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Statoil 2Q Misses on Costs

Zacks Equity Research

Statoil ASA’s (STO) second-quarter 2012 adjusted earnings of 61 cents per ADR failed to match the Zacks Consensus Estimate of 71 cents. The quarterly result also decreased from the year-earlier adjusted earnings of 74 cents per ADR due to increased exploration and production costs.

Adjusted net income after tax came in at NOK11.5 billion (US$2.0 billion), down from the year-earlier level of NOK 12.9 billion (US$2.4 billion).

However, total revenue leaped 19% year over year to NOK200.7 billion ($34.1 billion), aided by higher gas prices as well as higher volumes of both liquids and gas sold.

Operational Performance

In the reported quarter, equity and entitlement production increased 17% and 20%, respectively, from the year-earlier quarter. The increase was attributable to the start-up of new fields Pazflor in Angola and Gullfaks South Brent, production ramp-up at existing fields, commissioning of the newly acquired Bakken field, lower maintenance charges as well as higher gas sales. However, natural decline on mature fields partly offset the increase.

Total oil and gas equity production averaged 1.980 million barrels of oil equivalent per day (MMBOE/d) in the second quarter compared with 1.692 MMBOE/d in the year-earlier period. Of the total quarterly output, 64% was oil and 36% was natural gas.

Total oil and gas entitlement production averaged 1.786 MMBOE/d during the quarter (56% oil and 44% natural gas) compared with 1.486 MMBOE/d in the year-earlier period.

Total oil and gas liftings were 1.778 MMBOE/d, compared with 1.416 MMBOE/d in the prior-year quarter. The company's realized oil prices averaged $99.4 per barrel, down 11% year over year, while natural gas price realization averaged NOK2.23 per standard cubic meter, up 8% from the year-earlier level.


During the quarter, total capital investment was NOK27.4 billion and operating cash flows were NOK 48.4 billion. Net debt-to-capitalization ratio was 12.5% (versus 14.6% in the preceding quarter).


Management reaffirmed its production guidance for 2012. It had earlier said that it would deliver a compound annual equity production growth rate (CAGR) of around 3% between 2010 and 2012. Statoil aims to hit equity production of above 2.5 million barrels of oil equivalent in 2020. The growth is expected to come from new projects between 2014 and 2016, resulting in a 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%. 2013 production is expected somewhere around the 2012 level.

The company now expects organic capital expenditures of around US$18 billion (versus its prior expectation of $17 billion) and exploration activity of about $3.5 billion for 2012.


In the reported quarter, Statoil delivered strong exploration results, adding significantly to its resource base by making two high impact discoveries. The company made significant discoveries in offshore Tanzania and Norway. Since the last 15 months, Statoil made eight high-impact discoveries in total.

Statoil also made additional strategic progress on the agreement with Russian state-owned oil company OAO Rosneft. They have entered into an agreement under which the Norwegian oil giant will jointly explore and develop Russian offshore deposits in the Barents Sea and Sea of Okhotsk. The venture is expected to involve an investment of approximately $100 billion over decades.

Following a surge in global oil demand, we see the Norwegian oil major as benefiting from this cooperation alliance with the world's largest hydrocarbon-producing nation. The latest deal follows similar accords that Rosneft struck with Italy's Eni SpA (E) and U.S. energy behemoth ExxonMobil Corporation (XOM) for the exploration of oil in Russia's Arctic.

Although we have a favorable stance on Statoil's long-term production growth given its growing upstream presence in the emerging basins of the Caspian Sea, West Africa and the deepwater U.S. Gulf of Mexico, we remain cautious about escalating production cost. Unit production costs jumped 3% from the year-ago level related to costs from new fields coming online and improved activity related to well maintenance. Again, exploration expenses increased significantly to NOK5.2 billion from NOK2.2 billion in the year-earlier quarter. This was mainly due to higher drilling costs.

Our long-term Neutral recommendation remains unchanged and the company holds a Zacks #3 Rank (short-term Hold rating).

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