Aker BP: Better Pick Than U.S. Shale Stocks (OTCMKTS:AKRBF)

Aker BP ASA (OTCQX:AKRBF) (OTCQX:AKRBY) continues to be cheaper than US shale picks despite having substantially higher quality assets, as we detailed in our previous coverage. With substantial latent earnings in scope over the next few years of bringing new assets online, secular production concerns are limited. Norwegian Continental Shelf (the NCS) break even points are a fraction of those in the shale basins, less than half in cash costs per barrel. The reason the opportunity exists is because major allocators such as the Norwegian Sovereign Wealth Fund eschew Norwegian listed picks and picks in oil due to their mandate to diversify and secure Norwegian sovereign wealth that guarantees citizen pensions and welfare. Aker BP is therefore structurally ignored big money where Norwegian markets tend to be pretty marginal other than Equinor (EQNR).

Aker BP Q1 Earnings

Aker Q1 results give us a picture of its production trends. Oil dominated production is down in volume by around 6%. Natgas is basically at the same levels YoY. Realised prices have mostly fallen for Natgas, and as of close of the quarter the realised prices for oil were up in USD terms.

The period is ended March 31. Realised prices for oil will probably be a bit lower in the upcoming quarter. Part of the reason is that the outlining of the phasing out of supply cuts by OPEC+, driven by pressure from the UAE, spooked oil markets.

However, since the rout there’s been some upward pressure on oil prices as US stockpiles have fallen quicker than expected, and the landfall of Hurricane Beryl in Mexico creates a supply tailwind as speculators worry about the supply chain failure points in Mexico. Realised prices will probably be improved by the Q3, or at least have stabilised, in line with Q2 supposing supply tailwinds continue to lift oil prices.

Volumes are trending down for Aker BP as some of its assets begin to naturally decline. However, there are plenty of developments happening on the Norwegian Continental Shelf that is expected to grow their overall volumes in the coming years. But first oil is mainly coming online in 2027.

The total income declines are being entirely driven by these volume trends.

Bottom Line

However, we feel that the stranded asset concerns from before 2020 are no longer as valid. OPEC+ is comfortable pumping oil more slowly given its supply cuts, and in general, there has been a reality check for the electrification trends, particularly as it concerns EVs where a disillusionment cycle is now in play. As supply cuts phase out, there may be renewed pressure on oil prices since the cuts are independent of a forecast of the demand situation, it is a concession to certain countries who were desperate to renew production. However, in this regard all the producers are in the same boat, and shale oil producers would be more exposed since their breakeven costs are considerably higher than producers like Aker BP who are focused on the NCS. At an EV/EBITDA of 1.77x, the discount to the shale oil players is considerable. The cheaper ones trade at 2.88x, considerably more premium than Aker BP. Shale oil is also generally known to be quite underinvested, reflected in recent years of focus on payouts over investment, particularly under Biden, who was viewed as being oil-unfriendly. We don’t feel that the outstanding CAPEX burdens of shale oil producers would be so much less proportionate than at Aker BP, which is also a much larger company in terms of assets than a typical shale player. That shouldn’t be a cause for a discount of Aker BP. The fact is that the Norwegian markets, being passed over by their own massive sovereign funds, are generally ignored. The NOK is also a marginal currency, which doesn’t help. However, with a clear yield, capital appreciation doesn’t need to be the mode of return. The dividend is set to grow and well covered, with the PE at less than 8x, meaning a more than 12% earnings yield against a yield just below 10%.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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