Buy-recommended StatoilHydro (STO) offers unlevered appreciation potential of 40% to a McDep Ratio of 1.0 where stock price would equal Net Present Value (NPV) of $35 a share. Released today, second quarter results apparently exceeded our estimate for unlevered cash flow (Ebitda) from three months ago.
Lower natural gas price was cushioned by higher Ebitda margin. Natural gas, mostly sold to continental neighbors in Europe, drives 53% of NPV in our valuation that capitalizes cash flow at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P). Much natural gas outside North America is priced under contract that essentially lags crude oil by six months. As a result, natural gas price may increase in the fourth quarter after a further decline in the third quarter.
Pointing to possible further gains, futures prices for the next six years for oil crossed the 40-week average into an uptrend at the end of May. Concentrated practically entirely on oil and gas production, STO earns the high cash flow from oil today and invests in the higher long-term growth potential of natural gas. Management projects rising volume through 2012 and has a policy to distribute half of earnings as dividends.
Originally published on August 4, 2009.