Flight To Safety: The Value Case For Statoil ASA

Aug.11.14 | About: Statoil ASA (STO)

Summary

STO is the dominant producer on the lucrative Norwegian Continental Shelf.

STO's international production is overwhelmingly in stable nations like Angola and the United States.

FY2013 earnings were unusually low, but new wells are coming on line in 2014 that will increase production.

Norwegian oil giant Statoil ASA (NYSE:STO) is among the largest producers of Brent North Sea Crude oil in the world, and owns 69% of the production on the Norwegian Continental Shelf.

Normally, the contrarian in me keeps me away from stocks like Statoil, trading so close to a 52-week high. In this article, I aim to explain why, despite already enjoying a run-up, the company remains quite modestly priced, and why world events justify a premium on Statoil over many competitors.

Norway-centric: Statoil production overview
As I mentioned before, Statoil dominates the Norwegian Continental Shelf, and in many ways the shelf dominates Statoil as well, accounting for 63% of its total production.

That's good news, as not only does Brent Crude trade for a substantial premium over WTI Crude, but the continental shelf is also an extremely politically stable region, where interruptions are virtually unheard of.

That's 63%, but what about the other 37% of Statoil's production? Here too the news is overwhelmingly good, with the largest three locations, Angola, Azerbaijan, and the United States, all quite stable in their own right. Angola is the largest of the three for production right now, but new discoveries in the U.S. and dwindling Angolan reserves mean it will quickly be passed.

Beyond these three nations, all production is comparatively trivial to the bottom line. The most worrying of Statoil's properties is Amenas, in Algeria, which was the site of a disastrous January 2013 hostage-taking. They also have some extremely minor interests in Libya, where production is all but halted by civil war.

The bullish case for Brent
Brent Crude oil is the specification of choice for Europe, which is where the overwhelming majority of Statoil's production goes. The price has been consistently higher than the U.S. specification, WTI Crude.

Brent Crude Oil Spot Price Chart

Brent Crude Oil Spot Price data by YCharts

There is ample reason to believe that premium will not only remain, but will grow, as production in North America grows, while production around Europe continues to struggle. As mentioned before, Libya's production is virtually non-existent because of the civil war there, and that's not likely to change. Libya was traditionally a supplier of choice for Brent-specced refineries in the Mediterranean.

Other regional production is halted or at risk as well. Syria, another traditional Europe supplier, has lost most of its oil reserves to Islamist rebels. Sanctions are still keeping Iranian oil off the European markets, and both Chevron (NYSE:CVX) and Exxon-Mobil (NYSE:XOM) have been evacuating staff from Iraqi Kurdistan in the face of a militant offensive.

The only remain obvious exterior source to pick up the slack for European oil needs is Russia, but a growing sanctions war is likely to leave Russian producers reluctant to commit too much supply to the continent. That means Norwegian supply will continue to have to meet a large portion of European demand.

2013 and beyond
Looking at earnings, one can't help but notice Statoil's FY 2013 earnings of $2.00 per share were substantially lower than their FY 2012 earnings of $3.45.

Oil prices were down a bit, but that's not the whole story here. Rather, Statoil's lower earnings were primarily a function of decreased production, as some wells went off-line in 2013 and new wells being drilled to replace them won't be up and running until 2014 or later.

We've already seen earnings start to recover in the first two quarters of 2014, and the estimates for the full year are around $2.49, with the FY 2015 estimates going up to $2.59.

Obviously estimates in an oil producer are going to be extremely variable, depending on the prevailing price of oil, but ever-growing regional instability can be expected to keep those prices high.

The income case
Statoil pays its dividends once per year, in May. The payments are announced in Norwegian Krone, and on that basis they have slowly, but steadily risen annually.

The 7.00 NOK dividend puts the current yield around 3.9%. That's a solid yield, easily sustainable with current earnings, and likely to continue growing in the years ahead.

Conclusion
Even though Statoil is already up about 20% since January, their status as a top Brent Crude producer in an unusually stable region justifies much higher multiples than we're seeing, meaning Statoil remains a favorable value proposition. A 3.9% dividend yield also means a case is to be made for this as a reasonably-priced, stable income stock.

As energy supplies in Europe remain scarce on instability in the Middle East and Northern Africa, I anticipate a flight to safety. Investors will look to producers whose wells aren't impacted by unrest. In this regard, few can beat Statoil, and it should be at the top of your list for oil majors.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.