On 3rd February, Lundin Petroleum held its Capital Markets Day, which included new guidance on capex, opex, production profiles and 2016 drilling plans. However, greatest emphasis was placed upon a review of the company's tax position, and the benefit of the weakening Krona on costs.
The CEO expressed strong frustration with shareholders and the low valuation being attributed to the company, remarking that closer examination of the company’s financial statements should be undertaken, specifically around the tax and FX hedging position. Indirect reference was made to the recent Statoil transaction, where Statoil was willing to pay SEK120/share, a premium of 28% to the share price at the time and banks’ willingness to extend Lundin Petroleum’s RBL debt facility.
Tax synergies make a sizeable contribute to the value of Norwegian E&Ps such as Lundin Petroleum, which are subject to a tax rate of 78% on their profits. Lundin provided an update on its tax pools, which total NOK16.8bn (c. USD2 billion). However, one quote cut to the chase: "if Brent stays below $65/bbl, Lundin won't pay any cash taxes until the Johan Sverdrup field is brought on stream in late 2019".
In 2015, the company underspent on its USD1.28 billion capex budget by c.USD250 million, and a significant portion (c.50%) was due to the weakening Norwegian Krona. Savings were also achieved on operating costs and salaries in Norway. Looking ahead, management sees potential for further saving – Phase 1 development costs at Johan Sverdrup have fallen as a result of the current deflationary environment, but given 60% of the capex is priced in Norwegian Krona (at NOK6/USD) costs should fall further as the currency now trades at NOK8.6/USD. Importantly, Lundin has locked in a significant portion of this gain – the company has hedged NOK7.5 billion (USD890 million) at c.NOK8.4/USD over the period 2016-19.
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