Statoil ASA (NYSE:STO) announced its third quarter 2013 results on October 30, 2013. The company managed to beat the expectations of analysts although the company's operating earnings were slightly below the prior year level. However, when the causes of the company's slight earnings decline are analyzed, the true strength of the results becomes apparent. Investors should overall be quite pleased with these results and realize that these results show the first signs of the company's growth story playing out.
Throughout this analysis, I provide the company's official figures as measured by its reporting currency, the Norwegian currency. Following each Norwegian kroner figure, the same figure is provided in U.S. dollars in parenthesis. All U.S. dollar figures were converted directly from the Norwegian kroner figures at the interbank exchange rate as of November 4, 2013 at 12:00 noon eastern standard time.
Before getting into the meat of this analysis, I would like to share the highlights from the company's quarterly report:
- The company reported a net operating income of NOK 39.3 billion ($6.56 billion). This represents a slight decline from the NOK 40.9 billion ($6.84 billion) that the company earned in the year-ago quarter.
- Statoil reported adjusted earnings of NOK 40.4 billion ($6.76 billion). This is a slight increase from the company's reported adjusted earnings of NOK 40.0 billion ($6.69 billion) in the prior year quarter.
- The company reported adjusted earnings after tax of NOK 12.1 billion ($2.02 billion). This is a slight improvement from the prior year quarter's figure of NOK 11.9 billion ($1.99 billion).
- Statoil's net income for the quarter was NOK 13.7 billion ($2.29 billion). This represents a decrease from the prior year quarter's net income of NOK 14.5 billion ($2.43 billion).
- The company's average daily equity production increased year-over-year, going from 1,811 mboe per day to 1,852 mboe per day.
In many of my previous articles on Statoil, I discussed Statoil's ambitions to grow its average equity production to 2,500 mboe per day by 2020. The company reiterated this goal in its earnings press release. This represents an increase of 34.99% over the company's current level. Barring a massive decline in oil and gas prices, the process of achieving this goal should result in rising revenues and earnings going forward due to the higher quantities of oil and gas that the company will have to sell. However, as I have stated before, this growth will not follow a linear curve. Due to the normal declines in production volumes from the numerous maturing fields that the company operates, production in 2013 was expected to be lower than in 2012. This prediction has proven to be correct. In the first nine months of 2013, the company has achieved average production levels of 1,939 mboe per day. The company's average production in the same period in 2012 was 1,994 mboe per day.
The company has several new fields that it will begin bringing online over the next several years to offset the declining volumes from its maturing fields. The company began to bring some of these new fields online in 2013, which has resulted in much higher depreciation and amortization expenses than in the prior year. The company incurred depreciation and amortization expenses of NOK 22.6 billion ($3.78 billion) in the third quarter of 2013 compared to NOK 14.6 billion ($2.44 billion) in the third quarter of 2012. These higher expenses are the reason why the company's operating income decreased year over year. However, depreciation and amortization is a non-cash expense and so, despite the seemingly higher expenses, Statoil did not actually see any money leave the company due to this.
The oil and gas produced from these new fields should start pushing the company's average daily production back up beginning in 2014. In fact, we may be seeing the beginning of this production ramp up in the company's latest results. As already mentioned, Statoil achieved higher production in the third quarter than in the year-ago quarter. Granted, the company had some operational issues in the year-ago quarter that negatively affected its production but that does not change the fact that we could be seeing the early stages of the company's push for growth. However, with that said, the company will see its production negatively affected by scheduled maintenance in the fourth quarter of 2013. This will reduce the company's average daily production by about 30 mboe per day in the fourth quarter with the majority of the decline being composed of oil and not gas. This decline will only be temporary and the company should have production from the affected fields back to normal by the end of the year.
As mentioned previously, Statoil's forward growth will not follow a linear pattern. Instead, the growth will come from several field development projects that the company is working on in two waves. The first wave will take place from 2014 until 2016. In this wave, the company will bring online new projects that should increase its production at a compound annual growth rate of 2-3% for the period 2012 to 2016. The company's second growth wave will begin in 2016 and last until 2020. The company will see accelerated production growth during this wave as it brings new fields online and ramps up production from its projects that first started producing during the first growth wave. The company will see its production grow at a 3-4% compound annual growth rate during this second wave of growth.
Shortly after its earnings announcement, Statoil's CEO said that the company is not wedded to its production target of 2,500 mboe per day by 2020. Instead, the company will be focusing on delivering the most value possible to its investors. The takeaway here should be that Statoil retains its ambition to deliver the growth trajectory that I have presented here. However, the company will not be pursuing a "growth at all costs" mantra. It will only be pursuing growth projects that make economic sense. This is actually a good thing for investors as it means that the company will not be wasting money by attempting to extract oil and gas from the ground that cannot be extracted and sold profitably. Therefore, there is no guarantee that the company will achieve this forecasted production growth. However, as the company will still be pursuing projects that will grow its production profitably, investors can still expect the company to grow its revenues and earnings going forward.
The market did not appear to like these earnings as the ADR immediately fell following the earnings announcement and continued to fall throughout the remainder of the week. Not all of this fall in the stock price is attributable to the earnings announcement as the S&P 500 also hit its weekly peak just prior to Statoil's earnings report before falling off slightly. However, Statoil's price decline was much larger on a percentage basis.
Source: Fidelity Investments
In several previous articles, most notably this one, I stated that Statoil is one of the cheapest of the major oil and gas companies. This remains the case today:
Data Sourced from Yahoo! Finance
There are a few reasons for the relative cheapness of the stock including the fact that the company's production and resulting profits have been lower in 2013 than in 2012 (which was expected). Additional reasons for the relative cheapness of the stock are two factors that could potentially be turn-offs for American investors: the large ownership stake held by the Norwegian government and the annual (as opposed to quarterly) dividend. These factors appear to have collaborated to depress the stock relative to its peers. However, given the company's forward growth trajectory, these factors also appear to have produced a stock that offers an excellent value relative to its peers at present levels.