Statoil: Still Bullish on This Oil and Gas Stock

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Includes: BP, LUKOY, STO
by: Alex Cook

On January 29, I recommended Statoil (NYSE:STO) as an investment. There have been some new developments since that time, and I remain bullish on the company. This article is an update of my recommendation.

Background

Statoil is an oil and natural gas exploration and production company headquartered in Norway. The company is also involved in distribution with investments in a number of pipelines, and the company also owns retail gas stations, although reports indicate that the company plans to divest the retail branch.

Since I made my recommendation (original article), STO has traded fairly flat in the range of 21.57 to 23.55, and is currently around 23.41. I remain bullish.

Macroeconomic view

Oil prices had downward pressure in the past month due to sovereign debt concerns in Europe that caused investors to flee to the US dollar (hence, putting downward pressure on dollar-priced commodities like oil).

The United States economy still has weakness, especially with consumers, but GDP growth has been a positive sign. Additionally, it appears that unemployment may have hit at peak. A recovery in the United States will be bullish for energy with increased demand.

Additionally, I remain bearish on the US Dollar. Recent strength against the euro could likely be more due to investors fleeing the Euro than bullishly seeking the Dollar. The Federal Reserve has reiterated that interest rates will remain low for an “extended period.” From textbook macroeconomic theory, extended periods of low interest rates and high money supply will be bearish for the US dollar.

Admittedly, a risk with this theory is that the US dollar is somewhat of a special case as it is the de-facto international reserve currency, but I remain bearish as the reserve currency status was predicated of fiscal and monetary stability in the US. It is premature to declare reserve currency status to be at an imminent decline, but large deficits and quantitative easing would devalue a currency in any other country. Commodities should appreciate relative to the US dollar as a result.

Company view

Two major developments have happened to the company since my recommendation:

I view both of these developments as positives for STO.

Expanding natural gas delivery in the US is good since the US is a very large market for natural gas and could potentially become even larger if natural gas gains political favor. STO spinning of its retail division is in my view a good development also, since retail is a low-margin business, and the capital raise from this spinoff could help the company invest in more drilling.

Another interesting development is that apparently natural gas in shale rock formations is starting to be discovered in Western Europe, and Statoil is reportedly one of the companies exploring in shale. This could be a bearish sign for Russian natural gas companies if Western Europe starts discovering domestic sources, but it would be bullish for Statoil and other Western and Northern European companies.

Valuation

Company name Price P/E ratio Mkt Cap Div yield EBITD margin Opr. Margin
Statoil (NYSE:ASA) (ADR) 23.47 24.02 74.71B 3.04 37.75 26.13
Gazprom (ADR) 23.77 140.68B
BP (NYSE:BP) (ADR) 55.78 10.62 174.48B 6.22 15.41 10.74
LUKOIL HOLDING CO S/ADR (OTC:LUKOF) 55 12.9 46.57B
Chesapeake Energy Corp. 26.34 17.17B 1.12 -97.79 -118.76
TOTAL S.A. (ADR) 57.74 11.17 128.87B 6.06 18.84 13.23
Petrobras Energia SA 16.48 23.16 1.66B 4.34 20.13 11.82
Chevron Corporation 74.28 14.18 149.18B 3.74 17.87 10.79
Click to enlarge

Source: Google Finance as of March 5, 2010 at 12:00 PM Pacific Standard Time

Admittedly, STO does trade at a higher P/E than some competitors, but higher margins than the rest of the industry may warrant a higher multiple.

Conclusion: Maintain buy recommendation

I maintain the buy recommendation that I posted on January 29. I believe that macroeconomic trends are favorable for commodities. I also believe that the recent moves to divest STO’s retail unit and to invest more in distribution in the United States will benefit the company. Volatility between the US Dollar and the Euro may continue to affect energy for some time, but over a 12-month period, I remain bullish on STO.

Disclosure: None