Aker BP stock: ideal European location (OTCMKTS: DETNF)


(Note: this article was in the July 24, 2022 newsletter and has been updated as needed)

Aker BP (OTCPK:DETNF) is an independent Norwegian company that is now much larger following the merger with Lundin Energy (OTCPK:LNDNF)(OTCPK:LNEGY). Norway has a robust industry which should benefit from the current European situation. A company of this size is much more likely to deliver higher returns than would be the case with a giant company like Equinor (EQNR).

Aker BP dividend

Like many companies, this one will vary the dividend based on industry conditions.

Aker BP Second Quarter Dividend

Aker BP Second Quarter Dividend Presentation (Aker BP Second Quarter Dividend Press Release)

(Note that the various press releases mention at least one currency and that the US dollar is mentioned throughout the various presentations.)

The current environment has allowed the company to quickly increase the dividend. The oil and natural gas situation in Europe will create a very encouraging environment for increasing production. Therefore, this variable distribution entity seems to have a very bright future for shareholders income and capital appreciation.

There is a strong emphasis on abandoning Russian deliveries of these products. This company is able to offer at least a partial solution to current problems. The current strength in the commodity market seems to be offering a quick return on investment for many projects. This rapid return on investment should limit some of the risk of political gyrations on the ongoing charged discussions involving this industry.

Business break-even point

The company’s production, as is the case with much of Norwegian industry, is very profitable even at much lower prices.

Aker BP Corporate Breakeven Target

Aker BP Corporate Breakeven Target (Aker BP July 20, 2022, post-merger strategy update)

The company has a history of growing resources. Planned projects and exploration make this growth slightly lumpy, as noted above. But this growth should persist for a long time. Unlike much of Europe, Norway realizes that this industry is an asset and therefore strongly supports the industry.

However, the past five years ending with fiscal year 2020 have been very trying for this industry. Many companies don’t show much growth. Their share prices also did not appreciate much during this period. Fiscal year 2020 for many companies has been particularly detrimental to many corporate finances.

Now the future picture seems to be much nicer than it was before. This means that an industry recovery has been viewed much more favorably than was the case in the past. Whatever this company ends up producing in the future, that output can easily be sold to an energy-hungry Europe that wants a reliable supplier for its energy needs.

Current progress of the portfolio

Management has quite a few projects underway in addition to optimizing post-merger operations.

Aker BP Post-Project Portfolio Progress

Aker BP Post Project Portfolio Progress (Aker BP Post Merger July 20, 2022, Strategy Update)

The company has a long way to go to maintain current production levels. Management also announced a particularly important natural gas discovery for the European situation.

What is important to note with any company that participates in the offshore industry is that a significant discovery can literally change the company’s outlook overnight. Investors should look for a company that hits a lot of singles and doubles, as such a company is much more likely to “home run”. This company seems to have a very good oil exploration record.

What the future holds is anyone’s guess. But the rapid dividend increase alone is worth waiting to see what the future holds. Freelancers with low costs like this and a decent future often become takeover candidates at some point.

Investors should remember that any acquiring company wants “a deal” for its shareholders (and this goes for private companies as well as public companies). No one wants a business with lots of expensive debt and cash flow issues. This type of business is often sold (if it doesn’t go bankrupt first) at a considerable discount. A company like Aker BP promises few integration issues that many potential buyers want to see when they “buy”.

Aker exploration program

As expected, the company has an active exploration program.

Aker BP Map of Exploration Wells 2022

Aker BP Map Of 2022 Exploration Wells (Aker BP Post Merge July 20, 2022 Strategy Update)

The company primarily has discovery extensions planned for drilling. These are comparatively lower risk wells compared to a pure exploration well in an area with no known production but with good geology. The results shown above reflect this in the relatively lower percentage of non-commercial results.

The results imply that production can be sustained in established areas for some time to come. Now, no one knows if the continuous improvement of technology will continue to open up more possibilities in these same areas. I tend to think it’s very likely, but it’s certainly not guaranteed either.

A company like Aker BP can often afford pure exploration wells mixed with lower risk expansion exploration wells. This advantage makes it a much better long-term investment vehicle for investors who want that pure exploration risk. Established production and, to some extent, the growth of established production through expansions allows for continued growth in cash flow while investors wait for that “game-changing” discovery.

The problem with smaller players is that they often can’t afford to bid on the best square footage. Thus, the long-term results of smaller players are often longer than many realize.

The future

Aker BP has a decent financial strength rating. This rating may well improve in the future once the benefits of the merger become apparent to observers. The current environment combined with the situation in Europe should allow for dividend increases while the company benefits from a busy schedule which should allow production increases in the future.

The combined company is unlikely to expand at the pace of growth that Lundin Energy shareholders are accustomed to. However, the rate of return from dividend growth and production slowdown should remain satisfactory to shareholders over the long term. A well-chosen acquisition periodically is also likely.

This company is well positioned to take advantage of the current European situation as it focuses on offshore activities in Norway. Obviously, there is a lack of basin diversification. Again, investors should like this focus on European energy.

It is possible that this company will become a takeover candidate in the future as this company has many characteristics that many buyers want to see (including low costs and a decent balance sheet). In the meantime, the dividend offers a decent return for patient shareholders who don’t mind waiting for the future to unfold.

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