Lundin Energy H1 Results

Lundin Energy (LUNE.SS, Market Cap £5470m, SEK 214, 3.5% of JIC Portfolio)

H1 Results:

Conclusion: Revenue was below forecasts for Q2 due to the weak oil price. Remember, for much of the period the oil price was below $30 per barrel. Despite that, cash flow was strong due to low operating costs and post-tax earnings were helped by lower Norwegian taxes. Things should be better this quarter with the oil price above $40 per barrel. I originally bought this due to the prospect of rapidly increasing production of low-cost oil from Johan Sverdrup over the next few years. On top of that, we have accelerated development of eight projects which could add 120 Mmboe to reserves. Cash flow will benefit from increased production and hopefully, higher oil prices. It is paying a $1 dividend this year, giving a yield of 4.1%. It should be able to grow the dividend significantly over the next few years, which should help drive the share price. I have it as Medium Risk/High Reward (i.e. I think it can achieve in excess of 20% return over the next year). Happy Holder! 

Main points:

In Q2 it achieved record daily production of 162.9 Mboepd, compared to 76.1 Mboepd in Q2 2019

Q2 revenue was a little less than consensus forecasts at $403m (consensus $427m) due to weaker oil prices achieved.

Q2 profit before tax also fell short at $240m (consensus $272m) but die to lower Norwegian taxes, earnings came in at $179m v consensus of $160m. EPS were 63 cents v 56 cents consensus.

Strong operating cash flow meant that net debt rose by only $100m over the quarter, to $3.8bn

It states that recent Norwegian tax incentives mean that it will accelerate eight potential projects, targeting 120 Mmboe of net resources.

It maintains guidance for the full year of 157 Mboepd with operating costs of only $2.8 per boe.

Comment from Alex Schneiter, President and CEO of Lundin Energy:
“The resilience Lundin Energy has shown in the face of the sharpest downturn in the history of the oil industry is a testament to the quality
of the asset base, flexibility of our financial resources and operational excellence of the business and our people; this has been
further demonstrated by the award of a ‘BBB-‘ credit rating. We generated over MUSD 380 of free cash flow in the period and delivered a
positive free cash flow result from the oil and gas operations for the second quarter. This all in a period where we encountered some of the
lowest realised pricing we have witnessed, both when taking into account the historic negative dated Brent differential and physical
discount; a situation which has now normalised and in fact we are witnessing premiums for our barrels in the market again.
“The risk posed by coronavirus presented a unique challenge to the offshore industry and following swift and effective action, any potential
threat was mitigated and all of our staff have come through the period safely and we saw no disruptions to production. As we enter the
second half of the year, all offshore facilities have returned to normal manning levels and the projects are progressing on plan.
“Although faced with an uncertain market backdrop, operationally Lundin Energy performed exceptionally well. Johan Sverdrup reached
its increased plateau rate of 470 Mbopd in April 2020 and since then a further new production well has been completed. The capacity
of the facilities will be tested for further upside in the second half of the year. At Edvard Grieg, reservoir performance continues to
exceed expectations. The reservoir model is currently being updated along with the recently completed 4D seismic survey and we already
see clear potential for a further increase in reserves and an extension of the plateau production.
“The Norwegian government also played an active role during the period; establishing a tax incentive package which as well as
improving near term liquidity also significantly improves future project economics assuming plan of development(s) are submitted prior to
end of 2022. The Company has identified up to eight potential new projects targeting over 120 MMboe of net resources, which could
benefit from these tax incentives. We will be aiming to accelerate appraisal activities and field development studies for all of these
potential projects, with the objective of maturing them to sanction prior to the deadline at the end of 2022.
“As well as maintaining a very low operating cost base during the period of USD 2.78 per boe, we were also able to deliver a carbon
emission per barrel produced of 2.8 Kg CO2, which is 50 percent lower than in 2019 and significantly below our emission target in 2020 of
4 kg CO2 per barrel produced. Our carbon footprint will be further reduced by the end of 2022 when the Edvard Grieg field will be fully
electrified using mostly onshore renewable electricity. By then we will be targeting less than 2 Kg CO2 per barrel produced and be close to
our objective of reaching carbon neutrality from our operations.
“The second half of the year will see us resuming exploration activities in the fourth quarter, as well as continuing to focus on
maintaining strict capital discipline and opportunistically looking to take advantage of this low point in the cycle to complement our
portfolio. It is times like these which show the true mettle of a business and I would like to take this opportunity to thank all staff for
their hard work and determination, as we not only successfully traded through this difficult period but are indeed in a stronger and fitter
position. As the founder of the Lundin Group, Adolf Lundin, used to tell me, “when the going gets tough, the tough get going!”


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