Statoil (STO) is an integrated energy company primarily focused on the upstream Oil & Gas industry, with business operations in more than 40 countries worldwide; however, the majority of the reserves are located in the Norwegian continental shelf.
Statoil was "just" established in 1972, so it is a relatively young company by industry standards. Yet it is one of the world's largest net sellers of crude oil thanks to being predominantly in the upstream business and having a relatively small domestic Norwegian market.
Statoil is also the second-largest exporter of natural gas to Europe - after Russia, of course. It is the world's largest operator in waters deeper than 100 meters. Statoil is also the leader in arctic climate and deepwater technology usage.
Why Statoil is different, and why investing in it bears very specific risks
In total, the Norwegian government currently owns a 67% stake in the company. A two-thirds majority of votes is needed to approve propositions put to a shareholders' vote. The Norwegian State, therefore, effectively has the power to influence the outcome of any vote of shareholders due to the percentage of the shares it owns. There is always a risk that the state's interests will not be aligned with those of the shareholders.
However, this risk of state ownership is already priced-in. Since the Norwegian government already owns a controlling stake, the state ownership percentage factor can only work in favor of future stock valuations as, in effect, the only way likely for this stake to go is down.
On the other hand, the state ownership has its benefits. For example, it is tied with Statoil being the sole seller of the Norwegian state's oil and gas. The loss of this mandate to sell Norwegian oil and gas could negatively influence Statoil's bottom line.
Strong dependency on local Norwegian reserves
The majority of Statoil's proven oil and gas reserves are located in the Norwegian continental shelf. The company accounts for 60% of this shelf's total production. Unfortunately, the fields and reserves have been maturing. Statoil needs to branch out of Norway for reserves replacement.
Due to the fact that most foreign oil and gas reserves are already owned by Statoil's competitors, local governments or national companies, Statoil is forced to cooperate with other major Oil & Gas companies such as Chevron (CVX) and Exxon Mobil (XOM). Usually, Statoil is a partner owning 25-50% stake in these fields, but the other partner is the operator of the field.
This puts Statoil in a disadvantaged position going forward, as an ever-larger share of their reserves and production will be dependent on partnerships with competitors, which might not give them sufficient independence and control over these projects.
Focus predominantly on the upstream
Statoil is less diversified than most of its peers. This creates higher volatility of its business results, and can have both positive and negative effects, depending on the outlook for the upstream Oil & Gas industry.
This focus gives Statoil the advantage of deeper specialization and know-how, for example on arctic and deepwater technology usage. On the other hand, this dependency on mainly upstream operations makes Statoil vulnerable to oil price shocks and other events that negatively affect the upstream industry. Moreover, integrated major Oil & Gas companies will have an upper hand due to better operational synergies and financial strength resulting from larger overall company size.
Riskier international destinations
For the most part, the few international reserves that Statoil owns are located in countries where I would not dare go for a vacation, let alone operate a business that I would depend on for my regular income. Without being picky, I simply require countries with less political and other risk than Algeria, Angola, Azerbaijan and Venezuela offer.
On the other hand, for investors who understand well these country-specific risks and are willing to undertake them, this is one of the factors why Statoil trades at attractive valuations and gives such investors a well-deserved risk premium reward.
In addition, one has to say that Statoil's latest international investments have been heavily skewed in favor of safer international destinations, such as the joint partnership properties in the Gulf of Mexico.
Strong dependency on weak European gas markets
The majority of Statoil's gas sales are realized in Europe. Economic recession in many European countries and potentially slower future growth negatively affect Statoil's ability to increase sales.
What is worse, compared to most of its more integrated competitors, Statoil is subject to higher sales volatility as its ability to offset negative European sales with other growth markets is very limited.
Statoil has the lowest trailing P/E ratio of all the integrated major Oil & Gas companies - just 6.12 - while most of its peers, such as Chevron and Exxon Mobil, trade at P/Es of between 9 and 11.
Statoil's market cap of $72B is comparable to that of ConocoPhillips (COP), and is considerably lower than that of the largest Oil & Gas supermajors such as Exxon, Chevron and Royal Dutch Shell (RDS.A)
The price-to-book ratio of 1.23 is relatively attractive compared to the rest of the group, although there are exceptions with a significantly lower P/B, such as BP (BP), ENI (E) or China Petroleum & Chemical Corporation (SNP).
The dividend yield of 3.82% is very tempting and located in the middle of the Oil & Gas pack. The dividend payout ratio of 30% is satisfactory and in line with the rest, or perhaps even on the lower end of the scale.
The largest disappointment in Statoil's valuations and financials is the expected decrease in the earnings. In the next five years, earnings per share are expected to drop 2% every year on average.
Not only from the above valuation figures, it is clear that the company focuses more on the quality of the earnings and asset utilization, which results in a very nice, high return on assets of 8.95% and a return on equity of a whopping 23.04%. Only Exxon has higher return on assets.
Net profit margin is at an attractive 9.6%, which is on the higher end of the scale, while still lagging the Occidental Petroleum Corporation's (OXY) 17.08%, though that is more of an outlier.
Statoil's debt-to-equity ratio of 0.37 is average at best, perhaps on the higher end, if compared with the debt-to-equity stars of this industry, such as Ecopetrol (EC) and the Exxon-Chevron duo.
Statoil currently trades 3% below its 200-day simple moving average, positioning it in the bearish territory. The stock has been trading range-bound in a tight sideways movement between $22 and $26 for the past 18 months. Currently, it is trading very close to the lower boundary as it has been falling since February, but has been bottoming in the past six weeks.
So, if long-term investors are convinced that Statoil is the stock they want to buy, the current market situation could be viewed as a great opportunity to buy at a discount.
Statoil is an attractively-valued integrated Oil & Gas company at the moment. It can be an interesting diversification play on European markets as well as on the upstream Oil & Gas industry.
The company has its strengths, such as the arctic and deepwater expertise. However, Statoil has its share of risks as well, mainly its still-strong dependency on Europe for existing fields and markets, and reliance on competing partners for reserves replacement, not to mention the high correlation with the upstream industry outlook and the continuing support as well as risks from the Norwegian government being the majority holder.
Nevertheless, Statoil's valuation makes this stock an attractive purchase for those investors who are willing to accept the existing risks.
However, Statoil is not a stock for my portfolio. Not because of the valuation, which is more than interesting, but rather due to the fact that I am not willing to monitor or undertake some of the specific kinds of risks that I described in this analysis. Moreover, I already own Chevron, Exxon Mobil, ConocoPhillips, Royal Dutch Shell and BP.
Nonetheless, I am sure that Statoil already has its fans that have different investing criteria than I do, and it will find even more aficionados, especially at current valuations.
And what is your take on Statoil? Is it part of your portfolio?