Statoil: Norwegian Energy Bargain

 |  Includes: COP, CVX, PZE, STO
by: Gary Dorsch

Norway’s Statoil (NYSE:STO) owns the remaining 25% of the Jack #2 well in the Gulf of Mexico, and is one of the world’s largest sellers of crude oil and a substantial supplier of natural gas to the European market, with 4.1 billion barrels of oil and natural gas reserves. A net income of NOK 30.7 billion in 2005, was the best-ever result in Statoil’s history.

However, Statoil’s crude oil reserves in the North Sea are depleting, so the company is looking elsewhere for new acquisitions. Statoil said on Sept 21st, it would pay $700 million for rights to two Gulf of Mexico deepwater discoveries and one exploration prospect from Plains Exploration (NYSE:PXP). Statoil regards the Gulf of Mexico, Algeria, Venezuela and Angola as key targets for expansion, in order to sustain production at around 1 million barrels of oil equivalent per day until 2015.

Venezuela currently produces around 620,000 barrels per day of extra-heavy Orinoco oil in joint ventures between Petroleos de Venezuela and Chevron (NYSE:CVX), Conoco Phillips (NYSE:COP), and Statoil. PDVSA is currently certifying reserves in the Orinoco Belt’s Carabobo I block with Brazilian energy giant Petrobras (NYSE:PZE). On August 10th, Venezuela began certifying around 235 billion barrels of crude reserves in the vast Orinoco Belt, with companies from China and Iran.

Driven by soaring oil prices, STO reported a 36% increase in operating profit of 29.78 billion Norwegian crowns ($4.80 billion) in Q2 from the same quarter a year earlier. STO estimated total 2006 oil and gas production at 1.2 million bpd. However, STO is shifting more towards natural gas, with roughly 60% of its 4.1 billion of reserves in natural gas and the remaining 40% in crude oil.

But STO was dealt a major blow on Oct 9th, when Russian gas monopoly Gazprom said it would develop the giant Shtokman gas field in the Arctic alone. France’s Total (NYSE:TOT), Statoil and Norsk Hydro (NHY),ConocoPhillips and ChevronTexaco were also snubbed for the $20 billion project.

Interestingly enough, natural gas futures on the Nymex rebounded by 62% to $6.60 per thousand Btu, since hitting bottom on Sept 27th, after Amaranth Advisors, a large hedge fund manager which lost $6 billion in energy trades, finished liquidating its remaining energy positions. On Sept 22nd, Aramanth sold its remaining energy portfolio at a loss to Citadel Investment Group and J P Morgan Chase, after a 50% plunge in natural gas futures from their July 31st high of $8.21.

Higher natural gas prices should act to support STO near $22 per share, and two major brokerage firms, ING and Goldman Sachs boosted their ratings on STO in early October. However, until crude oil finds a bottom, STO will have to deal with panicky investors, who don’t know how low crude oil can fall. Perhaps traders should take a look at the Saudi Arabian stock market for clues about oil prices.

Half of the value of the Arab world’s largest bourse was wiped out in 60 trading days since February 26th, a loss of around $380 billion of its value, considerably more than the Saudi Arabian kingdom’s GDP. The Saudi All Share Index is 70% controlled by 7,000 Arabian princes, and Riyadh refuses to float oil giant Aramco. While the meltdown in Saudi shares was largely attributed to a correction of unrealistic P/E multiples from a record 42 times earnings to 18 today, one has to wonder if the Saudi princes were also aware of an eventual bust in crude oil prices sometime in 2006.

(To read our analysis and predictions for crude oil, gold, copper, and many other global markets, click on the Global Money Trends hyperlink at the top of the article).

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