We reaffirmed our Neutral recommendation on Statoil ASA (STO) on Sep 5, 2013. Statoil’s strong balance sheet, exit from low-profit generating operations and the broadening of its international asset base are positives. However, the Norwegian state’s concentrated ownership in the company significantly reduces the liquidity and attractiveness of the stock, relative to other European integrated names.
We appreciate Statoil’s endeavor to improve the recovery of resources in mature fields. The company has operations in all major hydrocarbon-producing regions of the world, with an emphasis on the Norwegian Continental Shelf (NCS). We believe that Statoil is well positioned to sustain its steady production growth for the next few years on the back of its large resource base at NCS.
During the second quarter, this Zacks Rank #3 (Hold) company made five discoveries and advanced on its exploration program. The latest finds gave the company access to new regions of Norway, Russia, Azerbaijan, Tanzania as well as Australia. Several high-impact discoveries made in the last two years have added significantly to its resource base, strengthened the company’s position and paved the way for profitable long-term growth.
Statoil plans to drill about 50 exploration wells worldwide in 2013 and about 20 high-impact wells between 2013 and 2015. The recent oil discoveries in offshore Newfoundland in Canada and in the Grane area, Norway, are in sync with its strategy of exploring new frontiers and help to create value through active portfolio management. Consequently, these finds also boost its financial flexibility.
Statoil aims to achieve an equity production of above 2.5 million barrels of oil equivalent in 2020 from new projects expected to start production within 2014 to 2016. These projects would result in a compound annual growth rate (CAGR) of 2% to 3% for the period 2012 to 2016. The second stream of projects is expected within the 2016−2020 period that would likely lead to a CAGR of 3% to 4%.
However, management remains cautious about uncertainties in gas value over volume, start-up and ramp-up, and operational regularity. In the second quarter, both equity and entitlement production decreased 1% year over year owing to production decline at existing fields. Further, divestitures are likely to adversely impact output in 2013. Thus, it remained skeptic about its growth target.
Other Stocks to Consider
While we prefer to remain on the sidelines for Statoil, Zacks Ranked #1 (Strong Buy) stocks – China Petroleum & Chemical Corp. (SNP), SM Energy Company (SM) and Range Resources Corp. (RRC) – could be good buying options for the short term.