LNDNF - Orron Energy: All About Renewable Energy

2023-04-17 18:23:05 ET

Summary

• Orrön Energy AB (publ) is the remaining business of Lundin Energy focused on renewable energy only.
• As part of the Lundin Group of Companies, this company has access to considerably more resources and experience than would normally be expected.
• Beginning in the first quarter of 2023, the company will report in euros rather than United States dollars.
• The net debt position appears to be fairly conservative.
• Fast growth is always risky, but the organizational backing appears to limit that risk with Orrön Energy AB (publ).

(Note: This article was in the newsletter on April 17, 2023.)

Orrön Energy AB (publ) ( LNDNF ) was the old Lundin Energy before the oil and gas part of the company was acquired by Aker BP ( AKRBF , AKRBY ). Beginning in January 2023, the company will change its reporting from United States dollars to euros. The exchange rate between the two will fluctuate, but for very rough estimation purposes it is basically one-to-one at the time of this article.

As noted above , Orron Energy is a very small portion of the previous Lundin Energy. As such, it should be regarded as basically a new business with a higher degree of risk than the previous company until an adequate public track record has been established.

As a renewable power generator, the majority of the company's business will be in Sweden and to a larger extent, Scandinavia in general. The beginning emphasis is on power generation from wind. This is very different from the company's composition before the transaction with Aker BP.

The Lundin Group of companies , of which this company is a part of, is an organization that has the Lundin family as the common controlling interest. There is not a corporation at the top of the organization chart. As a part of this group of companies, Orron Energy has access to a good deal more resources than would the typical company at this stage of development.

The Lundin Group of companies has a darn good reputation, and investment in a higher-risk company that is part of this group materially enhances (but definitely does not guarantee) a chance for success. The reason is that the additional resources are not typical for a company of the size of Orron Energy.

One thing many family-run companies are known for is a fairly conservative financial position here. Many of these types of companies watch the cash flow, the cash position, and the debt very closely. Rarely does a family-owned company "go out on a financial limb."

This is something that helps to reduce that small-company risk that is so inherent in both small companies and the renewable energy area. There is a major focus on cash generation that one often does not see in the typical "promise of the future" type company presentations of many small companies.

That gives this company an operating basis upon which to build the company of the future.

Reviewing the valuation of the new Orron Energy shown above, combined with the debt, reveals a company worth close to $400 million in United States dollars. That is quite a valuation for a company that really just started its public life.

Emphasizing the valuation situation is the cash flow statement shown above. Note that because this is the fourth quarter, the presentation is still in United States dollars. The whole situation reveals a stock that, despite its low price, has a fair amount of future promise baked into the current price.

Even using the operating cash flow number or EBITDA reveals a hefty stock price. Therefore, the expectation would be that this stock price may "tread water" for a few years. Europe, in general, is "big" on renewable energy. However, any company can only grow so much at one time. This one certainly has its sights set on a lot of lucrative projects that are politically favored in the area of operation. But it may take a while for operations to catch up with market expectations.

As shown above , management completed several transactions to build the company's earnings capacity considerably for fiscal year 2023. Management appears to plan to do more transactions. There is a bank line and, of course, the possibility of using some common shares in any transaction.

Still, any investor should expect that "new company discount" to earnings until a sufficient public record of this business is established.

Management has some aggressive plans for the future. As part of the Lundin Energy group of companies, this aggressive plan has a lot more credence than would be the case for many companies I follow.

So many smaller companies plan for a bright future only to get involved with a lot of competition, overproduction, and plans that never really happen quite the way management planned. In this case, there is an organization with a lot of experience in energy that knows full well what the future holds.

Any time you see 40% with an implication of fast growth in the future, that fast growth alone implies some risk. Here, the backing organization with the experience of more people than just the company itself helps to minimize that future risk.

Key Takeaways

This new Lundin Group company is a very small part of the former Lundin Energy. Much of that former company merged with Aker BP. The remaining company is focused on the "hot" renewable energy markets of which Europe has a lot of opportunities.

Many small companies plan to enter this market, so there will be a lot of competition. The stock itself has a fair amount of future expectations already priced in. What gives this company an advantage is the backing of the Lundin Group of Companies, which provide considerably more resources and experience than is typically available to a company of this size.

The company itself still needs to establish a public track record that is satisfactory to the market. The stock may, therefore, trade at a discount to other similar companies until that record is established.

Nonetheless, management does have some impressive growth potential for the current fiscal year and plans to rapidly grow through a combination of acquisitions and organic growth. So, the total organization's resources and experience will likely come in handy.

As such, Orrön Energy AB (publ) stock is probably a strong buy for risk takers at the current time. But it could quickly evolve into an investment grade vehicle in the future. The Lundin organization is known for building and selling companies. This one, Orrön Energy AB (publ), is likely to be no exception.

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