Statoil Stands to Benefit from Rising Energy Prices

Feb. 2.10 | About: Statoil ASA (STO)

Add this stock to your watch list: the Norwegian energy company Statoil (NYSE:STO). The company is a leader in offshore exploration and production, and it stands to benefit from rising energy prices.

Macroeconomic outlook

Macroeconomic trends for energy and commodities in general are good. Commodities perform well when there is weakness in the US Dollar, and I remain bearish on the Dollar because of deficits and stimulus. Also, commodities will rise when global demand increases and the Chinese and Indian economies heat up again. Morgan Stanley is putting an end of year price target of $95 on oil, which would be a rise of about 25 percent from current levels.

Brazil may be a trendy choice to invest in commodities, and I did indeed write that I am bullish on Brazil over the long term, but the article that I wrote was more of a ten-year out prediction. In the short term, some are now seeing weakness in Brazil. Investing in Norway could be a safer option, as Norway is not an emerging market, but instead a high-income free democracy that could really join the EU tomorrow if it wanted.

Potential new market

A possible catalyst for this company will actually be the northern provinces of the Kurdish Autonomous Region in Iraq, where Statoil has been expanding. The northern Kurdish areas have very poor infrastructure due to decades of oppression. Nevertheless, Iraqi Kurdistan is ripe with natural resources. If professionals from Statoil come in to develop the nascent Kurdish energy industry, this could be a major frontier market. Iraq’s security situation is much better than it was only three years ago. Iraqi Kurdistan could sell oil either through the international seaports in Basra or Umm Qasr, or through the Kirkuk-Ceyhan pipeline to Turkey. This pipeline would allow for sales directly to the European Union, and it would make Iranian threats over the Strait of Hormuz rather moot (say nothing though of what the US, Indian, Chinese, British, German, and French navies all would have done if Iran truly tried to block the Strait).

Financial comparisons

Ticker Company name Price EPS PE Ratio Div Yld ROE Net Prof Mrg Op Mrg
STO Statoil ASA 22.36 0.71 31.71 2.99 22.11 6.6 30.31
COP ConocoPhillips 48 -18.94 3.95 -23.58 -6.88 -1.43
TOT TOTAL S.A. 57.59 3.52 16.38 5.64 22.57 5.76 14.66
BP BP plc 56.12 2.82 19.9 5.81 22.88 5.9 9.6
RDS.A Royal Dutch Shell plc … 55.39 2.53 21.91 5.83 20.92 5.78 10.23
E Eni S.p.A. 46.52 2.41 19.32 6.02 20.8 8.78 17.12
CVX Chevron Corporation 72.12 6.15 11.73 3.65 29.23 8.77 15.73
XOM Exxon Mobil Corporation 64.43 4.26 15.11 2.54 38.53 9.47 17.13
HES Hess Corp. 57.79 0.94 61.42 0.68 21.38 5.74 11.44
OTCPK:LUKOY LUKOIL 54.9 4.27 12.87 3.01 19.98 8.49 12.73
Click to enlarge

Table from Google Finance, as of January 29, 2010

Statoil does indeed trade at a higher P/E ratio than some competitors, but it also has a significantly higher operating margin. That higher margin might warrant a higher multiple, as would frontier market growth in Iraq. Its return on equity is in line with competition.

Conclusion: Buy

Macroeconomic trends are looking positive for energy. Statoil is an established company based in a country with solid macroeconomic fundamentals, and it is expanding into a frontier market that could have a great deal of potential. Because of this, I am placing a buy recommendation on Statoil.

Disclosure: None