Statoil Continues To Enjoy Exploration Success - Will Be Visible In Future Years

| About: Statoil ASA (STO)

Norwegian oil and gas giant Statoil (NYSE:STO) has enjoyed great success in its exploration efforts in recent months. This success at exploration continues a trend that the company has experienced over the past few years both in its home market of Norway and abroad which has successfully reversed what was previously the company's biggest problem. For years, Statoil had seen the size of its reserves grow smaller and smaller as it failed to discover enough oil to replace all of the oil and gas that it pulled out of the ground. These new discoveries also push the company closer to its long-held goal of increasing its average daily production to 2,500 mboe per day by 2020. In order to achieve its goal, the company will also need to continue being successful at exploration as the higher production level will result in the company pulling more oil and gas out of the ground than it does now, so it will need to discover sufficient additional resources to replace this higher volume. Fortunately, the company's continual success in its exploration efforts provides confidence that the company can achieve this growth goal sustainably.


On September 23, Statoil announced that it discovered a 200 meter column of gas in the Johan Castberg region of the Barents Sea. Unofficially, this discovery was a disappointment as the company had hoped to find oil and not natural gas. However, this discovery still provides the company with between 6 and 25 million barrels of oil equivalent worth of gas that can be produced and sold.

Iskrystall was the second prospect to be drilled in the region and the second to result in a discovery of natural gas. The first one was at Nunatak, which had insufficient volume of natural gas for the company to commercially exploit. Iskrystall is large enough to be commercially exploited but, at this time, the company is still hoping to find oil at the two remaining exploration locations.

Source: Statoil

The company's next exploration well will be drilled at the Skavl prospect which is located approximately 5 km south of the company's giant Skrugard discovery. It is also located in very close proximity to the nearby Havis discovery. The site's proximity to these two large oil wells and the favorable geology at the site give it a solid chance of resulting in an additional oil discovery that would serve to increase the company's already substantial reserves in the area.


On September 26, just a few days after its announcement of the Iskrystall discovery, Statoil announced that it made a significant oil discovery off of the coast of Newfoundland, Canada. This discovery, which was made in partnership with Canadian oil company Husky Energy (OTCPK:HUSKF), was the company's third discovery in the region.

The Flemish Pass Basin is proving to be a very valuable region for Statoil and one that will likely contribute to the company's aforementioned production growth going forward.

Source: Statoil

The reason that this region could prove important to Statoil's growth ambitions is the high volume of oil that is present in the area. The company's first oil discovery in the Flemish Pass Basin was located at Mizzen and is estimated to contain recoverable oil of 100-200 million barrels. The company's second discovery, located at the Harpoon prospect, does not currently have a size estimate available. All that the company has said about its discovery at Harpoon is that it is "light, high quality" oil. I would not be surprised if the size of the discovery at Harpoon is comparable to the size of the well at Mizzen.

Statoil has likewise not provided an estimate for the size of its find at Bay-du-Nord. However, the company did state that a sidetrack well has confirmed that the Bay-du-Nord discovery is a high-impact discovery. Statoil defines a high-impact discovery as a discovery which contains at least 100 million barrels of oil equivalent net to Statoil or at least 250 million barrels of oil equivalent total. Statoil is the operator of the Flemish Pass Basin lease with partner Husky Energy owning a 35% stake in the three discoveries. Therefore, in order for Statoil to net at least 100 million barrels of oil from this discovery, Bay-du-Nord must contain at least 153 million barrels of recoverable oil equivalent after any required royalty oil paid in kind. In other words, it appears that the discovery at Bay-du-Nord is at least as large, if not larger, as the earlier Mizzen discovery.

Overall, the company's success at discovering these and many other oil and gas deposits bodes well for the company's future. In 2013, Statoil had the most successful exploration program of any oil and gas company, discovering more resources than any of its peers. This will prove beneficial as the company seeks to maintain its reserves and grow its production going forward.

The stock price has not yet responded to this, however. The ADR shares have been range-bound for the past five years.

STO Chart

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There are a few possible reasons for this including a high percentage of the company's common stock being owned by the Norwegian government and the once-yearly dividend that does not satisfy many American income investors. At the same time, the company has one of the lowest EV/EBITDA ratios in the industry and a production level that is likely to increase going forward. Analysts are expecting the company's earnings to drop in the short-term however, and that will likely be the case. This is because the company's production of oil and gas will likely be lower in the second half of 2013 than it was in the second half of 2012. This lower production will likely increase again in 2014 as several new projects begin to come online. The company's exploration success will become visible in the second half of this decade as the new fields that has discovered begin to produce.

Disclosure: I am long STO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.