DNO. Credit Research. 29 May 2015 PLEASE NOTE THAT FEARNLEY SECURITIES IS ACTING AS JOINT LEAD MANAGER FOR THE CONTEMPLATED BOND ISSUE IN DNO ASA

Transcription

1 DNO Credit Research 29 May 215 Author Torbjørn S. Håland, Analyst PLEASE NOTE THAT FEARNLEY SECURITIES IS ACTING AS JOINT LEAD MANAGER FOR THE CONTEMPLATED BOND ISSUE IN DNO ASA IMPORTANT / DISCLAIMER: This presentation is prepared by Fearnley Securities, an Astrup Fearnley company. For relevant definitions, methods, risks, disclosures on potential conflicts of interests etc. and disclaimers (including U.S. specific disclaimers) please see All research reports and investment recommendations should be reviewed in conjunction with the information therein.

2 Credit summary and rating Issuer/issue rating: BB-/B+ Credit summary FS has a BB- credit rating on the issuer (DNO ASA), and has assigned an indicative B+ rating on the contemplated new bond, in line with our rating of the two existing bonds The issuer rating is positively influenced by the company s strong reserve base and solid production capacity from the Tawke fields in the Kurdish Region in Iraq, with very low lifting cost of USD ~3/bbl. Furthermore, DNO has solid asset backing and we estimate a loan-to-value* of ~13% based on a risked SoTP valuation DNO is operator of the majority of its assets, and has the flexibility to adjust capex spending to operating cash flow. With the capacity building program at Tawke recently completed, we expect a limited level of capex spending going forward until export payments start to normalize The main credit concern in our view is the geopolitical risk, with uncertainty related to future oil export payments. However, this is somewhat mitigated by the company s ability to generate revenues from local sales in the KRI as well as by its production contribution from Oman Credit strenghts Solid asset backing from producing fields and low future capex commitments Low finding and development costs provide cushion against oil price fluctuations Ability to generate cash flow from domestic sales and production in Oman Strong balance sheet, net debt close to zero Credit weaknesses Limited visibility on export payments Geopolitical risk Limited diversification DNO s only outstanding debt today is two unsecured bond loans, DNO13 and DNO14, both of which mature in April 216, but with a continuous call option at price 11.5 until maturity *Pro forma assuming new bond of USD 45m (mid-range) 2

3 Company overview Company overview Focused on MENA Norwegian independent E&P company founded in 1971 with core focus on the Kurdistan Region of Iraq (KRI) after being one of the first international oil companies to enter the area in 24 In addition, the company has producing assets in Oman and Yemen (suspended), as well as exploration and development licenses in UAE, Tunisia and Somaliland Production capacity from main asset, the Tawke field, was recently increased to 2 mbopd; production ramping up and just reached 17 mbopd Listed on OSE with market cap of USD 1.5bn, net debt close to zero DNO working interest production Development of 2P reserves mboepd RAK UAE Oman Yemen Kurdistan mmboe Kurdistan Other E 216E 217E

4 Tawke has reached 2 mbopd milestone Tawke infrastructure Production, facility and pipeline capacity from Tawke reached 2 mbopd this month; production is ramping up and has reached 17 mbopd with 3 mbopd being solid into the local market As a mean to compensate the oil companies in the transition to regular export payments, the KRG this year implemented a temporary sales channel for local sales from Tawke with a simplified payment structure involving a 5/5 revenue split between the contractors and the KRG o With run rate sales of 3 mbopd and a realized oil price of USD 4/bbl, DNO should generate revenues of around USD 3m per quarter from domestic sales with this arrangement Tawke gross production (mboepd) Takwe revenues and valuation is resilient to low oil prices due to very low lifting costs of USD ~3/bbl. Similarly, life of field finding and development (F&D) costs are <USD 2/bbl with remaining 2P reserves of 68 mmbbl at YE14 Sources: DNO, Genel Energy, Fearnley Securities 4

5 Budget payments prove Baghdad is committed to oil deal In 213 the KRG built a separate oil pipeline to connect its fields to the export terminal at Fishkhabour near the Turkish border. The pipeline allows the KRG to export oil from the Kurdish fields independently of the state controlled pipeline network In early 214 the KRG started exporting oil through the pipeline, and during 214 more than 4 crude tankers with KRI oil were lifted from the Turkish port of Ceyhan Late in 214, an oil and budget deal was agreed between KRG and the Federal Iraqi Government, under which the federal government will release the 17% budget allocation to the KRG in return for 55 mbopd being exported through KRI infrastructure (25 mbopd from the KRI and 3 mbopd from the Kirkuk field). The drop in oil price has constrained the Iraqi budget, thereby delaying implementation of the oil export deal. Recent development has been encouraging, however, with Kurdish oil production at record levels and several budget payments transferred to Erbil in recent months At a production rate >55 mbpd, KRI has reached the inflection point corresponding to its 17 percent budget share, further increasing the pressure on the Federal Government in Baghdad to uphold the oil export deal with the KRG Sources: Company, Fearnley Securities 5

6 Significant increase in FCF expected from 215/16 The company has historically sticked to a policy of synchronizing operational cash flow with investments, although 214 was an exception due to higher capex associated with completion of the Tawke capacity increase program combined with lower oil prices/missing export payments DNO is operator for the majority of its assets (particularly Tawke), and has flexibility to adjust the level of CAPEX spending We expect free cash flow to increase significantly over the coming years as investments are scales back in Kurdistan and we expect a normalization of export payments, FCF estimated to increase above USD 3m p.a. in 216/17 with regular export payments USDm Free cash flow base case E 216E 217E 218E 219E 22E CF from Financing CF from Investments CF from Operations Free cash flow 6

7 Free cash flow positive even with local sales only Free cash flow no export payments In a scenario with no export payments and local sales ramped up to historical high levels of ~1 mbopd (gross), DNO should still be able to cover capex and service debt with cash flow from operations (Oman + local sales Tawke) In such a scenario, it would also be natural to assume lower capex spending which would improve FCF further 7

8 Solid asset coverage with current asset base Asset coverage* base case USDm LTV 13% 3,45 3,5 Asset coverage low case USDm LTV 32% 1,391 1,4 3, Risked development; 766 1,2 2,5 2, 1, 8 Tawke - only local sales; 95 1,5 Tawke; 2, , 4 Bukha & W. Bukha; Bukha & W. Bukha; 28 Cash 2q15e; 413 Assets 45 New bond loan Liabilities 2 Cash 2q15e; 413 Assets New bond loan Liabilities *Pro forma assuming new bond of USD 45m (mid-range) and repayment of exisiting bonds 8

9 Credit metrics USDm USDm USDm USDm NIBD/EBITDA Interest coverage E 216E 217E Net interest-bearing debt EBITDA NIBD/EBITDA E 216E 217E EBITDA Net interest Inter. cov. EBITDA (x) Equity/Total Assets FCF/Gross debt 2, 7% 4 8% 1,5 1, 5 6% 5% 4% 3% 2% 1% % 4% 2% % -2% -4% % E 216E 217E Book equity Total Assets Equity ratio Covenant -8-6% E 216E 217E Net interest-bearing debt Free cash flow FCF/Gross debt 9

10 SoTP risked valuation (pro forma 2q15e) Asset Working Volume Unrisked value Risked value Risking Interest (mmboe) NOKm USDm USD/boe NOK/share NOKm USDm USD/boe NOK/share Producing assets Tawke 55% ,779 2, % 16,779 2, Bukha & W. Bukha 5% % Production assets ,986 2, ,986 2, Discoveries Benenan/Bastora 47% 23 1, % Tawke Jurassic 55% 83 3, % 1, Peshkhabir 55% 124 5, % 2, Discoveries ,171 1, , Other assets NWC (161) (21) (.1) (161) (21) (.1) Overhead (748) (1) (.7) (748) (1) (.7) Gross asset value 27,247 3, ,81 2, Net interest-bearing debt Cash & cash equivalents 3, Interest-bearing debt (3,367) (45) (3.1) RAK Petroleum shares Underlift local sales Other assets Net asset value 23,558 3,

11 Capital structure last reported Enterprise value MCap (USDm/NOKm) 1 63/ Net debt FY1 (USDm/NOKm) - 96/- 74 EV FY1 (USDm/NOKm) 1 58/ Shares outst. (m) 1,84 Share data Price (USD/NOK) 1/ 11 Target (USD/NOK) 3./ 23 Upside/Downside 11% 52 wk range (NOK) m perf/osebx - 6%/ 7% Valuation NAV/sh (USD/NOK) 2.78/ EV/GAV.54 P/NAV.53 Stock information Free float 56% 3 mth avg vol (') 8,84 Beta 1 yr 2.5 Spread 1 yr.3% Velocity 1 yr 175% Volatility 9 days 72% Risk High May Jul Sep Nov Jan Mar Source FactSet Other liab 32% Bonds 18% DNO Book EQ 5% OSEBX (Rebased) DNO DNO NO / E and P /Norway Nordic PROFIT E & and LOSS P (USDm) 4Q14 1Q15 2Q15E 3Q15E E 216E 217E Operating revenue EBITDA EBIT Pre-tax profit Net earnings EPS adj DPS DPS BALANCE SHEET (USDm) 4Q14 1Q15 2Q15E 3Q15E E 216E 217E Total non-current assets Cash ,78 Other currents Total current assets ,254 Total assets 1,11 1, ,64 1,11 1,146 1,559 1,812 Shareholders equity ,3 1,293 Minority interest Net debt CASH FLOW (USDm) 4Q14 1Q15 2Q15E 3Q15E E 216E 217E Net cash from operations Cash flow from investments Net change in Equity Net change in Debt 9 Other items Net change in cash Free cash flow Key figures 4Q14 1Q15 2Q15E 3Q15E E 216E 217E P/E adj. nm nm nm nm nm EV/EBITDA EV/EBITDAX P/B Dividend yield.%.%.%.%.%.%.%.% EBITDA margin 16.8% % -22.1% 76.2% 55.4% 55.7% 74.6% 71.6% Return on equity (ROE) nm nm nm nm nm 7.2% 38.6% 22.7% Equity ratio 48.4% 5.2% 53.7% 57.5% 48.4% 6.8% 66.% 71.3% NIBD / EBITDA Interest coverage ratio (EBITDA)

12 Disclaimer Research Fearnley Securities and the analyst accept no responsibility and expressively disclaims any and all liabilities for any and all losses related to investments caused by or motivated by research reports or investment recommendations from Fearnley Securities. The information in this report has been obtained from public sources believed to be reliable but we do not represent that such information is accurate or complete and it should not be relied upon as such. Any person receiving a research report or investment recommendation from Fearnley Securities is deemed to have accepted this disclaimer. The disclaimer shall apply even if a research report or investment recommendation is shown to be erroneous or incomplete or based upon incorrect or incomplete facts, interpretations or assessments or assumptions by Fearnley Securities, and irrespective of whether Fearnley Securities or any person related to Fearnley Securities can be blamed for the incident. This research report and investment recommendation was not presented to the issuer before dissemination. The analyst may have assisted the corporate finance department related to the issuing companies the previous 12 months. For relevant definitions, methods, risks, disclosures of potential conflicts of interests etc. and disclaimers (including U.S. specific disclaimers) please see All research reports and investment recommendations should be reviewed in conjunction with the information therein. Sources: 12

13