Lundin Energy (LUNE.SS, Market Cap £6630m, SEK 277.9, 5.5% of JIC Portfolio, Medium Risk/High Reward =5.0% target weight)
Six months ended 30th June 2021
Conclusion: An excellent first quarter with record results benefiting from increased production and the stronger oil price. For me, the most important figures are production, free cash flow and debt. Production jumped 18.2% to 186.4 Mboepd up from 157.7 Mboepd in H1 2020. In fact, Q2 run rate was 189.8 Mboepd. Free cash flow per share was $3.34 up from $1.34 and net debt dropped from $3.79 bn to $3.19 bn. Looking forward, there is the potential for increased production from Johan Sverdrup as Phase 2 comes online and hopefully success from two exploration wells in the Edvard Grieg area in H2 this year. It says it is on track to produce over 200 Mboepd by 2023 and Lundin has generally been a company that does not over promise. Beating expectations is the name of the game. All this adds up to a highly cash generative company, which while reducing debt has plenty of leeway to ramp up dividends. This year it increased the annual dividend from $1 per share to $1.8. I look forward to the announcement for next year’s and expect another decent hike. The shares have come off over the last few weeks and I continue to believe that a price of SEK330 would more accurately reflect its current progress (that would represent a 4.7% 2021 yield to a Swedish investor). I have it as Medium Risk/High Reward = 5.0% target. I'm at 5.5%. Happy Holder!
· Record quarterly revenue of USD 1.3 billion with a realised oil price of USD 68 per barrel for the second quarter
· Record free cash flow generation of MUSD 949 for the six-month period, operating costs below guidance at USD 2.8 per boe and net debt reduced to below USD 3.2 billion
· Completed USD 2 billion inaugural investment grade bond issuance
· Record quarterly production above guidance at 190 Mboepd and full year production guidance increased to between 180 to 195 Mboepd
· Johan Sverdrup Phase 2 planned offshore installations completed on schedule and full field production capacity increased to 755 Mbopd gross when Phase 2 comes online in the fourth quarter of 2022
· Key projects on track to deliver growth to over 200 Mboepd by 2023 and pipeline of new projects being matured to sustain production
· Key projects on track to deliver growth to over 200 Mboepd by 2023 and Kobra East/Gekko project sanctioned
· Decarbonisation plans on track to achieve carbon neutrality from 2025, with around 60% of production already independently certified as carbon neutrally produced
Comments from Nick Walker, President and CEO of Lundin Energy:
“I’m pleased to report record production and financial results in the second quarter, backed by strong operating performance and the further strengthening of oil prices. Whilst certain challenges of the COVID-19 crisis will remain for the foreseeable future, we’ve normalised the management of these and continue to deliver on our main business priorities.
“Our world class producing assets continue to outperform with excellent production efficiency, along with industry leading low operating costs, delivering production in the quarter above the mid-point of the guidance range, leading us to increase our full year production guidance.
“Johan Sverdrup keeps on delivering above expectations. Phase 1 production ramped up to 535 Mbopd gross ahead of schedule and the full field production guidance has been lifted to 755 Mbopd. Phase 2 of the project is making good progress, with key offshore installations completed on schedule, and the project remains firmly on track for first oil in the fourth quarter of 2022.
“At the Greater Edvard Grieg Area, we continue to deliver on the projects that support the long-term plateau extension, with excellent results so far from the Edvard Grieg infill well programme and the Solveig and Rolvsnes projects on track for first oil in the coming weeks. There’s lots more to come and we’ll see the results from two exciting exploration wells in the area in the second half of the year.
“Our key projects remain on track to deliver growth to over 200 Mboepd by 2023. We’ve a strong track record of growing resources and I’m confident that we can continue to sustain the business at these production levels. We have a pipeline of potential new projects, the first of which has just been sanctioned, and an exciting exploration programme, targeting material resources.
“The business delivered record financial results, with free cash flow of MUSD 949 for the first six months and net debt reduced to below USD 3.2 billion. This demonstrates the quality of our strong cash generative business, allowing us to fund growth, cover dividends and deleverage. On the back of attaining three investment grade credit ratings, the Company successfully completed a USD 2 billion inaugural bond issuance, the proceeds of which were used to pay down existing corporate credit facilities.
“We continue to make good progress on our decarbonisation plans, with around 60% of our production today carbon neutrally produced, and we’re on target for the business as a whole to be carbon neutral from 2025. We’ve already made several certified carbon neutrally produced crude sales, which I believe will become a key value differentiator for Lundin Energy.
“We’ve delivered record results in the first half of the year, our key business priorities are on track and looking forward I’m confident the business will continue to deliver resilient sustainable growth.”