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Statoil ASA (NYSE:STO)

OMV Transaction Conference

August 19, 2013 7:30 am ET

Executives

Hilde Merete Nafstad - Head of Investor Relations

Helge Lund - Chief Executive Officer and President

Torgrim Reitan - Chief Financial Officer, Executive Vice President, Chairman of Corporate Risk Committee and Member of Corporate Executive Committee

Analysts

Theepan Jothilingam - Nomura Securities Co. Ltd., Research Division

Peter Hutton - RBC Capital Markets, LLC, Research Division

Lydia Rainforth - Barclays Capital, Research Division

Teodor Sveen Nilsen - Swedbank First Securities, Research Division

Anne Gjøen - Handelsbanken Capital Markets, Research Division

André Baustad Benonisen - Danske Bank Markets, Research Division

John A. Schj. Olaisen - ABG Sundal Collier Holding ASA, Research Division

Hilde Merete Nafstad

Good afternoon, and welcome, everyone. I'm Hilde Nafstad, Statoil's Head of IR. I assume you have all seen the release from Statoil this morning. Stock market announcement was issue and you will find the text and the presentation on our website at statoil.com.

I'm joined here today by Statoil's Chief Executive Officer, Mr. Helge Lund; and our Chief Financial Officer, Mr. Torgrim Reitan. They'll give a short introduction followed by a Q&A session.

With us here today, we also have Senior Vice President for Corporate M&A, Katie Jackson; and Senior Vice President for Performance Management and Risk, Svein Skeie.

And now we divert to our President and CEO, Helge Lund.

Helge Lund

Thank you, Hilde, and good afternoon to everyone. We're pleased to announce yet another major transaction realizing substantial value for our shareholders and also allowing us to focus our portfolio and to redeploy capital for future investments, among others to our new discoveries at the Norwegian continental shelf.

First of all, the deal we announced today has a strong strategic fit in the sense that we exit 2 non-core, non-operated assets in the U.K. and also divest 2 NCS assets with a high ownership share. We extract further value from 2 NCS fields through a strong industrial performance.

On Gullfaks, we have invested in an IOR to maintain a high production level and to secure a long life ahead at the field. And we have also, as we have announced earlier, made an exciting discovery this year. This allow us now to capture the current value of part of that investment and monetize it.

Gudrun is a different story but still rests on the industrial capability and offshore capabilities of Statoil. This was originally a marginal field that we have been able to develop into a profitable project. Development has been very well executed by our teams, and production start-up is only months ahead, as scheduled, and also below budget. In both assets, we will divest, but we still retain more than 50% of the fields and we have further industrial control. This is similar to what you observed for the deals we made at Peregrino and the oil sands in Canada earlier. And we divest of the field. With a high equity share, we use our industrial knowledge, we demonstrates value, and we realize intensified [ph] potential by keeping operatorship and a high ownership share.

The rationale for the U.K. fields are a bit different. We exit what is now considered a non-core asset to Statoil. We have important work to do elsewhere in the U.K. as we're operating Mariner and Bressay. It therefore made sense to us to sell the non-operated, non-core West of Shetlands asset.

Secondly, and beyond the strategic perspective, this transaction, of course, has a strong financial rationale. It's a major transaction even for Statoil. We realize a substantial value, raising proceeds of a bit less than USD 3 billion and, of course, we reduce future CapEx by around USD 7 billion, of which the majority of that is planned for before 2020.

And finally, I believe, from a risk management perspective, this transaction makes good sense. By divesting non-core assets, we improve the focus of our portfolio. We also are reducing our high-ownership shares at 2 fields. And, of course, we increase the financial flexibility and strengthen our balance sheet. In sum, we believe this transaction makes us better positioned in a more volatile macro environment.

In the past years, we have been more active in terms of portfolio management, and I believe we have been quite successful. Our approach is purely value driven. We've sold assets when the price is right. Since 2010, transactions have contributed with a total proceeds of around USD 15 billion and significant accounting gain. Peregrino, Canadian oil sands, Statoil Fuel & Retail, Gassled and the 2 most recent NCS transactions, Centrica and Wintershall, being the biggest contributors. All of these transactions are firmly line with our strategy, and they have contributed to substantial value creation. They should, therefore, be seen as a part of a pattern and a strategic choice.

We continue to use portfolio management as a means to create value for our shareholders, and I think today's announcement is a prime example of what we would like to achieve. We're pleased with the price we got for this transaction, particularly involving the significant CapEx relief that we have moving forward, and I also think it demonstrates the value of our overall portfolio.

Finally, I'm pleased that we're today also announcing that we're broadening our partnership with OMV, a competent partner. We're already a partner with the company on Aasta Hansteen and Edvard Grieg, the 2 fields in Norway. We are now broadening that with Gullfaks and Gudrun and also working in a broader exploration alliance across several licenses in Norway, the Faroe Islands and also in the U.K. And we also believe that these 2 companies can enhance each other's capabilities in IOR. As this is a critical area for the industry moving forward, we think this is a good transaction for both parties.

And with that I give the floor to Torgrim Reitan.

Torgrim Reitan

Thank you, Helge. Well, first of all, as you understand, we are pleased with today's transaction. We realized $2.65 billion in the deal plus a contingent payment related to the upside at Gullfaks, and we realized capital gains between $1.3 billion and $1.5 billion at effective date. In addition, we reduce future OpEx by around $7 billion, as Helge already mentioned.

This transaction demonstrates the underlying value of our assets. Firstly, this transaction accounts for 1.5% to 2% of oil reserves, and the price paid for this 1.5% to 2% is $2.65 billion. Secondly, if you compare this transaction with what you find in Wood Mac, we see a premium of more than 50%. The average premium across Centrica deal, the Wintershall deal and the OMV deal, it'll translate into a premium of around 50% compared to Wood Mac.

It is important to know that the assets we have divested today have reached different stages of maturity. Gullfaks has produced, but their hedge [ph] by the [indiscernible] Bank is yet to be sanctioned. It is necessary to have an idea of future capital requirements in order to fully understand the inherent value in the deal. This is why we leave you with an estimate for future costs. For this transaction, it will enable Statoil to redeploy around $7 billion in CapEx, of which $5.5 billion is in the period of 2020.

You'll also note that there is an upside to the deal. There is an additional upside in the value in the contingent payment. This is related to the reserves that will be added from the Lista discovery at Gullfaks. A compensation of $6 per barrel off Gullfaks is agreed for additional volumes related to this discovery. And there is no cap on that transaction.

We produced around 26,000 barrels of oil equivalent per day from the divested assets in the first half of year. We have estimated production from the assets for the next year of around 40,000 barrels, that is next year, and around 60,000 barrels in 2015. Our portfolio still has the capacity to deliver on the 2020 addition. There is no changes to our guidance, but, as we have said, we will constantly evaluate what is most value creative.

The deal is effective from 1st of January this year. There will be an adjustment for the cash flow at the time of closing, and that is expected to increase the proceeds further. We manifest our financial flexibility by this, not only due to the proceeds but also because future obligation already [indiscernible]. This is exactly what we told you back in February when we discussed our asset framework for the next years.

So let's turn to your questions. And Helge and myself will be able to explain the deal in some more detail. But, as in previous years, we are not diving into the details per asset. So let's discuss the transaction on an overall level.

And I'll give the ball to you, Hilde, to lead us to the Q&A session.

Hilde Merete Nafstad

Thank you, Torgrim. First, I'll ask the operator to [indiscernible] for posing questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Hilde Merete Nafstad

Thank you. Now we'll turn to our first question, which comes from Theepan Jothilingam from Nomura.

Theepan Jothilingam - Nomura Securities Co. Ltd., Research Division

I've got a number of questions, actually. Just firstly, come back to the CapEx savings of $7 billion. I just wanted to try to get a feel for where you see that in terms of it appears, even up to 2020, could be back-end loaded. And sort of an extension to that question, therefore, is in terms of guidance for the next couple of years or 2014, directionally, should we still expect CapEx to increase for the group next year? Secondly, just on the disposal strategy, yes, very much it makes sense to sell non-core assets. But I guess in the portfolio where you are operator with a majority stake, you've got a number of assets where you're not or you're so then potentially higher than 50%. Are there -- should we think about those assets potentially being also for sale? And then thirdly, I guess with Helge on the call, I want to ask perhaps whether Statoil had any discussions with the government in terms of their thinking on a potential sell-down in their stake in Statoil at the group level.

Helge Lund

Well, perhaps I can speak to the 2 latter and Torgrim can take the first one. It goes without saying that we have had no discussion with our shareholders or whether they want to buy or sell shares. That includes the Norwegian government. In terms of disposal of assets, the key for us is all the time that we try to capture maximum values -- value from all our fields, and that is the guiding principle for our portfolio management. Having said that, I think it's very important that, those that are following Statoil, there is a pattern into what we're doing today and what we have done over the last 4 to 5 years, very -- in a very strong way think about portfolio management as part of the overall management of value in Statoil. And of course, there's a combination of motivations for doing that: maximize value, making sure that we focus our strategy and, of course, and I think more and more important in the volatile macro environment, that we continue to operate in a -- with a very solid balance sheet. And we have a pragmatic view also to the ownership of share. Now from time to time, it is right to monetize the business that we have if we see that we can capture their value.

Torgrim Reitan

Theepan, on the question on the investment profile, on $5.5 billion that is before 2020, it's more front-end loaded than back-end loaded, this profile. That is, [indiscernible] impacting over the next [indiscernible] years. When it comes to the split of the profit of ongoing Stavanger's [indiscernible] at Gudrun, it's final stages of investment, and Gullfaks has a continuous investment profile aspect [ph]. Rosebank and Schiehallion are -- have significant investment [indiscernible]. When it comes to your question related to guiding, we have discussed an average of $21 billion [ph] over the next years, and we have stated that this is consistent with delivering 2.5 million barrels per day and this is still valid. This transaction, of course, creates more flexibility around our investment profile going forward.

Hilde Merete Nafstad

Thank you, Torgrim. Our next question comes from Peter Hutton from RBC.

Peter Hutton - RBC Capital Markets, LLC, Research Division

Yes, just following up on that last point. So at this stage, the saving on CapEx, which, if it's front-end loaded, might be as much as $1 billion a year in the early stages, gives flexibility rather than an opportunity at this stage to move that guidance down to towards $20 billion. Can you just confirm that one? And the second question is the 40 -- the guidance of 40,000 impact on volumes net to Statoil in 2014 and 60 in 2016, just sort of correlating that with OMV's presentation, they're giving 15 in -- from Gudrun and 25, 26 in 2014 from Gullfaks. Can I just confirm that -- the implication of that given that Gudrun is, I think, a 65,000 barrel a day gross project, the implication of that is you're expecting it to run virtually from the beginning of 2014. That would be helpful to confirm that whether you're on track for that one. And the second one is the difference between the 40 and the 60, can we therefore say that, that would be on Gullfaks and Gullfaks alone? Or any other elements coming from the 4 areas that you're divesting today?

Torgrim Reitan

Thank you, Peter. I hope you're doing well.

Peter Hutton - RBC Capital Markets, LLC, Research Division

Well...

Torgrim Reitan

On the investments, we don't make any adjustment to our guiding. I mean, it's just -- [indiscernible] the market to divest. But you're right, it gives us more flexibility in our investment program over the next year. When it comes to production numbers, I can't comment on this under this call, but these are consistent with our numbers. And yes, Gudrun is on track, and we expect that to be in production in the first quarter of 2014. So West of Shetland, there are no production in 2014, and there are some minor volumes from Schiehallion in [indiscernible].

Hilde Merete Nafstad

Thank you. The next question comes from Lydia Rainforth from Barclays.

Lydia Rainforth - Barclays Capital, Research Division

Three questions, if I could. Firstly, these are great assets that you're selling away. So could you just talk about the longer term, the 2020 aspirations for the Norwegian continental shelf and whether that has been affected? And then secondly, just could talk us through the research and development, the Enhanced Oil Recovery, and the fact that you -- partnership that you've put in place for OMV? And what are you expecting from that? And then finally, if I could just come back to this idea of your saving future CapEx. Are these still towards the low end of the Statoil portfolio in terms of the return on future CapEx that you're looking at and then just that you have other opportunities that you would rather spend them on? I'm just thinking -- wondering how to think about that element of it.

Helge Lund

First on the -- this is Helge. Thank you, Lydia. On the 2020 aspiration for the group altogether, we didn't introduce that by saying that it did have the capacity to deliver the 2.5 million barrels per day for the overall portfolio, including the Norwegian continental shelf. But also, after this transaction, and then we will go back to, of course, to how we manage that. We're clearly not driven by value ambitions but -- by volume ambitions but value, and I think this transaction is a clear statement to that. And we will use the [indiscernible] Day later to discuss the future beyond what we say now. On research and development or technology collaboration within IOR, this is a critical area for the oil and gas industry. I think Statoil has a tremendously strong track record on IOR at Norwegian continental shelf, while our counterpart has a similar track record in other fields and also smaller fields. We believe that there is a potential by these 2 companies working together on technology to see how we can learn from each other and launch technology efforts, but it's too early to be more specific at this stage. Perhaps Torgrim will comment again on the CapEx side.

Torgrim Reitan

So these assets are -- I mean, on a -- we are entering a situation with a lot of [indiscernible] of this project very well across the industry. For these assets, I'm not ready to discuss the [indiscernible] banking [ph] of assets. But the asset value creation of the divestment is attractive to us, and we are [indiscernible].

Hilde Merete Nafstad

That's great, thank you. Here, our next question comes from Teodor Nilsen, Swedbank First Securities.

Teodor Sveen Nilsen - Swedbank First Securities, Research Division

So just a follow-up question on the last question actually. It's related to production level on NCS. You said that you'll be able to produce 1.4 million barrels in Norway through 2020. Does this transaction change that? Or do you need to acquire more production in Norway to be able to meet that target?

Helge Lund

Again, we have made specific assumptions on guiding on the 40,000 barrels per day in 2014 and 50,000 barrels per day in 2016, and it goes without saying that on short -- such short-time horizon, this will impact our production. On the longer-term horizon, I'm not prepared at this stage to go into specific in our ambition -- 2020 ambition beyond what we already said earlier today and confirmed by Torgrim right now that the overall portfolio have the capacity to deliver 2.5 and beyond even after this transaction. Of course, you are very close to Norwegian continental shelf, and you know that they have made significant discoveries. But, of course, Schiehallion could be a very, very important part of the production perspective at Norwegian continental shelf and of course also in terms of value creation.

Teodor Sveen Nilsen - Swedbank First Securities, Research Division

So we can assume that -- or you mentioned several focus or focus areas at Ormen [ph], yes, going forward. And as far as you remember, you mentioned both Gullfaks and Utsira High. And after this transaction, maybe Utsira High will be even more important than before in terms of production goals towards 2020.

Helge Lund

Right, we will continue to explore at the Norwegian continental shelf. We'll continue to take the maximum out of the things that we are responsible for. Rosebank [ph] is, it goes without saying, extremely important for Statoil as well with a 40% share in both of the licenses. And we have an exciting exploration and -- fully going [ph] on also in the Barents Sea and several projects under execution. So I see that we have adequate and stimulating investment opportunities at the Norwegian continental shelf. I will maybe add to say that we have a strong resource base and a good project portfolio. And that is the key focus of our development activities moving forward.

Hilde Merete Nafstad

Okay, thank. Next in line, we have Anne Gjøen from Handelsbanken Capital Markets.

Anne Gjøen - Handelsbanken Capital Markets, Research Division

Since you have been giving us guiding when it comes to volume impact of 40,000 barrels in 2014 and 60 in 2016, I wonder if it's possible to you to guide on some kind of earnings impact if you, for example, assume an oil and gas price at today's level. The reason why I'm asking is that I'm a bit uncertain about the OpEx and depreciation level on these fields.

Torgrim Reitan

Okay, Anne, thank you. You were right, the volume impact is as you described. I think concerning earnings impact this year, there will be an immediate effect at '14. When it comes to sales, we have $1.5 billion. Beyond that, there are some characteristics that impact the our control. And that is the fact that new development, particularly the very high DD&A, very [indiscernible] like you have seen on [indiscernible] lately. So when Gudrun comes on stream, Gudrun will specifically have a high DD&A hurdle, and, specifically, Rosebank can [indiscernible] aspect. Apart from that, you know the Gullfaks assets very well so -- and you know that, that develops in our [indiscernible] going forward.

Hilde Merete Nafstad

Thank you. Then we have the next in line André Benonisen from Danske Bank.

André Baustad Benonisen - Danske Bank Markets, Research Division

Just a question here. It appears that the deal includes options of 11 exploration licenses. Could you give us a bit of details around that?

Helge Lund

It's right that it includes an intention by the parties, an option for taking -- we are going to taking share in exploration licenses in Norway and Faroe and the U.K. But that is H2 [ph]. We cannot go into more detail at this moment in time. But, of course, the value -- to invest -- interest in continuously of -- and strengthening their positions in the more core areas, including Norway.

Hilde Merete Nafstad

Thank you. Then we have John Olaisen from ABG.

John A. Schj. Olaisen - ABG Sundal Collier Holding ASA, Research Division

On your slides, you're right that the transaction is further increasing the financial flexibility of Statoil. And your net proceeds from the transaction is about 5 krones per share. Are you considering extraordinary dividends at all?

Torgrim Reitan

Well, we have a dividend policy, and there is no change to that. Nothing for us to communicate around that. But it goes without saying, and beyond the dividend question, that this is not only capturing a good value to Statoil but also generally increasing our financial flexibility and, of course, the strength of our balance sheet. We believe that is important in this period of high investment leverage and significant volatility in the macro environment. And as you very well know, you have -- we have been focused on this since the financial crisis, and we continue to be focused at that.

André Baustad Benonisen - Danske Bank Markets, Research Division

But your balance sheet is stronger than it's been for many years. How much stronger do you want your balance sheet to become?

Torgrim Reitan

We do not guide specifically on net debt-to-capital employed, but I think the commitment that we have to give to our shareholders is that we're able to manage Statoil and execute on our strategy in a very different oil and gas price environment. And I think this transaction will support that objective.

Hilde Merete Nafstad

Okay, thank you very much. Next in line, we have Nicolas Coleman [ph] from RBC Capital [ph].

Unknown Analyst

I'd just like to ask, in terms of how Statoil balances its Norwegian activity and its international activity, how does this fit in -- does this -- is it of the intention, for example, to free capital for future international projects for sort of international expansion? I'm thinking, for example, East Africa or something like that. Could you just sort of talk a bit about how this fits into that sort of global or international strategy, if it does? And in what way it does.

Helge Lund

The way I would like you to think about that question is that this transaction does not alter or change the strategic direction of the group altogether. And if you look at the pattern that we have established since 2008, we have sold assets or shares of assets in Norway as well as internationally. So this is much more strategy and asset driven. The strategy itself [ph] really, at a high level, includes 3 main pillars, and that is to maximize the value of Norwegian continental shelf; and then build positions in complex offshore fees around -- outside Norway, building on the or capitalizing on 40 years of offshore experience in Norway; and then they have taken industrial positions in shale gas and oil opportunities in North America. And those 3 areas still are where we would like to continue to develop in the group. I would also like to underline in context of your questions that we have been one of the most successful exploration companies over the last few years. We have made major discoveries in Norway, in Tanzania and Brazil. And the -- and, of course, that has also lead to everything we kind of think about how to -- how do we deploy our capital in the best possible way, and I think one way to think about Norway's area really is financial capacity to invest in a continuous exploration program but also take the value out or over or outside of the [indiscernible].

Hilde Merete Nafstad

Okay. Then we -- I only have one question left on the list, and that's from Peter Hutton, RBC.

Peter Hutton - RBC Capital Markets, LLC, Research Division

Yes, just a follow-up question, if I may. And just remind and looking then at your selling of packages for, are these all as one package? Is there any potential complication if, for example, one of the partners and one of the sales were to exercise preemption rights? I mean, just reminding that you're selling about 5.9% of Schiehallion. Well, Dutch [ph] bought Marathon's Schiehallion 5.9%. So it has indicators of interest in that. If that happens, does it cause a lot of complications? Or is it not -- or is it fairly neutral?

Torgrim Reitan

I don't think we want to go into the details in the agreement, but we believe that is relatively -- so completion dates for both parties.

Peter Hutton - RBC Capital Markets, LLC, Research Division

And the completion date is end of this year?

Torgrim Reitan

They have indicated around year end. That is because they are dependent on approval from third parties.

Hilde Merete Nafstad

Thank you very much. This concludes our conference call for today. If you have any further questions, please contact Investor Relations. Thank you very much and have a good day.

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