Lundin Energy: Swedish listed Oil Production and Exploration company added to JIC Portfolio

High quality, best in class operator!

Lundin Energy (LUNE.SS, Market Cap ÂŁ4570m, SEK 217, 2.0% of JIC Portfolio and 0.0% of JIC Top 10)

I have today added Swedish listed, Lundin Energy to the JIC Portfolio.

Its website is HERE and its latest corporate presentation can be found HERE.

Lundin Energy, formerly Lundin Petroleum is in my opinion, one of the highest quality oil and gas exploration and production companies in the world.

Quite a statement! Why?

It operates in a shareholder-friendly regime with 90% of its production from the Greater Edvard Grieg and the recently brought on stream, Johan Sverdrup fields in the Norwegian North Sea.

It is an industry-leading low-cost operator with operating expenditure of 3.2-4.2 $ per boe from 2020 onwards.

It is free cash flow breakeven at under $17 per barrel.

In 2019 it produced 93,000 barrels oil equivalent per day. This is forecast to grow to 145,000-165,000 boepd in 2020 and 160,000-170 boepd from 2021 onwards. Its target is 200,000 boepd in 2023. This is mainly through the ramp-up in production at Johan Sverdrup.

It has more than 10 years of reserve life and has an active exploration programme. Lundin has a proven record of successful exploration over the years.

In 2020 it has drilled three wells with one commercial discovery. It has a further five wells to drill in 2020 having moved tow to 2021.

From 2001 -2020 the total shareholder return grew at a compound annual growth rate of 26%.

It intends to pay a $1 dividend in four equal 25cent instalments this year (unfortunately I have missed the first).

Why Now?

Lundin Energy’s share price has not been immune to the collapse in the oil price. It is a low-cost producer and generates free cash flow, even at these low prices. This has enabled management to plan to pay a $1 per share dividend in 2020 in four equal instalments. At the current share price that gives a dividend yield of 4.5%, (although I believe UK shareholders will lose 30% of the dividend due to Swedish withholding tax. I understand, that unlike US stocks, the withholding tax from Swedish companies is not reclaimable in SIPPS or ISAs as they are tax-free wrappers. It is very difficult to get clear guidance but that is what I think is correct). When/if the oil price recovers, together with increased production, free cash flow should grow significantly, giving a decent scope for dividend increases. 

On Stockopedia it passes 7 screens: Benjamin Graham Deep Value, James O’Shaughnessy’s cornerstone, Richard Beddard’ Nifty Thrifty, Greenblatt’s Magic Formula, Cash Accruals Screen and on the negative, not surprisingly Earnings Downgrade screen and James Montier Trinity of Risk Screen.  

Investec recently described LUNE as the industry leader “The company has consistently delivered, it has a long reserve life, constant production growth, best in class operating costs and ESG is now a priority, which justifies a premium valuation”.

I am increasing my overall exposure to the oil sector slightly but am aiming to significantly increase the “Quality” of the exposure. Rockrose Energy needs oil some way above $30 per barrel in the medium to longer-term while at $30 per barrel, Lundin will be generating plenty of free cash. 

I have moved the Rockrose Risk rating to High, which with the High Reward rating points to a 2.0% position. Lundin enters with a Medium Risk/High Reward rating pointing to 4.0% position. 

As a first step, today I have added a 2.0% position in Lundin Energy and intend to reduce Rockrose in due course.

I paid 217.09 SEK 

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