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Executive summary:

  • Statoil’s Q4 2013 and FY2013 results were disappointing, particularly when compared to the previous year.
  • The company has future growth prospects but they are not as ambitious as they were previously.
  • Statoil increased its dividend to NOK 7.00 per share.
  • The company will be converting to a quarterly dividend payment.
  • I remain long and optimistic for the company’s future.

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Norway's Statoil (NYSE:STO) announced its fourth quarter 2013 results on Friday, February 7. Overall, these results were rather disappointing, although lower oil prices compared to the fourth quarter of last least partially explains some of the disappointment. There are still some good things here though, particularly the production growth outside of Norway. I have discussed several times in the past why this international production growth is so important and I will do it again later in this article. The company also announced a move that many investors, particularly American ones, have been clamoring for quite some time: the introduction of quarterly dividend payments!

Long-time readers of my earnings analyses likely know that I like to share the important numbers from the company's report before getting into the meat of the analysis. Here they are:

  • The company reported adjusted earnings of NOK 42.3 billion in the fourth quarter of 2013. This compares somewhat unfavorably to the NOK 48.3 billion that the company earned in the fourth quarter of last year.
  • The company's full-year adjusted earnings were also lower in 2013 than in 2012. In 2013, Statoil had adjusted earnings of NOK 163.1 billion compared to NOK 193.2 billion in 2012.
  • Despite the lower adjusted earnings numbers, Statoil's net income in the fourth quarter increased year-over-year to NOK 14.8 billion. The company's net income in the fourth quarter of 2012 was NOK 13.0 billion.
  • Statoil's average equity production was down in the fourth quarter compared to the fourth quarter of 2012. In the fourth quarter, Statoil achieved an average production of 1,945 mboe per day compared to the 2,032 mboe per day that the company achieved in the prior year quarter.
  • Statoil achieved a reserve replacement ratio of 128% in 2013. The company's organic reserve replacement ratio was even higher, at a record 147%.
  • Statoil increased its dividend to NOK 7.00 and announced that it will begin paying quarterly dividends in 2014. This means that the company will distribute two quarterly dividend payments in 2013, in addition to this quarterly dividend, assuming the shareholders approve.

In previous articles, I have discussed that one of Statoil's standing ambitions has been to grow its average daily production to at least 2,500 mboe per day by 2020. The company did not reiterate that goal as a part of its most recent report which could indicate that it has abandoned this goal. In fact, this is not the case. The company still expects to hit its goal of growing its production to 2,500 mboe per day on average. However, it no longer expects that it will be able to achieve this production growth by 2020. Instead, the company is going to slow down the development of its existing projects in order to grow its cash flow and begin accumulating cash. Several other oil and gas companies have been making similar moves as the costs of field development have begun to soar. This move to stabilize and strengthen its cash flow is also one reason why Statoil reduced its budget for capital expenditures (mostly oil field development costs) from $21.4 billion to $20 billion. These two moves and other cost saving strategies should result in the company delivering a positive free cash flow by 2016 even after paying its dividend. This will almost certainly be a net positive for the stock price as the company begins to deliver on that promise.

Another development that could prove to be a net positive for the stock price is that the company has changed its dividend payment schedule. Similarly to many Scandinavian companies, but certainly not American ones, Statoil paid a large dividend once per year. This annual dividend is something that I do not believe that American investors are comfortable with. As I discussed in an Alpha Rich article that was published on Seeking Alpha Pro, this discomfort may have been one factor that was preventing the stock from performing more in line with its actual results, which have been better than what the general news media and analysts state. That has now changed, as Statoil announced that it will begin paying a quarterly dividend for 2014. This is in addition to the dividend hike that was also announced. This will result in the company's shareholders receiving more money in the form of dividends than ever before from Statoil. This may be the kick that is needed to get the company's share price out of the doldrums. Truthfully though, I expect that the share price will remain relatively flat until Statoil delivers on its impending production growth.

Speaking of production growth, the company could begin to see that as early as this year. The company expects to increase its production by a 2% CAGR (compound annual growth rate) over 2013 levels in 2014. At the same time, the company will be bringing some of its new projects online over the 2013 to 2016 period and this should result in an average compound annual growth rate of 3% over 2013 levels over the period with regards to the company's production. Statoil's highly successful exploration program has also delivered several new oil and gas deposits that the company plans to develop and exploit. These new deposits will be the driver of the company's growth towards 2020 and beyond.

(click to enlarge)

Source: Statoil

As I mentioned earlier in this article, Statoil saw its operating income decline on a year-over-year basis. However, this is not something that is particularly concerning. There were two primary reasons for the decline in operating profits: lower production than in the fourth quarter of 2012 and lower realized prices year-over-year. Of the two, the first is more concerning but the production decline can be easily explained by the fact that the company sold off some of its producing fields and interests in producing fields in 2013 in order to strengthen its cash position. For example, Statoil held a 25.5% interest in Azerbaijan's massive Shah Deniz gas field and in the South Caucasus Pipeline that goes through Azerbaijan and Georgia. The company sold 10% of this interest for $4 billion with an effective date of January 1, 2014. Statoil made similar moves in 2013, resulting in reduced production year-over-year.

The company's operating income also suffered because oil and gas prices both fell year-over-year. With that said, the company did benefit from slightly higher average oil prices in the fourth quarter compared to last year, but the 2013 average price was slightly below the 2012 average price.

(click to enlarge)

Source: Statoil

Like its peers, Statoil is a commodity company and commodity companies have, by definition, no pricing power. This is because these companies produce a product which is completely interchangeable with other companies producing the same product. Thus, they have no ability to set prices because there is nothing to differentiate their product from that of other companies' products. Therefore, these companies are forced to accept the prices that the market provides. There are tactics that these companies can use to reduce the risk that their profits will suffer from adverse moves in the market but, for the most part, there is nothing that the companies can do in the face of falling market prices. Thus, at least part of the company's weakness in operating results was completely out of its control. This does not mean that investors should completely ignore this pricing weakness, though.

Statoil remains a good investment for someone seeking dividend income. In addition to announcing its results, Statoil also increased its dividend to NOK 7.00 which gives the company a yield of 4.5% based on its most recent price of NOK 155.30 on the Oslo Børs. For investors purchasing the ADR, the dividend will be converted into U.S. dollars prior to being paid. American investors are also subject to a 15% withholding tax, so it is better to hold the stock in a standard, taxable account as opposed to an IRA or other tax-advantaged account. This is because the withheld amount can be eligible for the foreign income tax credit. Please consult your tax advisor for specific information regarding your personal situation.

Source: Statoil Remains A Good Dividend Investment Despite Disappointing Results