the overall efficiency doesn't increase. I think you also have to justify why this will even happen in the first place, then the potential 46% cut may be justifiable. Is the likelihood of this happening more or less than 50% chance or should we see this as a random play?
The dividend does not matter if the stock goes down equally much so I don't put any value to this agument.
Don't get me wrong this may be a no-brainer but I am not grasping it from what I have read so far.
The company will certainly do acquisitions till 2026. It’s similar part of the company’s DNA. The chance of efficiency kicking in is very high, as it has always been in the history of OKEA. To address your concern regarding production levels, let me talk about the journey of OKEA. 2.5 years ago OKEA produced 16k boed and the management team announced their growth ambitions. Since then the company has grown to 42k boed. All of this happened while older assets certainly faced „issues“ due to their age. But because of M&A and measures taken by the company increase efficiency and recoverable resources, the company was able to grow quick. The life expectancy of the Draugen asset for example was extended from 2027 to >2040. Today, OKEA still has the same growth ambitions as 2.5 years ago. Furthermore, if you take a look at what Bangchak Holding (the largest shareholder of OKEA and huge energy company from Thailand= projects from OKEA, then they guide for production of 100k boed by 2030. During the last few months Bangchak Holdings has increased its position in OKEA.
Not doubting they will pull it through, however the thesis is more or less:
"OKEA good company because management able to extend life of dying assets and make them more efficient. Therefore, they will be able to continue to do this based on historic data. No doubt, they will be able to acquire more assets in the near term because they have proven to be good at it"
So the investment thesis is more or less primarily an investment in the management team as I see it. Not necessarily bad but it requires a lot of faith in them .
Further question; if that 920M NOK of "Business combinations, cash paid", which supposedly is the Statfjord aquisition cost, and contributed mostly to the net investing activities of 1.4B NOK in Q4 2023, why do we still have around 1.4B NOK in investing activities in Q1 2024? Wasn't this supposed to be a one time thing?
The simple reason is, that the 1.4B NOK in investing activities in Q1 is largely attributable to a deferred consideration top Equinor. The Statfjord deal included a deferred consideration that was tied to certain conditions that would mean cash payments to Equinor.
Your estimation of OKEA's EV is too simplistic, for example, you didn't include the ARO and other liabilities. Same with Ithaca, you forgot the ARO and contingent payments. In both cases, the financial situation dramatically changes.
These companies benefit from the acquisition of mature assets, but they come with a series of operational and financial liabilities that have to be considered when analysing them.
Great write up thank you.
Thanks ;)
What is the downside protection of the OKEA thesis? Have you accounted for the worst? 4 of their assets stop production in 2.2 years. Brage+Gjoa+Yme+ I. Asen=15.6MBOE of 2P. they produce 19.4 kboepd in total => 15.6/19.4*1000=804 days = 2.2 years. 2C oil is not included in worst case scenario as we should not rely on what management thinks and estimates.
So in 2026 we will have at least 19.4 kboepd cut from 42 kboepd => 22.6 kboepd. What is a fair value including this, assuming no further aquisitions until then? What happens when they milked the last drops of these assets, just write them off as worthless in the balance sheet? Impairment, depreciation?.
Im trying to figure out, what is the absolute floor level here
thanks
The business model of OKEA has always been and will remain unchanged. They are nearly solely focused on M&A. They are always doing acquisitions and will work on improving existing fields. They had remarkable success by increasing reserve life with many fields and will continue to do so. Statfjord is a gigantic opportunity for them as the field is huge and a small increase in overall efficiency or recoverable resources would lead to a lot of value creation. What the absolute floor is, is impossible to estimate, but Im pretty confident that we have already seen the bottom earlier this year. The operational performance is great, while we’ll see dividend payments as soon as next year. The cash flow generation should remain very high, as all assets are producing. Also, looking at investor confidence, the company’s perception by investors has massively improved from the low (driven by the closure of the Statfjord deal & a great operational performance). The chart also looks very good.
Thanks for the replies but this feels more like a speculation on the management team . Even if the Stratfjord deal is great, how much does this matter if they don't do another acquisition until 2026 and the production is cut by 46%? What would a fair value be then? is a 40-50NOK stock price fair if they will produce just a little bit more in 2 years than what they are doing now?
" small increase in overall efficiency or recoverable resources would lead to a lot of value creation" sure, but this doesn't matter if the overall efficiency doesn't increase. I think you also have to justify why this will even happen in the first place, then the potential 46% cut may be justifiable. Is the likelihood of this happening more or less than 50% chance or should we see this as a random play?
The dividend does not matter if the stock goes down equally much so I don't put any value to this agument.
Don't get me wrong this may be a no-brainer but I am not grasping it from what I have read so far.
The company will certainly do acquisitions till 2026. It’s similar part of the company’s DNA. The chance of efficiency kicking in is very high, as it has always been in the history of OKEA. To address your concern regarding production levels, let me talk about the journey of OKEA. 2.5 years ago OKEA produced 16k boed and the management team announced their growth ambitions. Since then the company has grown to 42k boed. All of this happened while older assets certainly faced „issues“ due to their age. But because of M&A and measures taken by the company increase efficiency and recoverable resources, the company was able to grow quick. The life expectancy of the Draugen asset for example was extended from 2027 to >2040. Today, OKEA still has the same growth ambitions as 2.5 years ago. Furthermore, if you take a look at what Bangchak Holding (the largest shareholder of OKEA and huge energy company from Thailand= projects from OKEA, then they guide for production of 100k boed by 2030. During the last few months Bangchak Holdings has increased its position in OKEA.
Not doubting they will pull it through, however the thesis is more or less:
"OKEA good company because management able to extend life of dying assets and make them more efficient. Therefore, they will be able to continue to do this based on historic data. No doubt, they will be able to acquire more assets in the near term because they have proven to be good at it"
So the investment thesis is more or less primarily an investment in the management team as I see it. Not necessarily bad but it requires a lot of faith in them .
It’s a combination of buying a company with a good management team at an absurd price. We will see how things turn out
Also, are you counting cash as cash+ restricted cash? What are “other current assets”? And why is there restricted cash?
Further question; if that 920M NOK of "Business combinations, cash paid", which supposedly is the Statfjord aquisition cost, and contributed mostly to the net investing activities of 1.4B NOK in Q4 2023, why do we still have around 1.4B NOK in investing activities in Q1 2024? Wasn't this supposed to be a one time thing?
The simple reason is, that the 1.4B NOK in investing activities in Q1 is largely attributable to a deferred consideration top Equinor. The Statfjord deal included a deferred consideration that was tied to certain conditions that would mean cash payments to Equinor.
Your estimation of OKEA's EV is too simplistic, for example, you didn't include the ARO and other liabilities. Same with Ithaca, you forgot the ARO and contingent payments. In both cases, the financial situation dramatically changes.
These companies benefit from the acquisition of mature assets, but they come with a series of operational and financial liabilities that have to be considered when analysing them.