Huge Oil Discoveries In The Last Year Make Statoil A Buy

| About: Statoil ASA (STO)

If you are looking for a safe investment that pays a good dividend, you should take a good look at Statoil ASA (NYSE:STO). Societe Generale's John Herrlin - head of oil and gas equity research - thinks integrated oil companies will be among the least volatile and least risky in the troubled times ahead. Statoil is one of these. It pays a great dividend of 3.70%, and it has good stock price appreciation potential. The big knock on it recently has been that it has not replaced its reserves used for production quickly enough. That has changed in the last year.

As of Dec. 31, 2010 STO had proved reserves of 2,124 million barrels of oil and 509 billion cubic meters of natural gas. Combined these translate to proved reserves of 5,325 million boe. Statoil also has 2,283 fuel stations. In the last year STO has grown its reserves considerably:

  1. It bought Brigham Exploration (BEXP) for 4.4B -- a Bakken play. This has an estimated resource base of 300-500 million recoverable boe, and estimates for recoverable oil in the Bakken have been going up.
  2. It announced the 250 million boe Skrugard oil discovery in the Barents Sea in April of 2011. Estimators think this field may hold up to 500 million of recoverable boe. Statoild is the operator of Skrugard with a 50% interest.
  3. It announced in June 2011 the discovery of the 150-300 million boe Peregrino South oil field discovery in offshore Brazil. Statoil is the operator with a 60% interest. The original recovery estimate was for 9%. However, STO later announced that it would use a water injection and rock compaction method to increase the recovery percentage to 20%. The field is now estimated to have reserves of 300-600 million barrels of recoverable oil in place.
  4. It confirmed a new "giant" oil field discovery in the North Sea. In this two reservoir zones called the Aldous and the Avalsnes are believed to be communicating the petroleum. Combined the discovery should come to 500 million to 1.2 billion of recoverable boe. STO has a 40% interest. The entire field operated with Lundin Petroleum (OTCPK:LNDNY) was estimated to contain 1.7B-3.3B recoverable boe initally. Anders Holte said Lundin would probably lower the upper part of the Avaldsnes' range of estimates to 1.3B barrels from 1.8billion. Lundin said it was not lowering its bottom end of the range for the Avaldsnes section from 800 million barrels. Statoil said it was not lowering its estimates for the section of the Aldous/Avaldsnes play that it operates.
  5. It announced the discovery of a second Barents Sea find on Jan. 12, 2012. This one has 200-300 million recoverable boe. STO has a 50% interest.
  6. It announced that its Snoehvit offshore gas field in the Arctic contains 11% more in gas reserves than originally thought (20 billion cubic meters more).
  7. It signed an a memorandum of understanding to explore a promising prospect, the Indra (and around there), in offshore Brazil with Petrobras (NYSE:PBR) and to share technology. This agreement should help both companies.

I am sure I have left out important points. However, the above should demonstrate just how positively STO has grown in the last year. It is hard to say what STO's stock price will do in the near term. The overall market is over bought. Any retracement would likely pull STO down with it. The EU credit crisis may rule the investing world, especially in the EU; and STO is a Norwegian company. Still the above discoveries should lead to good stock price appreciation over the longer term. Plus you will get to collect a good dividend of 3.70% while you wait.

The two year chart of STO gives some technical input for this trade.

click to enlarge

The slow stochastic sub chart indicates that STO is neither over sold nor over bought at this point in time. The main chart indicates that STO has been consolidating for the last several months. The current stock price is $25.42 as of the close on Monday Jan. 30, 2012. In an overall market downturn, STO could move down to support at $24, $22, or even $19. However, it would likely pop back up quickly. It is currently forming a pennant formation, and it is getting to the end of the pennant.

With all of the good fundamental announcements over the last year, the direction of STO's stock price seems likely to go up rather than down when it does finally reach the end of the pennant. The fundamentals will normally win out in the long run for any stock. STO's fundamentals have improved greatly over the last year with little positive effect on the stock. This is partially because STO shrunk production in 2011 slightly. However, it intends to grow production by 3% in 2012.

Plus the above announcements/discoveries are hugely positive. The longer 1-5 year direction of the stock price seems almost certain to be upward. Goldman Sachs $112.50/barrel estimate for the average price of WTI for all of 2012 is higher than the average price obtained in 2011. The secular bull market for oil is still in place. The emerging market countries are still demanding more and more oil.

The prospects for STO for 2012 and beyond look excellent. Statoil will give you price appreciation with little long term downside risk. Plus you get a good 3.70% dividend. This stock is a much better investment than bonds. Still averaging in is a good idea in an over bought market.

Good Luck Trading.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in STO over the next 72 hours.