Oil &Gas:Korpfjell disappoints for Lundin &Statoil

Sub-commercial gas discovery at Korpfjell

    The NPD has announced that Statoil and Lundin have made a non-commercialgas discovery (<100mboe) at the Korpfjell exploration well on PL859(STL 30%,LUPE 15%, CVX 20%, Petoro 20%, COP 15%) in the Norwegian Barents Sea. Ahigh risk frontier prospect in a previously undrilled area, any discovery waslikely to have faced substantial commercial challenges. As such we do notbelieve that the equity of either stock should reflect much value for the well.Nonetheless, as a very large structure with potentially substantial volumes inthe success case, this is likely to have attracted speculation and is a negative.

    Drilling to return in 2018

    This was one of the most anticipated exploration wells in 2017for the industry.The first well to be drilled in the formerly disputed Arctic zone with Russiaalongside huge multi-billion barrel potential; this particular block was the mostsought after in the 23rd licensing round. The partners had attributed a c.20%chance of success to the well, although our main concern was always that theregion was gas prone and the partners would struggle to commercialise even alarge discovery, given its remoteness and lack of infrastructure. This is locatedin the same region as the 138Tcf Shtokman gas and condensate field, whichhas been stranded by poor economics and challenging met-ocean conditions.Nonetheless, we expect both partners to return to the southeastern BarentsSea next year with a multi-well drilling programme that targets additionaldeeper prospectivity on PL859and the large Signalhornet prospect in PL857.

    Statoil valuation and risks: NOK120TP, Sell

    For Statoil this counts as another failure from its high profile 2017Barentsdrilling campaign. The rig will now proceed to drill the Koigen Central prospectin license PL718. Several material exploration wells remain to be drilled in 2H,including the Verbier well in the UK. Our NOK120price target is based on amid-cycle FCF yield of 5.0% and a P/NAV multiple of 0.90x. Upside risksinclude faster gas price recovery, renewed OPEC action, and lower cash taxes.

    Lundin valuation and risks: SEK173TP, Hold

    Lundin has traded at a premium to the sector over the last 12M as investorsback its potential to create value across its low cost portfolio, but we wait forsolid resource growth from its Barents Sea portfolio to justify this premium.Exploration success is not just about NAV growth, but about sustainingproduction and cash flow growth beyond Johan Sverdrup start-up byredirecting the cash flows thrown off into new developments. We carried justSEK1/sh in our risked NAV for the well, but appreciate that others were keener.

    Our SEK173price target is based on a 50:50blended average of a SEK146risked NAV and 1.1x target P/NAV multiple and 8.0x EV/DACF (SEK186). Keydownside risks are JS project delays and cost over-runs. Upside risks areexploration and appraisal drilling success and production outperformance.