Statoil Reports Record Quarter, Appears Undervalued

Sep.16.11 | About: Statoil ASA (STO)
Norwegian petroleum and gas giant Statoil ASA (NYSE:STO) recently announced very respectable second quarter results. Here are some of the highlights from the earnings report:
  • Statoil sold a 40% stake in Brazil’s Peregrino field. This a produced a NOK 8.8 billion ($1.56 billion) pretax gain.
  • Statoil enjoyed successful exploration efforts in Norway and elsewhere.
  • The company’s plan for developing and operating Norway’s Hyme (formerly Gygrid) field was approved.
  • The company’s plan for developing and operating Norway’s Valemon gas and condensate field was approved.
  • The company’s plan to fast-track development of the Visund South oil and gas field was approved.
  • Statoil awarded the contract for two specially designed Category D rigs to Songa Offshore. These rigs will be used on the Norwegian Continental Shelf.
  • Statoil increased its presence in the Texas Eagle Ford Shale by acquiring new leases.
Statoil’s net income for the second quarter was NOK 27.1 billion ($4.80 billion), a new record for the company. This is an increase of 774% over the prior year quarter. The company’s net operating income for the quarter was a similarly impressive NOK 61.0 billion ($10.8 billion). This represents an increase of 129% from the prior year quarter, primarily driven by increases in the average prices of both oil and gas. This profitability increase happened despite production falling from 1,957 mboe per day in the second quarter of 2010 to 1,692 mboe per day in the most recent quarter. The company’s net income and net operating income also benefited from the sale of 40% of the Peregrino field in Brazil and from the sale of 40% of the Kai Kos Dehseh Oil Sands Project in Canada. Statoil retains a 60% interest in both of these assets.
The first thing that jumped out at me on this report, other than the record-breaking profit numbers, was the relatively steep decline in production from the prior year quarter. This was entirely expected though. I discussed in a previous article that production throughout this year was expected to decline throughout the first half of the year and then pick up in the second half. That still appears to be the case. Planned turnarounds are expected to increase average production per day by 70 mboe in the third quarter. Most of this (about 80%) will be liquids such as oil and the remainder will be gas. Total production for 2011 will likely come in slightly lower than the average production level in 2010. This will almost certainly result in the company having substantially higher revenues and profits in 2011 than in 2010. This is a near guarantee if energy prices remain at current levels.
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Source: Statoil, ASA
Statoil looks undervalued at present levels. According to Yahoo Finance, the company has trailing P/E and EV to EBITDA ratios of 6.24 and 2.05 respectively. These values are among the lowest of any of the major vertically-integrated oil companies. Please keep in mind that these values are being calculated using the trailing earnings numbers. As I have just illustrated, 2011 is likely going to have higher earnings numbers than 2010 did and so the forward P/E and EV/EBITDA values are even lower.
The case for revenue and profit growth becomes even more compelling beginning in 2012. This is because of the investments that the company has been making internationally in recent years in places such as the Eagle Ford Shale, Athabasca Oil Sands, and Brazil. This was an effort to diversify away from Norway whose production peaked in 2000 and is now declining. The company and country still have prospects in the Arctic as recent discoveries have shown. Statoil will be the primary company involved in any production coming from the Norwegian Arctic. Meanwhile, the company’s aforementioned international investments will begin to pay off beginning in 2012. Statoil expects production to begin growing at a 3% CAGR based on actual 2010 equity production (which was above today’s levels). If oil prices remain at or above today’s levels, a likely scenario barring another recession, the company should see growing amounts of cash flowing into its coffers.
Statoil has plans to continue their Norwegian and international growth going forward. According to the earnings press release,

“Statoil has an ambition to reach an equity production above 2,500 mboe in 2020. The growth is expected to come from new projects in the period from 2014 to 2016 resulting in a growth rate of 2 to 3% (GAGR) for the period 2012 to 2016. A second wave of projects is expected to come on stream from 2016 to 2020 resulting in an accelerated growth rate (GAGR) of 3 to 4%.”

A production level of 2,500 mboe per day would be an increase of 47.75% over the levels achieved during the most recent record-setting quarter. It seems very unlikely that oil prices will be lower in 2020 than they are today. There are short-term pressures on oil prices. For example, a Greek debt default or a worsening of the European debt crisis could cause a fall in oil prices. Despite the short-term pressures though, it seems that oil is most likely to rise in price over the coming decade. An increase in oil prices combined with a significant production increase should push profits ever higher. Statoil will be delivering the majority of this growth after 2015 so this is definitely a long-term play. The stock does appear to be priced at a level that discounts or even ignores the company’s coming growth though so a patient investor may want to buy in today and wait for the profits to come.
Disclosure: I am long STO. I plan to add to my position within the next 72 hours.