DETNF - Aker BP And Oil In General Depends On China

Summary

• Aker BP is pumping way more oil now that it has progressed to Phase 2 in Johan Svedrup.
• Aker BP stills trades very cheaply along with a lot of other commodities that are presumed at the end of their cycle.
• Supply is not such an immediate concern for oil speculators, it's about demand. China's reopening has meant bets are starting to build.
• However, we recognise the danger of blowback as China could reintroduce inflation and lengthen tightening cycle in global markets.

Aker BP ( OTCPK:DETNF ) is a stock we began to cover in the Norwegian oil space a little while ago, recognising that it has premium value with assets primarily located in the Norwegian Continental Shelf, which is one of the lower breakeven point areas in the world. They are growing production, but more importantly there is latent demand that could drive up oil prices, and therefore the price of oil stocks, much further than current levels. However, we think there are blowback risks from a China reopening that could affect asset prices generally. Still, stocks like Aker BP look good, although we still think there are superior plays in oil.

Specifics on Aker BP

In our last article on Aker BP we covered some critical elements that could lead to idiosyncratic growth in earnings, which is that on their major oil field of Johan Svedrup they are entering phase 2. Comprehensive of all Aker BP's assets this means that production volumes are likely to grow about 30%. This is coming into effect as we speak.

They are also acquiring Lundin Energy which is an E&P business and continues to consolidate their bet on a secular oil market and grow they commodity-leveraged revenue. Obviously, for this consolidation and investment to have been well conceived, oil prices are going to have to go up - quite a lot of cash was used in the deal to buy Lundin after all.

Latent Demand

Current oil prices stand at around $80 per barrel for the WTI. They were hovering down around $70 for a little while, primarily on speculation around the demand environment. Softening demand in the US and Europe, which was apparently something the market hadn't fully expected, put pressure on oil prices. At this point, Chinese demand was understood to be dormant after a really bad 2022, related both to real estate markets but of course consumer markets as the country was in heavy lockdowns with the COVID-zero policies.

While equity markets are more confident about an economic recovery, plenty of traders are responding to exactly what they are seeing, which is that a consistent Fed narrative of keeping rates high is likely to keep a cap on European and US demand. However, now we are going to see some recovery in Chinese demand as that market emerges from lockdowns, with COVID-zero now more or less entirely retired after its spectacular economic failure. This has been the main speculative impetus for oil prices coming to $80 from $70. However, there are still challenges, as supply chain issues could flare up with sick workers, and inflating commodities again from a reignited Chinese demand and travel, after years of not traveling, could all leave money on the table as far as the reopening goes. There is some uncertainty about how quickly China will get back on its feet too. Regardless, oil prices are trending higher as the recovery in China, supported also by amnesty in the real estate and lending markets, starts to create effective liquidity for consumers and begins to flow into products again and drive key inputs like crude. All the money saved up during the pandemic could similarly flow into products that will support the crude price upstream.

Aker BP's consolidation with Lundin sharpens their focus on premium assets with the best threshold margins to produce shareholder value. Moreover, new productivity is coming online at a great time. The current Aker BP multiple is 7.18x in PE. Average prices were about 10% higher for both the main indices in 2022 than current spot prices. Assuming these prices hold on no new evolution in Chinese demand, and no further deterioration in global demand, run-rate PE is at around 8x, which is still low and offers a great earnings yield. The dividend yield is good and well-covered at 6.35% too. Since Chinese demand is likely to continue to improve, and since some amount of major supply chain bottlenecks are almost fully loosening now that inventories have had time to fill since before the pandemic, global demand should remain positive since tightening cycles are indeed entering their later stages, Aker BP looks well positioned. However, the best deal continues to be Japan Petroleum Exploration ( OTCPK:JPTXF ), which is also exposed to gas prices. With Russian supply likely to be out of the hands of western markets for a year or so more to come, JAPEX's gas-based revenues are likely to stay constructive on the supply side in a 2023 which at no point should benefit from Russian product in the terminals.

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