researchonline.sebgroup.com Important. All disclosure information can be found on pages 94 – 96 of this document
Increased confidence in a new cycle
● Here we go again: significant oil market tightening on the horizon
We forecast a balanced market in 2016 with a gradual tightening in 2017 (-0.4m bl/d) and 2018 (-0.5m bl/d) and then a significant tightening in 2019 (-1.2m bl/d). In the near term we believe the upside in the oil price is capped by a revival in US onshore production in addition to a crude oil stock overhang. However, we expect the inventory level will normalize in 2018 and move below average in 2019. Although we expect a strong revival in US crude production, this is not enough to offset the shortage from the rest of non-OPEC and we expect a very tight market in 2019. We have increased our target price for Statoil to NOK 190 (NOK 180) and upgraded our rating on AkerBP from Hold to Buy with a target price of NOK 180 (NOK 160).
● Tight market provides upside to E&P spending
Overall we believe that oil companies are set to increase offshore activity and spending, the first of the two potentially being apparent already this year. Tracking more than 50 official budgets for 2017 we increase our E&P spending estimate to 0- 5% (up from -10%) and see upside to 2018 upstream investments.
● Good risk/reward in oil service
Based on our updated market view, we are incrementally more positive towards the oil service sector. We have updated our seismic market view and have upgraded our recommendation on PGS from Sell to Buy and on TGS from Sell to Hold. We have a separate update on the accommodation market and resume coverage on Prosafe with a Buy rating and NOK 70 target price. We have raised our target price for BW Offshore (Buy) from NOK 36 to NOK 38 and highlight our Buy ratings on Subsea 7, Aker Solutions, Akastor, Archer and Spectrum, all of which remain attractive.
Oil & Oil Services
Global Sector Comment
6 February 2017
Please note: the statement at the rear of this report contains details of investment banking services recently provided by SEB which could be considered relevant to the subject matter of this report.
Oil and Oil Service sector update
Source: Statoil / Harald Pettersen
Analysts Harald Øyen (47) 2100 8542 harald.oyen@seb.no Terje Fatnes (47) 2100 8538 Terje.fatnes@seb.no Halvor Nygård (47) 2100 8626
halvor.strand.nygard@seb.no Øystein Bogfjellmo (47) 2282 7128
oystein.bogfjellmo@seb.no Bjarne Schieldrop (47) 2282 7253 bjarne.schieldrop@seb.no
SEB Equity Research 06 February 2017 2
Contents
Page
Summary ... 3
Oil market: USD 80/bl in sight ... 4
Equity and credit investment ideas ... 12
AkerBP – Buy ... 15
BW Offshore – Buy ... 27
Petroleum Geo-Services – Buy ... 34
Prosafe – Buy ... 44
Statoil – Buy ... 72
TGS-Nopec – Hold ... 81
Target price and recommendation revision history ... 92
Target prices and risks ... 93
SEB Equity Research 06 February 2017 3
Summary
Oil market to tighten substantially to 2019 – we see oil price at USD 80/bl
In our updated supply-demand model we forecast a balanced market in 2016 with a gradual tightness in 2017 (-0.4m bl/d) and 2018 (-0.5m bl/d) and then a substantial tightness in 2019 (-1.2m bl/d). Although we expect a solid growth in US production (+2.9m bl/d over three years), we do not believe this is enough to offset the impact from production declines in the rest of non-OPEC (stemming from massive capex cuts) in addition to close to flat OPEC production and an at-trend demand growth of 1.4% CAGR. As a result of this and our thesis on price dynamics, we forecast an oil price of USD 55/bl in 2017, USD 60/bl in 2018 and USD 80/bl in 2019
E&P spending
Overall we believe that oil companies are set to increase offshore activity and spending, the first of the two potentially being apparent already this year. Updating our E&P spending survey published in August (“On the road to recovery”) with recent developments and official budgets from more than 50 global oil and companies, we now expect upstream E&P spending to be in the range of 0-5% in 2017 compared with 2016. Based on our revised oil price outlook (2017: USD 55/bl, 2018: USD 60/bl and 2019: USD 80/bl), we believe there is a likelihood of further upside for 2018 spending, which we believe can be around 5-10%.
SEB Oil and Oil Services, equity and credit recommendation overview
Source: SEB Equitues
E&P Old rec New rec Old TP New TP Share price Potential Mkt cap (USDm)
Statoil Buy Buy 180 190 155 23% 61,101
AKER BP Hold Buy 160 180 153 17% 6,302
Lundin Petroleum 199 7,732
Subsea, development, other Old rec New rec Old TP New TP Share price Potential Mkt cap (USDm)
Subsea7 Buy Buy 125 116 8% 4,605
Aker Solutions Buy Buy 51 45 14% 1,477
BW Offshore Buy Buy 36 38 24 58% 541
Akastor Buy Buy 16 15 7% 497
Prosafe unrated Buy 70 34 105% 297
Archer Buy Buy 20 15.7 27% 111
Kværner Hold Hold 8.7 10.6 -18% 346
Seismic Old rec New rec Old TP New TP Share price Potential Mkt cap (USDm)
PGS Sell Buy 18 35 28 26% 1,148
Spectrum Buy Buy 50 40 25% 260
TGS-Nopec Sell Hold 100 200 192 4% 2,383
Polarcus Hold Hold 0.55 0.4 49% 24
Offshore drillers Old rec New rec Old TP New TP Share price Potential Mkt cap (USDm)
Fred Olsen Energy Hold Hold 16 19 -14% 151
Awilco Drilling Hold Hold 31 35 -11% 128
Seadrill Sell Sell 10 16 -36% 975
Songa Offshore Sell Sell 0.25 32 -99% 436
Ocean Rig UDW Sell Sell 0.5 1.4 -63% 111
Pacific Drilling Sell Sell 1.1 3.4 -68% 72
Credits
Company Reccommendation
BW Offshore Overweight
AkerBP Overweight
Songa Marketweight
Aker Solutions Marketweight
Statoil Marketweight
Seadrill Underweight
Ocean Rig Underweight
Pacific Drilling Underweight
Fred Olsen Energy Underweight
SEB Equity Research 06 February 2017 4
Oil market: USD 80/bl in sight
We forecast a balanced market in 2016 with a gradual tightness in 2017 (-0.4m bl/d) and 2018 (-0.5m bl/d) and then a substantial tightness in 2019 (-1.2m bl/d). In the near term we believe the upside in the oil price is capped by a revival in US onshore production in addition to a crude oil stock overhang. However, we expect the inventory level will normalize in 2018 and move below average in 2019. Although we expect a strong revival in US crude production, this is not enough to offset the shortage from the rest of non-OPEC and we expect substantial tightness in 2019.
New and old oil price forecast (USD/bl)
Q1/17E Q2/17E Q3/17E Q4/17E 2017E 2018E 2019E LT
New 55.0 57.5 55.0 52.5 55 60 80 60
Old 55.0 57.5 55.0 52.5 55 60 60 60
Change 0 0 0 0 0 0 20 0
Source: SEB
As a result of this and our thesis on price dynamics, we forecast oil price of USD 55/bl in 2017, USD 60/bl in 2018 and USD 80/bl in 2019 – markedly higher than the futures curve and consensus estimates.
SEB’s supply-demand balance (m bl/d)
2013 2014 2015 2016E 2017E 2018E 2019E
Demand
OECD 46.1 45.82 46.36 46.64 46.6 46.6 46.6
US 19.0 19.1 19.5 19.6 19.9 20.1 20.4
Europe 14.3 14.1 14.4 14.7 14.7 14.7 14.7
Non-OECD 45.6 47.2 48.6 49.9 51.4 52.7 54.2
China 10.3 10.8 11.5 11.9 12.3 12.6 13.0
Total Demand 91.7 93.0 95.0 96.6 98.0 99.3 100.8
Growth (%) 1.4 2.1 1.7 1.5 1.4 1.4
Supply
OPEC 30.6 30.5 31.71 32.42 32.65 33.12 33
OPEC NGL 6.2 6.3 6.5 6.7 6.9 7.1 7.3
Non-OPEC 54.5 57.0 58.4 57.6 58.0 58.7 59.3
Non-OPEC & non-US liquids 44.4 45.3 45.7 45.3 44.9 44.1 43.2
US crude oil production 7.5 8.7 9.4 8.8 9.3 10.5 11.7
Total Supply 91.3 93.8 96.6 96.7 97.5 98.9 99.6
Growth (%) 2.7 3.0 0.1 0.8 1.4 0.7
Supply/Demand Balance -0.4 0.8 1.6 0.2 -0.4 -0.5 -1.2
OECD inventories (year end, mb) 2,571 2,712 3,015 3,000 2,848 2,682 2,256
Call-on-OPEC (before stock change) 31.0 29.7 30.1 32.3 33.1 33.6 34.2
Call-on-US crude oil (before stock change) 7.9 7.9 7.8 8.6 9.7 11.0 12.9
Source: SEB
Brent oil price and estimates (USD/bl)
Source: SEB 20 30 40 50 60 70 80 90 100 110 120
Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20
Brent oil price (USD/bl)
Brent futures SEB Brent cons Brent actual
SEB Equity Research 06 February 2017 5 Supply and demand balance (m bl/d)
Source: SEB, IEA
● Total non-OPEC production: After declining 0.8m bl/d in 2016 we expect non-OPEC production to rise by 0.4m bl/d for 2017, 0.7m bl/d for 2018 and 0.5m bl/d for 2019.
● US production: We expect a strong rise in US crude oil production as US shale oil production revives. We expect US crude production at 11.7m bl/d in 2019 – up 2.9m bl/d from 2016 as we expect US shale oil rig count at more than 1,000 rigs at the end of 2019 compared to some 450 rigs at end of 2016.
● Non-OPEC, non-US production declined by 0.4m bl/d y-o-y in 2016. We expect this decline to accelerate over the coming three years as the large capex cuts continue to erode production. We expect a y-o-y decline of 0.4m bl/d for 2017, 0.8m bl/d for 2018 and 0.9m bl/d for 2019.
● OPEC: We expect OPEC to leave cuts behind and move back to normal operations in H2 2017 as their objective to draw down inventories will have been reached to a satisfying degree. We only expect modest supply growth from OPEC for the coming three years as lack of investments is likely going to hurt supply growth. We are not optimistic about Libya and expect production to fall back again to 0.5m bl/d. We expect OPEC’s production at 32.7m bl/d for 2017, 33.1m bl/d for 2018 and 33.0m bl/d for 2019.
● Demand: Growth in oil demand in 2016 has continuously been revised upwards and is now estimated to be 1.6m bl/d – somewhat above the long-term trend. We estimate that non-OECD demand will flatten while non-OECD demand growth will slow to 2.7%.
In sum, we expect total demand to grow at trend of around 1.4% or 1.4m bl/d in 2017, 2018 and 2019.
● Inventories: OECD inventories moved sideways to slightly lower in 2016. We expect them to head lower as production cuts by OPEC and some non-OPEC countries help in the process. We expect OECD inventories to below 2,700m barrels at the end of 2018 before being run very low in 2019.
● S/D-balance: We expect the oil market to run a deficit of 0.4m bl/d and 0.5m bl/d in 2017 and 2018. Current elevated oil inventories will suffice to cover that. This will bring inventories down to normal levels at the end of 2018. For 2019 we expect a deficit of 1.2m bl/d unless the US rig count has managed to rise to about 900 rigs by end of 2018.
0.3 -0.1
-1.6
0.2 0
-1.3 -0.8
0.1 -0.4
0.8 1.6
0.2
-0.4 -0.5 -1.2
-2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E
S > DS <Dm bl/d
SEB Equity Research 06 February 2017 6 OECD stocks (LHS, mb) and days of forward demand cover (RHS, # days)
Source: SEB, IEA
10 20 30 40 50 60 70
1,500 1,700 1,900 2,100 2,300 2,500 2,700 2,900 3,100
Demand forward cover (# days)
OECD total stocks (m bl)
OECD total stocks OECD demand fwd cover Total demand fwd cover
SEB Equity Research 06 February 2017 7
Investment budgets on the rise
Overall we believe that oil companies are set to increase offshore activity and spending, the first of the two potentially being apparent already this year. Updating our E&P spending survey published in August (“On the road to recovery”) with recent developments and official budgets from more than 50 global oil and companies, we now expect upstream E&P spending to be in the range of 0-5% in 2017 compared with 2016.
Based on our revised oil price outlook (2017: USD 55/bl, 2018: USD 60/bl and 2019:
USD 80/bl), we believe there is a likelihood of further upside for 2018 spending, which we believe can be around 5-10%.
Our updated 2017 spending estimate of 0-5% is an upward revision from our -10%
spending scenario from August last year as the oil price has moved ahead of our estimate and oil and gas companies in general seem both able and willing to put growth back on the agenda.
Annual change SEB global upstream E&P spending (1977-2017E)
Source: SEB
Looking at the development over time we see that budgets have constantly been revised up in the recent months as new companies publish their official budgets.
7 14
36
11 16 16
-33 -9
-20 -24
8 7 3 10 6
0 20 19
7 16
23
3
-25 8
16 6
21 27
23 26 19 22
-8 15 19
14 11 2
-26 -27 -40
-30 -20 -10 0 10 20 30 40
1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017E 0-55-10
SEB Equity Research 06 February 2017 8 Development in official 2017 budgets over time
Source: SEB
In terms of structure, we still expect offshore spending to be down in the range of 5-10% in 2017 compared with 2016, implying that onshore and in particular onshore US spending will increase relatively more. But also our updated offshore spending estimate has been revised up compared with our previous estimate of a decline of 10-15%. With continued deflation, of which the majority is derived from old contracts and projects rolling off, our base scenario is that a 5-10% decline in offshore dollars spent can yield an increase in activity for 2017. This is a key thesis for our market view in the short term.
2017 global upstream spending, change from 2016, by segment (SEBe Aug16 vs Jan17)
Source: SEB
We reiterate our main thesis that the oil industry is able and willing to re-start activity again following the worst industry downturn and investment cuts in the past 30 years.
Firstly, driven by underlying cost cuts, deflation (both marginal and legacy) and overall capital efficiency improvement, the global oil and gas industry is likely to generate more free cash flow at a Brent price of USD 45/bl than the average in the period 2010-14 when the oil price stayed above USD 100/bl. With SEB’s current oil price forecast (2017:
USD 55/bl, 2018: USD 60/bl) the industry is estimated to generate around USD 9/bl in free cash flow – a level not seen since the period 2004 to 2007.
-10% -10%
-8%
-3%
-1%
1%
3%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4% Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17
Growth (%)
-20%
-10%
0%
10%
20%
30%
40%
50%
Offshore US shale Other onshore
Aug-16 Jan-17
-10-15%
-0-10%
10-15%
30-40%
-10-15%
+/- 0%
SEB Equity Research 06 February 2017 9 Oil and gas industry free cash flow per barrel: base case and USD 45/bl oil price
Source: SEB, Bloomberg
In our sector update “Activity clearly on the rise” from 7 Dec 2016, investigating 2016 YTD cash flow development, we found that the industry’s Q3 reports supported our cash flow projections – in line with the direction set out above.
As a result of this improved cash flow, the larger oil companies’ focus on balance sheets and dividends is set to change. Based on the long-term growth and asset depreciation, we believe the focus will again turn to reserve replacement, growth and investments.
Organic reserve replacement ratio, 1994-2015 Reserve-life ratio, 1994-2015
Source: SEB Source: SEB
The majority of the oil and gas companies will report their reserve statement in the coming months; so far only Petrobras has published official numbers recording an organic reserve replacement for 2016 of 25%.
3.5 5.0
2.2
-0.4 2.4
-3.9 -1.2
7.5
9.2
3.2 3.8
-6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
FCF/boe (USD/boe)
FCF/boe: base case FCF/boe: flat USD 45/bl
102%110%
128%
152%155%
123%
110%112%
103%95%
85%78%
89%
107%
91%
108%111%
126%
96%
124%
114%
26%
0%
25%
50%
75%
100%
125%
150%
175%
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
12.0 12.012.2 12.6
12.8 12.9 12.5 12.5
12.312.1 11.811.9
12.912.8 12.6
12.912.8 13.3
13.0 13.313.1
11.9
10.5 11.0 11.5 12.0 12.5 13.0 13.5
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
SEB Equity Research 06 February 2017 10 Petrobras organic reserve replacement ratio, 2006-16
Source: SEB, Petrobras 82%
133%
36%
209%
172%
116% 101%
145%
117%
-183%
25%
-250%
-150%
-50%
50%
150%
250%
-250%
-150%
-50%
50%
150%
250%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
100%
SEB Equity Research 06 February 2017 11 Announced E&P spending budgets, 2016E and 2017E
Date Company 2016E 2017E Change(%) Comment
22/09/2016 Total 14,300 11,800 -17 Assumed USD 4.2bn for Downstream flat as guided
01/11/2016 Shell 24,000 20,100 -16 Group capex around USD 25bn (low end of 25-29bn), assume downstream flat 01/11/2016 BP 14,300 13,700 -4 Q3 report updated spending Group from 16.0 to 15-15.5bn
01/11/2016 Occidental Petroleum 2,200 2,700 23 Q3 report, Midstr & Chem 800m
02/11/2016 Pioneer 2,100 2,450 17 Q3 report
02/11/2016 WPX Energy 600 830 38 Guidance in Q3 report
03/11/2016 Chesapeake 1,450 2,000 38 1.6-2.4bn ex cap.interst
09/11/2016 OMV 2,102 2,200 5 Q3 result presentation
10/11/2016 ARC Resources 450 665 48 Guidance announcement
10/11/2016 Crescent Point Energy 1,100 1,400 27 Company presentation
11/11/2016 ConocoPhillips 5,200 5,000 -4 CMD
11/11/2016 Vermillion Energy 240 295 23 Company presentation
14/11/2016 Whitecap Resources 175 300 71 CMD
15/11/2016 PennWest 105 150 43 Company presentation
15/11/2016 Diamondback Energy 388 575 48 Investor presentation, from 90 wells to 120 wells drilled 16/11/2016 Noble Energy 1,400 2,200 57 CMD 2.0-2.4bn Eastern Med jumping
16/11/2016 Cimarex Energy 600 600 0 D&C capital, from investor pres
17/11/2016 Cabot Oil & Gas 380 575 51 Investor presentation, from 40 wells to 70 wells drilled 21/11/2016 Ecopetrol 1,398 2,850 104 Budget announcement, exploration from 282m to 650m 28/11/2016 Advantage Oil & Gas 140 205 46 Guidance announcement
05/12/2016 PDC Energy 410 750 83 Guidance announcement
07/12/2016 Chevron 20,200 17,300 -14 Guidance announcement
08/12/2016 Cenovus Energy 807 1,075 33 Guidance announcement
12/12/2016 Baytex Energy 215 325 51 Guidance announcement, seimic and land 1%
12/12/2016 EQT Corporation 1,000 1,500 50 Guidance and presentation
13/12/2016 Consol Energy 205 555 171 CMD
14/12/2016 Husky Energy 720 1,195 66 Guidance announcement
14/12/2016 Raging River Exploration 210 310 48 Guidance announcement
18/12/2016 Resolute Energy 125 225 80 Guidance announcement
19/12/2016 Gran Tierra Energy 145 225 55 Guidance announcement
04/01/2017 Concho Resources 1,300 1,500 15 1.3-1.5bn
04/01/2017 Antero Resources 1,300 1,300 0 D&C budget
05/01/2017 Crew Energy 100 200 100 Guidance announcement
05/01/2017 Gulfport Energy 586 913 56 Pro-forma for 2016 incl Vitruvian
05/01/2017 Cimarex Energy 600 600 0 Presentation
05/01/2017 Penn West Energy 95 180 89
05/01/2017 Bellatrix 77 105 36
10/01/2017 PTTEP 1,100 1,567 42
11/01/2017 Tullow Oil 900 500 -44 Exploration limited to USSD 125m
11/01/2017 Kosmos Energy 675 175 -74 Has farmed down in Mauritania/Senegal to BP, Ghana down
11/01/2017 MEG Energy 125 590 372
12/01/2017 Premier Oil 690 350 -49
12/01/2017 Hess Energy 1,900 2,250 18 Exploration 350, mainly Guyana
16/01/2017 AkerBP 1,220 1,320 8
17/01/2017 Laredo Petroleum 420 530 26
19/01/2017 Woodside 1,406 1,300 -8 Exploration flat at USD 325m, we had 1.5bn for 17' 19/01/2017 Lundin Petroleum 1,050 1,300 24 Exploration and appraisal USD 210m, we had 1057m for 17'
19/01/2017 CNOOC 7,621 9,503 25 We had USD 9.0bn for 16', 8.6bn for 17'
23/01/2017 Sanxhez Energy 275 450 64
18/01/2017 Pengrowth Energy 65 125 92
25/01/2017 Murphy Oil 605 890 47
25/01/2017 Continental Resources 1,100 1,950 77
01/02/2017 Exxon 14,547 16,700 15 Group capex 22bn, activity driven
Sum 134,422 138,352 3
Pure play North America 19,693 27,043 37
Diversified 114,729 111,310 -3
Source: SEB, Companies
SEB Equity Research 06 February 2017 12
Equity and credit investment ideas
In our equity coverage, these are our top equity investment ideas Statoil – Fuelled by higher oil price – Buy, TP NOK 190 (+23%)
● We have raised our target price from NOK 180 to NOK 190 and reiterate Buy.
● FCF should turn positive in 2017 for the first time in five years, despite muted oil price.
● We are 6%-15% above consensus on EPS for 2017E and 2018E.
● We argue that the implied oil price in Statoil is around USD 55/bl versus USD 70-75/bl as many argue.
● We expect the CMD to be well received.
● Gearing peaked in Q2 2016 and should drop below the 30% level in Q4.
● Counter-cyclical actions taken – we expect more.
AkerBP – Cash machine – Upgrade to Buy, TP NOK 180 (+17%)
● We have increased our target price to NOK 180 and upgraded our recommendation from Hold to Buy.
● An attractive production profile.
● Very strong cash flow (from USD 400m to USD 1.2bn in four years).
● Solid balance sheet (NIBD/EBITDA < 1.0x in 2018).
● Superb asset portfolio (mix of producing and development assets).
● Robust and growing dividend (can be maintained with oil price at USD 30/bl, dividend could easily be doubled).
● War chest and capability to do more M&A and organic investments (over USD 3bn based on our estimates.
Aker Solutions – order intake creeping up – Buy, TP NOK 51 (+15%)
● Growing order intake in 2017 as oil companies are likely to sanction significantly more projects as project costs have come down.
● Strong balance sheet with no refinancing risk.
● Earnings trough in 2017, making profit in the worst year in the worst industry downturn for 30 year.s
● Valuation based on long-term margin of 7%, sensitivity NOK 12/sh for 1% change in margin.
Subsea 7 – Improved visibility for 2017 – Buy, TP NOK 125 (+10%)
● High revenue visibility for 2017 with backlog covering 90% of revenue estimates.
● Growing order intake in 2017 on more projects being sanctioned, building visibility for 2018.
● Strong balance sheet with USD 770m net cash.
● 2017E EV/EBITDA 4.1x, FCF yield 9%, P/BV 0.8x.
SEB Equity Research 06 February 2017 13 Prosafe - Rejuvenation in accommodation – Buy, TP NOK 70
● We resume our coverage of Prosafe with a Buy recommendation and a target price of NOK 70. The investment case is based on our view of an offshore accommodation market set to improve, with a supply side characterised by 25% less capacity from peak coupled with increased demand across most segments.
● Our bottom-up analysis of accommodation demand over the past 10 years provides an important insight into how we should think of MMO – the single most important sub- segment of demand. Although some part of the maintenance is more tilted towards an oil company opex line, overall MMO demand is a levered game on oil companies’
investment strategies – which we believe are set to turn.
● In such a scenario we believe new relevant accommodation units can hit a mid-cycle valuation between USD 200-250m, relative to the implied value of USD 180m in the current Prosafe share price.
Archer – A new Archer is emerging – Buy, TP NOK 20
● Although Archer still has high financial leverage and will have to reach an agreement with creditors in 2017, we believe such discussions will become more constructive with the improvement in financial results, cash generation and positive market development in key segments.
● The huge restructurings that have taken place in Archer in the last couple of years are starting to bear fruit. Significant cost and capex cuts, changes in management and the board, combined with a recovery in activities in many segments have put Archer in a position where we estimate the company could already be generating free cash flow in 2017, covering interest, capex and taxes.
Akastor – MHWirth has a high strategic value - Buy, TP NOK 16 (+12%)
● Impressive transition of the company, made four divestments in 2016 all at value above market expectations.
● Flexibility now to consider potential new investments
● The valuation of MHWirth is likely to correlate with the fundamentals in the offshore drilling market, not with new rig orders.As such, a re-valuation can materialise sooner than the market currently implies.
● NAV NOK 19.2 per share, trading at 24% discount to NAV BW Offshore – De-risking value – Buy TP NOK 38
● BW Offshore is a leading global provider of floating production services to the oil and gas industry. The company is the world’s second largest contractor with a fleet of 14 FPSOs.
● Two reasons why this is attractive exposure to macro development:: i) Oil companies will seek cash flow and reserves, hence extending existing producing assets which have break-even levels below current oil price make sense and ii) The number of FIDs will increase: 2017 should show an uptick, positive for FPSO demand and activity.
● We believe the positive revision to our overall industry market outlook, including positive revision to our E&P spending, strengthens our FPSO market view. A more active FPSO market should benefit BWO, even if new awards and projects for BWO are not on the short-term agenda. We believe our updated industry view means a higher likelihood that the options in BWO’s portfolio will be exercised.
SEB Equity Research 06 February 2017 14
In our credit coverage, these are our top credit investment ideas
AkerBP – Credit view upgraded to BB+/Stable – Overweight (DETNOR02)
● After the merger the production is doubled to around 120 kboe/d and has become more diversified
● The reserves have increased from to 711mmboe from 498mmboe
● Fully funded at close to USD 32/boe flat oil price from Q1 2017 given existing credit facilities, from previously USD 45/boe driven mainly by the boost in cash flow
● LTV has declined to 45% from above 60% including dividends
● Leverage has declined to 2.8x from above 4.7x prior to the transaction and will continue to decline to 1.4x year-end 2018 based on our estimates
BW Offshore – Bonds still trading at attractive levels – Overweight all bonds Improved and comfortable liquidity situation after the refinancing
● Solid project execution for the Catcher FPSO (roughly 40% of 2018 EBITDA)
● When Catcher FPSO comes on stream Q4 2017 we estimate a significant deleveraging from above 5.5x at the end of 2017 to 2.9x at the end of 2018 due to the strong increase in the operational cash flow
● Firm EBITDA backlog year-end 2016 of USD 2.2bn, but USD 4.3bn including all options. This gives solid asset backing given the estimated outstanding net debt of USD 1.7bn year-end 2016
● Low risk of clients not exercising options given that the current oil price exceeds the running opex for all of the BWO operated fields
SEB Oil and Oil Services, equity and credit recommendation overview
Source: SEB Equitues
E&P Old rec New rec Old TP New TP Share price Potential Mkt cap (USDm)
Statoil Buy Buy 180 190 155 23% 61,101
AKER BP Hold Buy 160 180 153 17% 6,302
Lundin Petroleum 199 7,732
Subsea, development, other Old rec New rec Old TP New TP Share price Potential Mkt cap (USDm)
Subsea7 Buy Buy 125 116 8% 4,605
Aker Solutions Buy Buy 51 45 14% 1,477
BW Offshore Buy Buy 36 38 24 58% 541
Akastor Buy Buy 16 15 7% 497
Prosafe unrated Buy 70 34 105% 297
Archer Buy Buy 20 15.7 27% 111
Kværner Hold Hold 8.7 10.6 -18% 346
Seismic Old rec New rec Old TP New TP Share price Potential Mkt cap (USDm)
PGS Sell Buy 18 35 28 26% 1,148
Spectrum Buy Buy 50 40 25% 260
TGS-Nopec Sell Hold 100 200 192 4% 2,383
Polarcus Hold Hold 0.55 0.4 49% 24
Offshore drillers Old rec New rec Old TP New TP Share price Potential Mkt cap (USDm)
Fred Olsen Energy Hold Hold 16 19 -14% 151
Awilco Drilling Hold Hold 31 35 -11% 128
Seadrill Sell Sell 10 16 -36% 975
Songa Offshore Sell Sell 0.25 32 -99% 436
Ocean Rig UDW Sell Sell 0.5 1.4 -63% 111
Pacific Drilling Sell Sell 1.1 3.4 -68% 72
Credits
Company Reccommendation
BW Offshore Overweight
AkerBP Overweight
Songa Marketweight
Aker Solutions Marketweight
Statoil Marketweight
Seadrill Underweight
Ocean Rig Underweight
Pacific Drilling Underweight
Fred Olsen Energy Underweight
SEB Equity Research 06 February 2017 15
AkerBP – Buy
Cash machine
● Up to Buy with new target price of NOK 180 on higher oil price estimate
With our expectation of a significantly tighter oil market in 2019 with an oil price of USD 80/bl, we have increased our target price to NOK 180 and upgraded our recommendation from Hold to Buy. We find the AkerBP investment case very appealing, with an attractive production profile, strong cash flow, a solid balance sheet, superb asset portfolio, robust and growing dividend and a war chest and capability to do more M&A.
● Oil market to tighten substantially to 2019 – we expect oil price of USD 80/bl In a separate report today (Here we go again, 6 February), we forecast the oil market to tighten gradually in 2017 (-0.4m bl/d) and 2018 (-0.5m bl/d) and markedly in 2019 (- 1.2m bl/d). Although we expect strong growth in US production (+2.9m bl/d over three years), we do not believe this is enough to offset the impact from production declines in the rest of non-OPEC stemming from massive capex cuts in addition to close to flat OPEC production and an at-trend demand growth of 1.4% CAGR. As a result of this and our thesis on price dynamics, we forecast an oil price at USD 55/bl in 2017, USD 60/bl in 2018 and USD 80/bl in 2019.
● Significant dividend, investment and M&A capacity
Based on our forecasts for the oil price, production, costs and the company’s tax position, AkerBP’s free cash flow will grow from USD 400m in 2017 to above USD 1bn in 2019. We have assumed a CAGR of 10% in our dividend forecasts, but the dividend potential and capacity is significantly above this. We identify headroom for further transactions, organic investments and a growing dividend.
Recommendation Upgrade. Date and time of decision to change recommendation: 2 Feb 2017, 17:00 CET
Share Price Performance (%)
-1M -3M -12M
AKERBP.OL (4) 20 206
Relative Norway (4) 6 135
Relative sector (2) 11 156 Key Data (2016E)
Price (NOK) Target price (NOK) - changed from (NOK) Recommendation - changed from Risk Reuters Bloomberg Market cap (NOKm) Market cap (USDm) Market cap (EURm) Net debt (USDm) Net gearing
Net debt/EBITDA (x) 3.0
Shares fully dil. (m) Avg daily turnover (NOKm) Free float
153.20 180.00 160.00 Buy
5,848 Hold
High
AKERBP NO
6,275 51,741 AKERBP.OL
30%
2,462 97%
337.7 47.1
Share Price (12M)
50 70 90 110 130 150 170
Feb Apr Jun Aug Oct Dec Feb
Absolute performance (blue) / Relative to Norway (grey).
Financials (USD)
Year end: Dec 2014 2015 2016E 2017E 2018E
Revenues (m) 464 1,222 1,256 2,395 2,499
Operating profit (m) (299) 41 199 612 830
Net profit (m) (279) (313) 122 168 260
EPS (reported) (1.68) (1.54) 0.51 0.50 0.77
EPS (adjusted) 0.41 0.58 0.71 0.73 1.01
DPS 0.00 0.00 0.53 0.74 0.81
Revenue growth (%) 189.0 163.2 2.8 90.6 4.3
Operating profit growth (%) 0.0 n.m. 380.0 208.3 35.6
EPS (adjusted) growth (%) 185.4 43.3 22.5 3.2 37.1
Operating margin (%) (72.6) 3.6 15.7 25.6 33.2
ROE (%) (47.4) (63.1) 8.5 6.7 10.6
ROCE (%) (13.9) 1.5 5.1 12.3 17.6
PER (x) 13.2 10.8 26.1 25.3 18.4
Free cash flow yield (%) (56.0) (27.9) (6.1) 7.0 8.9
Dividend yield (%) 0.0 0.0 2.8 4.0 4.4
P/BV (x) 1.67 3.75 2.47 2.56 2.57
EV/DACF (x) (48.03) 7.02 10.41 7.21 6.59
EV/EBITDA (x) 14.8 4.0 10.5 5.1 4.4
EV/EBIT (x) (10.3) 92.0 44.0 14.0 10.0
Operating cash flow/EV (%) (1.3) 8.5 6.8 8.5 9.6
EV/Capital employed (x) 1.05 1.28 1.70 1.75 1.80
Source for all data on this page: SEB (estimates) and SIX/Thomson Reuters (prices)
Analyst
Halvor Strand Nygård (47) 2100 8626
halvor.strand.nygard@seb.no
SEB Equity Research 06 February 2017 16
A cash machine
Based on our forecasts for oil price, production, costs and the company’s tax position, AkerBP’s free cash flow will grow from USD 400m in 2017 to above USD 1bn in 2019. We have assumed a CAGR of 10% in our dividend forecasts, but the dividend potential and capacity is significantly above this. Furthermore, the additional investment and M&A capacity is substantial (over USD 3bn based on our estimates).
FCF before and after dividend (USDm) and estimated dividend per share (USD/share)
Source: SEB
Estimated production AkerBP* (000s boe/d)
AkerBP from Q4 2016 onwards Source: SE
0.53
0.74 0.81 0.89 0.96 1.04 1.11 1.18
155
438 556
1,208
937 829
1,063
1,322
188 287
915
618 485
695
928
2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
FCF FCF after DIV
FCF (USDm)
Dividend (USD/share)
60 77
130 127
119
135 136 139
149
- 20 40 60 80 100 120 140 160
2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
1,000 boe/d
Alvheim FPSO Skarv Valhall/Hod Ula/Tambar Ivar Aasen Gina Krog Johan Sverdrup Other
SEB Equity Research 06 February 2017 17 Oil price “breakeven” with dividend floor at 3.5x NIBD/EBITDAX
Source: SEB
An overly conservative balance sheet
With solid cash flow generation we forecast net debt to drop by USD 0.2bn this year and again to USD 2bn at the end of 2018. On our estimates, gearing in the same period will drop below 1.0x (NIBD/EBITDAX). Therefore, both on an absolute and on a relative basis (versus E&P peers), we find the balance sheet to be too conservative. On this basis, we argue there is definitely headroom for increased leverage to finance further transactions, additional organic investments and a growing dividend.
NIBD (USDm) and gearing (NIBD/EBITDAX)
Source: SEB 28
34
39 35 37 37
34 55
60
80
70
64 65 66
0 10 20 30 40 50 60 70 80
2017E 2018E 2019E 2020E 2021E 2022E 2023E
Brent oil price (USD/bl)
Oil price "breakeven" SEB base case
2,532 2,462
2,274
1,987
1,072
454
2.2x 2.2x
1.1x
0.9x
0.3x
0.1x
0.0x 0.5x 1.0x 1.5x 2.0x 2.5x
0 500 1,000 1,500 2,000 2,500 3,000
2015 2016E 2017E 2018E 2019E 2020E
NIBD/EBITDAX)
NIBD (USDm)
NIBD NIBD/EBITDAX
SEB Equity Research 06 February 2017 18 NIBD/EBITDA for E&P peer group NIBD/2P for E&P peer group
Source: SEB, Bloomberg Source: SEB, Bloomberg
0.0x 0.5x 1.0x 1.5x 2.0x 2.5x 3.0x 3.5x 4.0x 4.5x 5.0x
2016 2017 2018
NIBD/EBITDA
AKERBP LUPE Premier Tullow
14.7
7.9
5.4
3.3
0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 16.0x 18.0x
Tullow Premier Lundin AkerBP
NIBD/2P (USD/boe)
SEB Equity Research 06 February 2017 19
Estimates
Estimates (USDm)
P/L (USDm) Q1/16 Q2/16 Q3/16 Q4/16E 2015 2016E 2017E 2018E 2019E
Revenues 205 256 248 548 1,222 1,256 2,395 2,499 3,030
Exploration expenses -36 -36 -31 -46 -76 -149 -168 -120 -120
Production costs -34 -39 -32 -141 -141 -247 -526 -481 -429
Other operating expenses -5 -5 -6 -10 -52 -27 -40 -40 -40
EBITDA 129 175 179 351 953 834 1,661 1,858 2,441
DD&A -114 -120 -115 -240 -481 -589 -969 -948 -868
Impairments -38 20 -8 -20 -430 -47 -80 -80 -80
EBIT -23 74 56 92 41 199 612 830 1,492
Financials 8 -29 -5 -31 -155 -57 -122 -111 -95
PTP -16 45 51 61 -114 142 490 719 1,397
Taxes 48 -39 13 -42 -199 -20 -322 -458 -870
Net profit 32 6 63 20 -313 122 168 260 527
EPS 0.16 0.03 0.31 0.06 -1.54 0.56 0.50 0.77 1.56
Adjusted EPS 0.35 -0.07 0.35 0.12 0.58 0.75 0.73 1.01 1.80
Assumptions
Production (' boe/d) 60,617 62,440 59,838 126,629 60,004 77,468 129,871 127,431 118,619
Brent oil price (USD/bl) 35 46 50 50 52 45 55 60 80
Oil price realised (USD/bl) 37 49 50 50 55 47 55 60 80
Opex/boe (USD/boe) -6 -7 -6 -12 -6 -9 -11 -10 -10
DD&A/boe (USD/boe) -21 -21 -21 -21 -22 -21 -20 -20 -20
Cash flow
Profit/loss before taxes -16 45 51 61 -114 142 490 719 1,397
Taxes paid 0 -1 0 0 -321 -1 0 -86 -239
Other 204 83 201 263 1,122 751 971 948 868
Cash-flow operations 189 127 251 324 688 891 1,461 1,580 2,027
Capex -231 -323 -258 -344 -1,030 -1,155 -1,023 -1,024 -819
Other -1 -2 422 0 -138 418 0 0 0
Cash-flow investments -232 -325 164 -344 -1,168 -736 -1,023 -1,024 -819
Free cash flow -43 -197 415 -20 -480 155 438 556 1,208
Dividend 0 0 0 -63 0 -63 -250 -269 -294
Equity 0 0 0 0 0
Debt 100 112 300 -553 285 -41 -188 -287 -915
Cash-flow financing 100 112 300 -616 285 -104 -438 -556 -1,208
Net change in cash 57 -85 715 -636 -195 51 0 0 0
Cash at beginning 91 155 68 786 296 91 150 150 150
Cash at end 155 68 786 150 91 150 150 150 150
NIBD (USDm) 2,584 2,783 2,380 2,462 2,532 2,462 2,274 1,987 1,072
Dividend (USD/share) 0.53 0.74 0.81 0.89
Source: SEB
