Description

Important Disclosures: Certain funds and accounts managed by us are currently long Aker ASA.  We may buy and/or sell shares of Aker ASA in the future for the funds and accounts managed by us without notice, and we are under no obligation or agreement to take, or not take, any action or restrict our actions in any manner.  This is not a recommendation to buy or sell shares.    Our views are subject to change without notice and we may trade in any manner, whether consistent or inconsistent with this recommendation.  The information below is from public sources.  We have not independently verified this information and we make no representations as to the accuracy or correctness of any such information.  We undertake no obligation to update any information below.

Thesis

Aker ASA (AKER NO) is a Norwegian holding company with ownership interests in oil & gas, maritime shipping, biomarine, commercial fishing, and other industrial and financial assets. As a result of the company's complex corporate holding structure, trading illiquidity, and low sell-side coverage, the stock currently trades at 2/3 of stated NAV, based on current share values for its publicly listed holdings and reported book values for its remaining unlisted assets. AKER pays out a NOK 13 annual dividend for a 6.4% yield.  Management recognizes the current value discrepancy and is committed to realizing the value potential of its holdings, which management believes far exceeds stated NAV, through steady asset monetization over the next three years.  At AKER’s Capital Markets Day in November 2013, management commented that full NAV based on private market value of its assets approximated NOK 500 per share, or two and a half times the current share price.

Description of Holdings

1. Aker Solutions (AKSO NO) is a global oil services company, providing engineering and systems solutions to oil & gas drilling customers worldwide. AKSO currently pays a 4.0% dividend yield and trades at a greater than 20% discount to peers. Peer group multiples suggest AKSO shares are worth NOK 130-135 vs NOK 102 today. While weakening customer capital spending budgets have pressured near-term results, we believe AKSO possesses quality assets that would complement the portfolios of a number of strategic buyers. Management recently announced its intention to split AKSO’s drilling technologies, oilfield services, and process systems business units into a separate public entity (Akastor) to be further streamlined over time, transforming AKSO into a fast-growing, pure-play subsea services provider. AKER owns a 34.2% stake in AKSO, equivalent to NOK 9.5 billion based on current share price levels, comprised of a 28.2% indirect ownership interest through Aker Kvaerner Holding, a partnership with the Norwegian government in which AKER holds a 70% stake, as well as a 6% direct ownership interest.

2. Det norske (DETNOR NO) is an offshore oil exploration & production company with 65.8 million BOE (Barrels of Oil Equivalent) proven and probable reserves located across the Norwegian continental shelf. These reserves exclude DETNOR’s stakes in the recently identified Johan Sverdrup field, Norway's largest offshore oil discovery since 1974, which holds an estimated 1.8-2.9 billion BOE. Including DETNOR’s Johan Sverdrup interests and assuming oil prices remain stable at US$100/barrel, we believe DETNOR shares are worth NOK 122 vs NOK 65 today. AKER owns a 50% stake in DETNOR, equivalent to NOK 4.6 billion based on current share price levels, which do not fully reflect the value from Johan Sverdrup.

3. Ocean Yield (OCY NO) owns and manages a fleet of shipping vessels serving the oil and industrial sectors under long-term bareboat charters with durations of 5 to 15 years. The company completed its IPO in July 2013 and currently trades at an 8.1% dividend yield. AKER owns a 73.4% stake in OCY NO, equivalent to NOK 3.6 billion.

4. Aker BioMarine (unlisted) is an integrated marine science company specializing in krill harvesting and production of oil and other krill-derived products. AKER owns 100% of Aker BioMarine, which has a book value of NOK 1.8 billion (or roughly US$300 million). Notably, the rapidly emerging krill derivatives industry is driving strong revenue and profit growth at Aker BioMarine, with management forecasting EBITDA to expand from US$25 million in 2013 to US$100 million over the next three years at current growth run rates.

5. Kvaerner (KVAER NO) is an engineering, procurement and construction services company serving the oil and gas industry. AKER owns a 28.7% stake in KVAER through its 70% ownership interest in Aker Kvaerner Holding, equivalent to NOK 0.9 billion.

6. Havfisk (HFISK NO) is Norway's largest commercial fishing company, specializing in the harvesting and processing of cod, haddock, saithe and prawn. The company owns 10-11% of Norwegian cod quotas. AKER owns 73.2% of HFISK, equivalent to NOK 0.7 billion.

7. Fornebuporten (unlisted) is a real estate development company focused on commercial and residential properties in Norway and the United Kingdom. AKER owns 100% of Fornebuporten, equivalent to NOK 1.2 billion.

8. AKER holds interests in three asset management funds – Converto Capital, Oslo Asset Management, and Norron – totaling NOK 4.0 billion in assets. The largest fund, Converto Capital, represents NOK 3.3 billion in assets, including substantial investments in Aker Philadelphia Shipyard (AKPS NO) and American Shipping (AMSC NO), two coastal oil shipping companies with positive exposure to US Jones Act laws.

9. AKER's other assets include NOK 2.5 billion of Cash on Hand, NOK 0.4 billion receivables (excluding Fornebuporten), NOK 0.2 billion equity investments (excluding Fornebuporten), and NOK 0.3 billion of other financial investments.

Valuation

As detailed below, AKER's asset value totals approximately NOK 30 billion (Gross), or NOK 24 billion (Net). During the company's Capital Markets Day in November 2013, management highlighted its commitment to realize a minimum of NOK 3 billion of asset value over the next three years through the monetization of real estate holdings, Converto Capital investments, and other investments. This strategy is a continuation of management’s efforts since 2008 to optimize portfolio value and improve transparency, as demonstrated through the IPOs of Aker Drilling and Ocean Yield and sales of non-core subsidiaries (Mooring and Loadings System, Well-Intervention Services, Epax, etc). Notably, AKER is able to avoid tax leakage as a result of a favorable tax system in Norway. The Company also pays a NOK 13 dividend equivalent to a 6.4% yield.

Stated Net Asset Value (in NOK billions)

 $9.5    Aker Solutions

 $4.6    Det Norske

 $3.6    Ocean Yield

 $1.8    Aker BioMarine

 $0.9    Kvaerner

 $0.7    Havfisk

 $1.2    Fornebuporten

 $4.0    Fund Investments

 $2.5    Cash

 $0.4    Receivables

 $0.2    Equity Investments

 $0.3    Other Investments

 $29.7  Gross Asset Value

($5.8)   Total HoldCo Liabilities

 $23.9  Stated Net Asset Value

We believe the stock is conservatively worth NOK 280 (38% upside assuming a 15% HoldCo discount to NAV) and in excess of NOK 500 (146%+ upside assuming management’s estimates for actual market values of underlying investments).

Risks

1. Kjell Inge Rokke, Chairman of AKER’s Board and owner of 68% of AKER’s outstanding shares, garners mixed views from analysts and investors. While prior investments have ultimately generated strong returns for shareholders over the long-term, significant volatility during near and medium-term periods has created negative sentiment regarding Rokke’s management abilities
2. Aker Solutions continues to experience weak near-term demand trends
3. Det Norske's E&P activities create exposure to commodity price volatility

Catalyst