In a September 13 research note, Pareto Securities analysts discussed their revised oil price deck and top picks in the oil exploration and production (E&P) space today.
"We think the still out of favor E&P sector offers a good risk/reward due to the combination of high free cash flow and low relative valuations," the analysts wrote.
On the heels of oil exceeding US$70 per barrel (US$70/bbl), the analysts relayed they increased their short-term oil price forecast but maintained their long-term one. Now, they expect the Brent oil price to average US$75/bbl in 2022, US$78/bbl in 2023, and US$70/bbl in 2024. Pareto forecasts it to subsequently decrease gradually to about US$60/bbl and remain there long term.
"This view is driven by a continued demand recovery and [the] Organization of the Petroleum Exporting Countries (OPEC) managing the supply side," the analysts wrote. "The latter is also aided by years of low investments in non-OPEC supply that looks unlikely to change in the current environment."
The analysts reviewed their seven top picks of oil explorers/producers, on which they raised their target prices by an average of 24% in light of Pareto's higher oil price projections.
Pareto favors two companies because of their strong balance sheet, highly profitable production/development portfolio, expected dividend growth, and much lower carbon footprint than the industry's average.
These companies are Aker ASA (AKER:Oslo): Aker has guided to producing 210,000 to 220,000 barrels of oil per day in 2021. The company's development portfolio, with a US$27/bbl break even oil price, is expected to deliver 70% production growth by 2028. Pareto has a Buy rating and a NOK280 per share target price (previously NOK220) on Aker BP.
Lundin Energy AB (LNEGY:OTCPK): The company's full-year 2021 is estimated to be about 188,000 barrels of oil equivalent per day (188 Mboe/d). Pareto expects 2023 production guidance to exceed 200 Mboe/d. Pareto now has a Buy rating, changed from Hold, and a SEK340 per share price target (up from SEK290) on Lundin.
Four more companies are Pareto top picks because of their low pricing compared to current cash flow generation.
They are DNO International (DNO:OSE): Free cash flow and distributions should result in a rerating, the analysts noted. Given its new oil price forecasts, Pareto expects DNO will generate its entire 2021 enterprise value (EV) in cash flow within three years' time. Pareto has a Buy rating and an NOK18 per share price target (NOK14) previously on DNO.
International Petroleum Corp. (IPCO:TSX): Pareto increased its per share target price on this company to SEK55 from SEK36. It maintained its Buy recommendation. International Petroleum could start distributing dividends around the end of 2022.
Africa Oil Corp. (AOI:TSX): Its continued progress in Nigeria should boost the company's share price. Management is still investigating acquisition opportunities. Pareto has a Buy recommendation and new price target of SEK14 per share, up from SEK12.
Panoro Energy ASA (PEN:OSE; 1PZ:FRA): Given Pareto's revised oil price, Panoro is on track to generate its whole EV in free cash flow before year-end 2024. Within that time frame, in 2023, the company aims to increase production by greater than 30% to 12 Mboe/d. Pareto has a Buy rating and a NOK30 per share price target on Panoro.
As for Pareto's favorite oil company to short, it is Equinor ASA (EQNR:NYSE; EQNR:Oslo), because of its "substantial outperformance and premium pricing compared to peers," the analysts wrote.
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Pareto Securities Disclosures, September 13, 2021
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Please find below an overview of material interests in shares held by employees in Pareto Securities AS, in companies where a recommendation has been produced or distributed by Pareto Securities AS. "By material interest" means holdings exceeding a value of NOK 50 000: Aker, DNO International, Panoro Energy, Equinor.
Overview over issuers of financial instruments where Pareto Securities AS have prepared or distributed investment recommendation, where Pareto Securities AS have been lead manager/co-lead manager or have rendered publicly known not immaterial investment banking services over the previous 12 months: Aker, Panoro Energy.