The complete Wall Street Transcript CEO Interview with Ian Lundin
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CEO INTERVIEW: IAN LUNDIN, LUNDIN OIL AB (LOILY)
THE WALL STREET TRANSCRIPT CORPORATION (HAR621)
published 10/25/1999
IAN H. LUNDIN is the Managing Director, President & CEO of Lundin Oil
AB. In 1984, Mr. Lundin joined International Petroleum Corporation and
was based in Dubai as operations manager. Prior thereto, he was with
Wintershall AG, a subsidiary of BASF, as a drilling engineer on
Wintershall's offshore fields in northern Greece. In 1989, Mr. Lundin
became the President of International Petroleum (since amalgamated with
Sands Petroleum to form Lundin Oil). Mr. Lundin obtained a Bachelor of
Science degree in Petroleum Engineering from the University of Tulsa in
1982.
Sector: OIL & GAS DRILLING & EXPLORATION
TWST: If you would, start us off with a background summary, sort of an
historical sketch on the company, enough information that gives us a
perspective. Then, bring us up to date, as what you see as your
business, and what you see as your company today.
Mr. Lundin: Lundin Oil AB is a Swedish independent oil and gas
exploration and production company. We're purely involved in the
upstream side of the oil business, and we have a totally global focus.
We don't have any restrictions in terms of what countries we can go
into, and what countries we cannot go into. We basically just go where
we think we have the best chances of finding oil, and where we can get
the best fiscal terms. The brief history of Lundin Oil is that it's a
product of a merger between a Canadian company called International
Petroleum Corporation and another company called Sands Petroleum AB from
Sweden. The surviving company was Sands, so it became a Swedish company.
Both of these companies were controlled by the Lundin family, so the
name of the company was switched to Lundin Oil AB in May 1998. Our head
office is in Geneva, Switzerland. We have a representative office in
Stockholm, where our main shareholder base is. We have about 40,000
shareholders, and we're listed on the Stockholm Stock Exchange, and we
also have a listing on NASDAQ. That's basically from the IPC side of the
company. We have over 8000 barrels a day of production in the North Sea
and development activities going on in Libya, Malaysia and Sudan. In
Malaysia we also have some production. Our net share of production there
is over 5000 barrels a day. So total production in the company is about
14,000 barrels a day.
We have some big projects underway at the moment
which we hope will increase the size of the company substantially over
the next three to four years. Once Phase II of our development project
in Malaysia comes on stream and our Libyan discoveries have been
developed, we expect our production to go up to 40 to 50,000 barrels a
day by 2003, 2004. In terms of financing all of these activities, we
have about $50 million of estimated operating cash flow this year. We
also have about $30 million of cash reserves, and there is a warrant
outstanding that, if it's exercised, will bring in about $25 million. So
we expect to have enough in terms of reserves to carry out these
programs. In addition, we will seek some project finance from various
banks. So that's basically everything in a nutshell.
TWST: What do the partnerships look like today as you're developing
these sites in the various regions and countries?
Mr. Lundin: We normally take about 40% interest in the various projects
that we work in. Libya is an exception. It's a smaller project, so we
have 100%. Normally we work with companies that are similar to us, in
terms that they have no restriction on where they can work. These are
mostly European companies and state owned companies. In Sudan, for
example, our partners are OMV, the Austrian state company, Petronas,
which is the Malaysian state company, and Sudapet, which represents the
Sudanese government. In terms of partnership, we work very closely with
the host governments in the various countries. In Malaysia we have a
partnership with the state company as well. Finally, the North Sea is a
completely different type of environment, where the state doesn't take
any active role whatsoever. There we basically have small interests in
various fields. The North Sea is one area where we don't operate. We
acquired those assets from another company in 1995. The fields we're
involved in are operated by household names like the Exxons and the
Shells, and so on.
TWST: Where are the growth activities for the next five to ten years?
Where are you concentrating?
Mr. Lundin: Our main area of growth right now is Libya, where we have an
active program. We have a development program going on, and an
exploration program. So we hope that once that goes on stream it will
add about 20,000 barrels day of production by the end of next year.
There is also a lot of potential in terms of discovering additional
reserves. There is Sudan, where we recently made a discovery. That will
probably move into development in about a year's time. The third area of
growth is Malaysia, where we're already on stream, but we're about to
embark on the second phase of the development.
TWST: As you look at these opportunities, or additional opportunities,
what role will mergers and acquisitions play? Is that a good way for
your company to grow, or do you prefer to do your own development and
exploration activities?
Mr. Lundin: We're always open to corporate transactions. But right now
we have some fairly big projects on our books that need to be basically
taken to the next stage. I don't think that the share price reflects the
value of those projects. If we felt that the market maybe recognized the
value of the projects then it would be easier to do corporate deals. But
right now we feel that we're very much undervalued. About 30% of the
company is controlled by the Lundin family, which basically has no
intention of diluting itself from that holding.
TWST: What about being a target for acquisition? Is that at all a
strategy?
Mr. Lundin: Yes, it's a possibility. Because of the places we work in,
the US companies can't really look at us. But things are changing on the
political scene and we could become a target. But like I said, we would
not consider selling out at these levels.
TWST: The political risk, obviously, is an item that a US investor would
be concerned with. Do you feel that there's a different view of
political risk then, the American US investor versus the Euro or global
investor?
Mr. Lundin: No, I think that everybody has their own view on political
risk. I think that if you're in the oil business, and if you want to
grow, any oil man will tell you that you have to go to frontier areas.
You have to go where there is political risk because the traditional
areas have been picked over, and there's no more potential in places
like North Sea or Gulf of Mexico for big discoveries. You have maybe the
ultra deep water, which the major oil companies can afford to get into.
But for a company our size, if you want to grow you have to go into
areas like that. The political risk is manageable. We've been working in
those areas for two decades now, and we're familiar with them.
TWST: Do you see a movement from the larger companies out there now to
look at these regions, since you've laid the groundwork?
Mr. Lundin: I think that major oil companies have recognized the value
of being in those places long ago, and we compete head on with them
right now. There are a lot of independent oil companies as well,
especially Canadian companies who are not as restricted as the US
companies to go into those areas. Then there's quite a lot of European
companies too.
TWST: When you look out short-term, 12, 24 months out, what specifically
is on the agenda? What would make that time frame a success for your
company?
Mr. Lundin: If you look at the immediate future, we have an exploration
well going down right now as we speak in Libya. The results of that will
come in towards the end of October. If you look at the reserves base
right now, it's about 275 million barrels of oil equivalent. That
discovery could add about 100 million barrels. The discovery we have in
Sudan we haven't booked yet. It's a very new discovery. If it proves to
be a commercial discovery through appraisal drilling, that could add
about 100 million barrels as well. So what we're looking at over the
next year to two years is doubling our reserves base. That's only from
existing discoveries or from current drilling.
TWST: Give us a profile and assessment of your top management team. As
you look at these opportunities, do you feel you have the breadth and
depth of management necessary? Do you have the skill sets? Looking out
today, what areas, if any, are there gaps, are you looking for changes
or additions?
Mr. Lundin: We're a small company, but we're very much technically
oriented. For us it's very important to understand the geology of the
areas we work in. Since we have worked in those areas for a number of
years, we're very familiar with them. In terms of a technical
department, we have a dozen geologists and geophysicists, all with an
average of 15 to 20 years experience. The whole technical team is about
20 people, and they're all based in Geneva. We have operating offices in
Tripoli, Khartoum, Kuala Lumpur. These offices are basically responsible
for the day to day operations, whereas the technical work is carried out
in Geneva. We don't have any hardware. We basically contract out all
the drilling services. We do have a drilling manager who is responsible
for our worldwide drilling and a reservoir engineer who evaluates the
discoveries. But I would say that we're very thin on the ground. Our
approach is that it's better to be understaffed than overstaffed.
Sometimes that does cause a bit of a problem, and it means that we have
to bring in consultants to help us out, and consultants can be very
expensive.
TWST: Do you feel that you're given just value for the intellectual
property that you have in this company? Is that standard within the
industry to have that depth of expertise, or do you feel that that's a
value-add for this company?
Mr. Lundin: I think that we have probably as much capability as we need
in terms of geology and geophysics. A lot of oil companies our size
don't operate, so they don't really need as much staff as we do. But we
take the view that it's important to operate because that allows us to
control the schedule, and when the money is being spent. So in that
respect we're a little bit different. We have more of a proactive
approach I think.
TWST: What trend in technology, or what issue in technology is having
impact on you, your strategies and goals over the next two to three
years? What depths are you working at, or land-based operations do you
have? And then, what impact is technology having?
Mr. Lundin: Technology has had a big impact on the oil industry in
general. About a third of our oil reserves are located onshore Libya and
the rest is offshore the North Sea and Malaysia. I think both onshore
and offshore have benefited tremendously from the three-dimensional
seismic. We found that our discovery ratio has increased dramatically.
It was running around 50% until recently and it is now approaching 100%.
With three dimensional seismic we can actually locate the wells so
accurately that the dry hole becomes fairly rare. Then in terms of
drilling technology, you have things like horizontal drilling, dual,
triple completions, which increase productivity, and also the recovery
factor of the oil from the reservoirs. So all these come together to
really reduce your finding costs. Our finding costs are less than $0.70
a barrel. Of course the operating costs are coming down thanks to
automation. The North Sea, for example, which has about the highest
operating cost of anywhere, we run about $8.50 per barrel. That's
because it's a pretty harsh environment. Places like Libya and Malaysia
it's less than $4 a barrel. Technology plays a big role in there too.
TWST: What's the ultimate vision for Lundin at this point when you look
long-term? What does that ultimate enterprise look like?
Mr. Lundin: The long-term vision I would say is that we want to create a
significant independent oil company. We hope that production that we'll
be over 50,000 a day within the next three to four years, and then we'll
be setting our targets at about 100,000 barrels a day. The idea is to
get to that point with a minimum amount of dilution in the company,
which means basically working off your own cash flow, taking it step by
step, and using project finance wherever it's feasible.
TWST: For the investment community today, how could they improve their
perception of Lundin? As you speak with analysts, with investors, with
potential investors, what have been the misperceptions? What have been
perhaps the assumptions that you hear that you find are missing the
target somehow?
Mr. Lundin: I think we're a little bit of a mystery to a big portion of
the investment community. Our following so far has been mostly retail. I
think that the institutions in general kind of view us maybe a little
bit too aggressive, and maybe big risk takers. I think that's a
misconception in the sense that we do spread our risk by working in many
different areas. We never get into a situation that we cannot recover
from in terms of financial commitment. So we're very careful in terms of
what commitments we make. I think it's a matter of getting that message
across. We are actually quite conservative in the way we manage the
company. Obviously, when you work in areas like that people
automatically assume that you're a risk taker, which is not always the
case. We're just there because that's where the oil is, and that's how
we're going to grow the company.
TWST: With the family holdings, and with not wanting to expand the
float, is that causing a problem? Are there liquidity issues at all?
Mr. Lundin: In terms of cash there's always liquidity issues. It's a
capital intensive business, so we have to be extra careful where we do
our budgets, so we don't have too much coming at the same time. For
example, last year we had a capital budget of almost $100 million. This
year it will be less than $50 million. And next year it will be around
$50 million as well. I think these type of budgets we can handle.
Sometimes companies our size are a victim of their own success because
when you make a very big discovery, you need a large amount of capital
to actually develop a discovery. But that's a nice problem to have. If
you are in a situation like that then what you do is you bring a partner
into the project. As long as you get good value for it then, there's
noting wrong with doing that.
TWST: Another way to look at liquidity is that the number of shares you
have outstanding, and the ability to satisfy retail or institutional
investors, are there any questions concerning the overall volume of
shares available for transaction?
Mr. Lundin: I don't think so. There is a float of over 60%, and if you
look at the Stockholm Stock Exchange, which is our main market, there
are days on which 0.5 to 1.0 million shares are traded. Our average so
far this year is over 300,000 shares. Even on NASDAQ, which is much
smaller in terms of the volume because we don't have much following, we
run about 30,000 shares a day. So there is a fair amount of liquidity.
But obviously we would like to increase the liquidity because that's
important for institutions.
TWST: As they discuss combining exchanges in Europe, would that have an
impact on your exchange, from your understanding, or on your stocks
ability to trade or to be visible in that market?
Mr. Lundin: For us that's a very positive development because right now
our following is very much from Sweden because there's a tendency in
Europe for people to buy stock on their home stock exchange. If you
look, for example, at Norway, which understands the oil business much
better than they do in Sweden, they don't really follow our company at
all. I think once they start talking about combining all the
Scandinavian stock exchanges, then we'll start getting a following from
investors in Norway, and Denmark, and Finland. There are a lot of
individual investors in those countries that like this kind of
investment.
TWST: Here we have gradations. I believe now people talk about small cap
as under $500 million capitalization, and micro-cap as under $200
million. Do you feel that you have a leg up in the Euro market for your
size, given what the competition is for equity?
Mr. Lundin: There's no doubt that in Sweden we are more of a medium
sized fish, whereas over here - with about $300 million in market cap,
we are somewhere between micro and small cap. So you definitely have a
different profile over there. But we find that investors over here like
our size of companies as well because they do tend to have a lot of
upside potential. So I think it's just a matter of getting our message
across.
TWST: Give us a little insight into your own management philosophy. As
you go about participating and setting goals and priorities for Lundin,
what are the so-called ABCs of business that you fall back on or rely on
as you go about setting those goals and strategies?
Mr. Lundin: I like the idea of a very lean management structure with as
little levels as possible. So we're a very close knit team. I think it's
important to keep everybody together. As for the management team itself,
we brought everybody back to Geneva because we think it's important to
have this day to day interaction with everybody. In terms of the size of
our management team, we're about four or five people. There's myself, my
father who is the Chairman, we have a chief financial officer, a chief
operating officer and an operations manager. We basically meet on a
daily basis to go through all the aspects. I, myself, as the CEO, have a
direct involvement in the projects. I very much believe in hands on type
of management. I spend a lot of time in Malaysia, Libya, and Sudan,
talking directly with the people on the ground. I think that it's
important for them to feel that they have a direct access to me, and
that they're part of the team. So I guess you can say that we believe in
a family type of environment in terms of conducting the business.
TWST: What would you give as your summary statement, or essential
message, the short list of highlights, strengths that would convince an
investor to buy in today?
Mr. Lundin: I think that if an investor believes in oil as a basic
commodity, and recent oil prices certainly have reflected that there is
a lot of money to be made in that industry, we have a tremendous gearing
and exposure to high oil prices. I think that in the medium-term, the
companies that will end up on top are the ones with the big reserves
base. We have a situation where not only do we already have a very
significant reserves base, we also have exposure to a lot of additional
reserves. We also have a very lean and mean type of management
structure. We can move very quickly into new areas. Liquidity-wise we're
a healthy company. We have a low debt gearing and I think there's a
significant upside to the company.
TWST: Thank you.
IAN H. LUNDIN
Director, President & CEO
Lundin Oil AB
6 Rue de Rive
CH-1211 Geneva 3
Switzerland
(41 22) 319 6600
(41 22) 319 6666 - FAX
info@lundinoil.com
www.lundinoil.com
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Interview with Ian H. Lundin, Director, President & CEO of Lundin Oil
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