European Event-Driven Analyst

Jesus Rodriguez Aguilar

Jesús is an Insight Provider (Event-driven) on the Smartkarma network, where he looks across sectors at opportunities arising from securities mispricing (both credit and equity), share classes, bid announcements, prospective bids, and special situations. He has served as Economic and Business Advisor at the Spanish Congress in Madrid. Prior to that, he has worked in the City of London: as a Credit Analyst at Bloomberg; Event-driven associate at former boutique European Research; and doubled as Special Situations and Equity-linked VP (convertible bonds) at Merrill Lynch. Jesús has an MBA from the London Business School, a BA (Hons.) degree in Economics from the Complutense University in Madrid, and a BA (Hons.) in Law from U.N.E.D., also in Madrid.

Norwegian Energy Co (NOR NO): Shell Divests Danish Assets to Noreco for $9/Boe 2P Reserves

Frontera Energy (FEC CN): Mixed Results at Acorazado Reiterate Investor Concerns

Equity Bottom-Up

Norwegian Energy Company / Equity Bottom-Up

Noreco was during the noughties Norway’s second-biggest E&amp;P. High production costs, a falling oil price (during great financial crisis) and a suboptimal capital structure conspired against Noreco. The crisis was compounded by damage to its Siri oil platform in the Danish North Sea in August 2009, with a subsequent production shutdown. The turnaround started in 2014, it involved a debt-for-equity swap, asset sales, new management and new financing and capital structure.
On 17 October 2018, Noreco announced the $1.9 bnagreement for the acquisition of SOGU, which contained Shell’s Danish upstream assets including a 36.8% participating interest in the Danish Underground Consortium.
Nowadays, Noreco is the second largest E&amp;P company in Denmark with &gt;45 Mboe/day post completion of the Tyra redevelopment by mid-2023e.
Considering the recent share underperformance and NAV discount, the current share price seems attractive. I find Noreco's valuation undemanding, with reasonable growth potential. The company trades at a P/NAV of 0.4x. Bearing in mind that the company has regained scale and its assets are operated by Total, in an area free of political risk, its share price is arguably cheap, in my view. As such, this seems a favourable time to secure exposure to producing assets at a 49% discount to my valuation, at Brent $68.5/bbl post resumed Tyra production.
Catalysts. Tyra redevelopment on track to lift production to &gt;45 MBOE/day from 2023e. The partnership (operated by major Total) is working to redevelop/upgrade the Tyra hub, on budget for resumed production in mid-2023e. I expect this to lift Noreco’s net production from 28.4 Mboe/day in 2020e (opex USD 20/boe) to &gt;45 Mboe/day. From that point, Noreco has indicated a production level of c. 50 mboe/day combined with an opex of c. $12/boe, laying the foundation for a very strong FCF (note the increase in estimates from $8.6 mn to $405.7 mn).
Noreco could generate a FCF yield &gt;60%, and given a refinancing of the RBL and bond, could pay a dividend and deleverage completely from 2024/25 onwards, based on $68.5/bbl Brent.
Risks. Execution risk on Tyre (delays and/or higher costs), paramount for Noreco's strategy. Lower production than planned. Breach of covenant of 5x NIBD/EBITDAX during Tyre redevelopment. Lower future oil prices, although Noreco seems to be hedging appropriately. The stock is not very liquid (a typical daily volume is under $500,000). Leverage. 
Trade recommendations
<ul>
<li>Long NOR 06/26 9% SR BDS, as it currently yields 9%.</li>
<li>Long NOR NO, TP NOK 260.</li>
</ul>

Noreco was during the noughties Norway’s second-biggest E&amp;P. High production costs, a falling oil price (during great financial crisis) and a suboptimal capital structure conspired against Noreco. The crisis was compounded by damage to its Siri oil platform in the Danish North Sea in August 2009, with a subsequent production shutdown. The turnaround started in 2014, it involved a debt-for-equity swap, asset sales, new management and new financing and capital structure.
On 17 October 2018, Noreco announced the $1.9 bnagreement for the acquisition of SOGU, which contained Shell’s Danish upstream assets including a 36.8% participating interest in the Danish Underground Consortium.
Nowadays, Noreco is the second largest E&amp;P company in Denmark with &gt;45 Mboe/day post completion of the Tyra redevelopment by mid-2023e.
Considering the recent share underperformance and NAV discount, the current share price seems attractive. I find Noreco's valuation undemanding, with reasonable growth potential. The company trades at a P/NAV of 0.4x. Bearing in mind that the company has regained scale and its assets are operated by Total, in an area free of political risk, its share price is arguably cheap, in my view. As such, this seems a favourable time to secure exposure to producing assets at a 49% discount to my valuation, at Brent $68.5/bbl post resumed Tyra production.
Catalysts. Tyra redevelopment on track to lift production to &gt;45 MBOE/day from 2023e. The partnership (operated by major Total) is working to redevelop/upgrade the Tyra hub, on budget for resumed production in mid-2023e. I expect this to lift Noreco’s net production from 28.4 Mboe/day in 2020e (opex USD 20/boe) to &gt;45 Mboe/day. From that point, Noreco has indicated a production level of c. 50 mboe/day combined with an opex of c. $12/boe, laying the foundation for a very strong FCF (note the increase in estimates from $8.6 mn to $405.7 mn).
Noreco could generate a FCF yield &gt;60%, and given a refinancing of the RBL and bond, could pay a dividend and deleverage completely from 2024/25 onwards, based on $68.5/bbl Brent.
Risks. Execution risk on Tyre (delays and/or higher costs), paramount for Noreco's strategy. Lower production than planned. Breach of covenant of 5x NIBD/EBITDAX during Tyre redevelopment. Lower future oil prices, although Noreco seems to be hedging appropriately. The stock is not very liquid (a typical daily volume is under $500,000). Leverage. 
Trade recommendations

Long NOR 06/26 9% SR BDS, as it currently yields 9%.
Long NOR NO, TP NOK 260.


Norwegian Energy Company: Overlooked and Cheap