Description

Investors seeking exposure to the fastest growing publicly traded intermediate producer (outside of the former Soviet Republics) in the world today would be well advised to accumulate shares of Lundin Oil AB.
With a 55-year present reserve life index, Lundin is also the most inexpensive intermediate firm we cover on a proven asset basis.

Lundin Oil AB currently carries one of the most conservative financial profiles in the sector. Total net liabilities (net long term, short term and accounts payable debts) are estimated to be $110 million U.S (roughly 1.8 times trailing 2000 cash flow). Shareholders equity exceeds $240 million U.S. Seldom does an investor ever find an opportunity to purchase shares of any publicly traded oil firm for roughly the present value of shareholders equity. This greatly limits downside risk from a financial perspective.

For fiscal 2000, Lundin generated earnings of $.25 per share and cash flow of $.60 per share on net shares outstanding of 103 million. Average daily oil production was somewhat over 13,800 boepd for 2000. Should development projects be completed as scheduled, Lundin’s boepd production would surpass 15,000 boepd in 2001, 26,000 boepd in 2002, 30,000 boepd by 2003 and peak at over 50,000 boepd in 2004.*** This would result in Lundin generating annualized cash flows of between $2.50 to $3.50 per share*. Significant capital appreciation in the mid term (three years) is forecast.

The massive forecast increase in revenue, cash flow and production would arise from the successful development of two current projects.

1. Libya. Lundin owns 100% of NC 177, a 100 million barrel reserve field. Phase 1 development is now underway, with initial production forecast for the fourth quarter of 2001. Full phase 1 exploitation of this field will result in 15,000 bopd net to Lundin by the first quarter of 2002.** Phase two development could commence in late 2002, and could ultimately boost total production to above 23,000 bopd for Lundin by 2004.**

2. Malaysia-Vietnam. Lundin owns 41.4% of the Block PM-3 oil and natural gas fields. Present phase 1 development has yielded net production of 5700 boepd for Lundin.*** The completion of phase 1 development in 2001 is forecast to boost total net production to somewhat more than 6600 boepd.*** Phase two exploitation is then forecast to be completed by the fourth quarter of 2003. This could result in total output in excess of 33,000 boepd net to Lundin by the 1st quarter of 2004.***

These development projects are estimated to cost roughly $450 million U.S. and would be financed from a combination of internally generated cash flow and bank project lending. We estimate Lundin may generate in excess of $500 million of free cash flow prior to 2004*. This would further strengthen the already strong balance sheet

Further upside in revenue, cash flow and production could arise from a highly promising new discovery announced this month.

3. Sudan. Lundin Oil AB owns 40.3% of Block 5-A. The initial test well of a structure adjacent to oil fields producing 180,000 bopd was successful.** Oil flows tested above 4300 bopd.** A second test well is now scheduled to determine the feasibility of this field. Should this prove successful, production could commence rapidly (as early as 2003), due to the proximity of Sudan’s major oil pipeline to the discovery. Successful exploitation of this field is not included in our estimates.

Total production of oil on a daily basis for Lundin Oil AB is forecast to grow from 15,000 boepd in 2001 to more than 50,000 boepd by 2004.*** This is the fastest forecast growth rate of any oil stock outside the former Soviet Republics that we follow. With this rapid growth rate and low share price by all benchmarks, one should not rule out a takeover at some point.

Bear in mind that investors assume political risk as well as oil pricing risk when purchasing shares of Lundin Oil Ab. Due to the location of the development fields, U.S. investors may have certain reservations about ownership of this equity. This will probably result in a permanent discount to other intermediate producers.

We estimate that the shares will be discounted to approximately 3 times estimated cash flow through 2004. That said, should development of the Libya and Malaysia-Vietnam projects be completed on time and on budget through 2004, Lundin would be exceedingly undervalued at current prices.* If you assume that the shares will sell for 3 times forecast 2004 cash flow ($2.50 to $3.50 per share*), Lundin AB would be fairly priced between $7.50 to $10.25 per share. Successful exploitation of the Sudanese discovery would render this projection to be conservative.

* All estimates assume that oil prices range between $20 to $25 U.S. boe equivalent in this report through 2004.

** bopd = barrel of oil per day

*** boepd = barrel of oil equivalent per day. This combines oil production , natural gas liquids and natural gas production converted at 6:1.

Catalyst

More than a tripling of net production, largely financed from cash flow, through 2004. A promising new discovery may render our forecast to be conservative