Russia is home to the world's biggest natural gas reserves and the Russian state owned Gazprom (OGZPY.PK) is the sole exporter of the commodity. As I noted earlier in a previous article, the firm, which is a key supplier to Europe, is facing a significant threat from the Norwegian energy company, Statoil (STO), which is strengthening its foothold in debt ridden, and therefore very price sensitive, Europe. Gazprom meets ~25% of the total European gas requirements which makes it the biggest player in the continent's gas sector while Statoil is quickly gaining ground on it. Statoil's recent discovery successes create a powerful argument for future growth, some of which will come at Gazprom's expense.
Going over the latest financials quickly, the company's fourth quarter net profit dropped by 49% on lower prices but higher volumes delivered from $4.51 billion in Q4-2011 to $2.36 billion but was well above analysts' estimates of $2.16 billion. The company's adjusted earnings (non-GAAP) rose from $0.79 to $0.84, again easily beating analysts' estimate of $0.68 per share. Statoil's total revenues for fiscal 2012 rose by 8% to $124.3 billion while net operating income fell 2% to $37.4 billion and adjusted earnings increased by 7% to $34.87 billion.
In 2012, Statoil discovered 23 wells and has several important projects in its pipeline which will help ensure that the company reaches its target of exceeding equivalent production of 2.5 million barrels of oil per day (Mboe/day) by 2020. This, in conjunction with Statoil's production surging by 8% to 2.004 Mboe/day, speaks volumes to its increasing importance in the global oil and gas economy. Its most recent discovery was in a Lavani-2 exploration well off the shore of Tanzania in which it is working closely with Production Tanzania Ltd. and Exxon Mobil (XOM). The company's most significant strategic alliance with Russia's Rosneft to develop offshore projects by investing about $100 billion over several decades is going to be a key revenue driver going forward.
Statoil also has considerable presence in the Gulf of Mexico, West Africa and markets surrounding the Caspian Sea but it has dropped the idea of developing a Kazakh offshore oil project at Caspian after seven years of delays and cost blowouts. ConocoPhillips (COP) has also left the Kashagan project for similar reasons. This is a difficult area of the world to explore and drill in. On the other hand, Statoil has now received the government's approval for its massive UK North Sea project. The British government has given the green light to Statoil to start developing the $7 billion Mariner oil field project, one of the biggest projects ever on the North Sea.
The field has more than 250 million barrels of technically recoverable 12-14 API Crude oil. Statoil now expects Mariner, as well as another field, Bressay, located nearby, to start production in 2017 with the former producing 58,000 barrels and the latter producing 52,000 barrels per day. Statoil has not made a final investment decision on the Bressay oil field yet. Edinburgh based Cairn Energy and the Japanese JX Nippon Oil & Gas Exploration Corp are its partners at Mariner with Statoil holding the majority stake.
Besides the North Sea, Statoil is also expanding its foothold in offshore Brazil.
About a month ago, Statoil purchased a 25% participating interest from Brazil's mining giant Vale SA for block BM-ES-22A off the shore of Brazil. The block was jointly held by Vale, 25%, and Petrobras (NYSE:PBR), 75%. Petrobras, like Gazprom, has enormous oil reserves and has virtually no competition in its home country. However, technically, it is not a monopoly but certainly operates like a typical state-owned one. Its inefficient management has not given investors much of anything to cheer about.
Petrobras' net profit of $10.83 billion for 2012 was a 36% drop from last year, producing just 1.98 Mboe/day versus the 2.032 Mboe/day for the much smaller Statoil. One increased production by 8% while the other saw production drop by 2%. For the current year, its CEO Maria das Gracas Foster sees the company touching zero growth in production.
Petrobras is currently working on new refineries and other projects and until that work is completed by 2014, no improvements are expected to come in volume or profits. Like China, Brazil has also put a lid on fuel prices to curtail inflation which is hurting Petrobras' refining margins. Inflation is a monetary problem first and a price problem second. The government is so far unwilling to increase the prices. Petrobras has an ultra-ambitious $237 billion investment plan through 2016, the biggest capital expenditure plan ever laid out by any firm anywhere in the world. The falling levels of output and declining profits are going to create enormous short term challenges.
As identified in the table above, Petrobras's enterprise value is almost twice as big as that of Statoil but it has shed billions in market cap which is currently just $23.6 billion more than that of Statoil. The latter's ADRs are currently trading at a discount to its book value and as indicated above, the short term for the company is going to be even more challenging therefore it has not bottomed yet. Statoil at this point represents solid value and has a great opportunity to gain market share in Europe.
As a pure play on oil and gas production Statoil is one of the better opportunities out there for investors. Exxon-Mobil has been moving towards diversifying its revenue to more downstream activities as cheap U.S. crude is driving higher refining margins domestically. And compared to ConocoPhillips, who split off its downstream business into Phillip66 last year and is still looking to divest itself of under-performing assets, Statoil looks to be on a better growth path with much higher return on assets. As 2013 wears on the lack of strong fundamentals in the global economy will take its toll on stocks and, possibly commodity prices.
Statoil makes the most sense as Exxon-Mobil is trading very high compared to its book value and provides low downside risk through its meager yield. Statoil's growing position as a supplier of natural gas to Europe should support its current price while its yield is attractive at these prices versus ConocoPhillips who will be looking at low domestic gas prices and lacking downstream revenue to offset soft oil prices.