Noreco Bonds NORNO <CORP>
November 18, 2011 - 10:17pm EST by
2011 2012
Price: 5.42 EPS $0.00 $0.00
Shares Out. (in M): 244 P/E nm nm
Market Cap (in $M): 228 P/FCF 0.0x 0.0x
Net Debt (in $M): 796 EBIT 0 0
TEV ($): 1,024 TEV/EBIT 6.4x 3.4x

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Moving up cap structure to Sr. Secured bonds with credit enhancing events afoot seems a good place to wait out the storm. For a 17% YTM and a 27% Yield to likely Call on 11/20/2012, I like the NORECO 12.9% of 2014 (ISIN NO0010548449, currently priced 91x93).
Norwegian Energy Company ASA, known as Noreco (symbol NOR NO), is a North Sea E&P company.   Production and cash flow sank over the past year, displeasing investors, as the company sold producing assets to plow money into new developments.  The timing gap between the old production and new potential was too long to keep investors feeling safe and the holder base rotated as cash flow investors sold to exploration oriented purchasers.  332m of asset sales and 70m of debt paydown is behind them, and we are now just past an inflection point where production and cash flow are back on the rise:
  • Production ramping as two large North Sea oil projects come online: Oselvar & Huntington, adding 7000 net barrels a day in 2012 and 10,000 net a day upon peak production in 2013
  • Q3 production was the nadir at 3428 boe/day (down from 13,100/day in Q2 2010), Oct was the first step up to 4569 boe/d,  now they add another 7,000 boe/d net to the company as these projects ramp over the next year with increasing monthly production
  • Currently realizing $105 per boe with gas/oil ratio moving toward mostly oil and brent at $107
  • Past the exploration stage…  Now awaiting tie-in of undersea umbilicals to the FPSO so the already drilled wells can start flowing, pipe connections and minor construction still ahead as they finalize installation of the production platforms
  • By the 11/20/2012 call date at 105, they’ll have ~11,500 barrels/day flowing… and the banks will help them take out this 12.9% debt with a loan of L+250ish
  • Should have ~$275m ebitda at that time, assuming $100 Brent
  • Current net debt ~$800m
  • Ahead of you in the cap structure is an existing bank line of $330m, with $170m drawn
  • These bonds are Sr Secured and the issue size is 1.25B NOK = ~USD $220m,  exchange rate is ~5.75 to the dollar
  • Covenants include book equity ratio > 25%, Leverage ratio < 5x, Dividend protection, and change of control put provisions
  • Q3 did see a covenant breach (but not a default which requires two consecutive quarters) due to a goodwill writedown on relinquished areas, but Q4 will correct this due to cash receipts and reduction of liabilities related to asset sales



Give it a couple quarters of reporting climbing production and cash flow and these bonds should be back at 106, patiently awaiting the call at 105 in November 2012

FWIW, Boone Pickens says oil is going to $300-$500 when Saudi King Abdullah dies leaving big questions about future production.  He said, “They produce 9.7 million barrels a day and he (Abdullah) is 86, 300 pounds, and has diabetes. An actuarial table on him would be in days or weeks.”  I wish him well, but the future does not bode for an easy transition considering the Saudi royalty collapsed twice in the 1800s due to discord over succession, the new Crowed Prince named within the past month though liked by the West is highly controversial within the Kingdom, and “Arab Spring’ is still in bloom.
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