Statoil (NYSE:STO) is one of the largest publicly traded oil companies in the world. Initially founded to explore and develop oil in and around Norway, the company quickly started to take part in oil projects far away from the country in order to diversify its portfolio, and as a result it became one of the major players in the global oil industry.
Reserve Replacement Ratio
As oil reserves near Norway started to diminish, the company was forced to find new oil fields around the world. In 2008, the company's reserve replacement ratio was only 34%, well below the other oil giants. In 2009, this number improved to 73%, then to 87% in 2010. The company achieved a reserve replacement ratio of 117% in 2011.
Reserve replacement ratio refers to a company's ability to replace the oil it extracted by discovering or acquiring new oil reserves. Ideally this number should be higher than 100% in order to ensure long term sustainability for the company. A reserve replacement ratio of 100% would mean that the company is able to acquire new reserves worth of 100 barrels of oil for every 100 barrels of oil it extracts in the same year. In the last couple of years, Statoil was more aggressive about finding new oil reserves and this has been paying off so far. In 2011, the company found/acquired new oil reserves worth of 1.1 billion barrels of oil.
In 2011, the company drilled 41 new wells in an effort to increase its oil reserves. Of these drillings, 22 resulted in solid oil discoveries so far with seven more still being under investigation. It is important to note that most of Statoil's new discoveries were in locations with high political and social stability. For example some of the major findings of Statoil in 2011 include locations such as North Sea, Canada, Norway, Brazil and Southeast Asia. Historically, much of the high quality oil reserves in the world reside in countries with low political or social stability such as Iraq, Iran and Venezuela. Political and social stability indicates that the reserves will be safe from wars, coups and "nationalizations" for the time being, making those reserves even more valuable.
Between 2012 and 2014, the company will continue to seek oil near Norway, in the offshore and continental U.S. and Alaska, Canada, shores of Africa and Southeast Asia. During this period, most of the exploration will be done in the oceans and offshore rather than in the land. This indicates a new era for the global oil production. The company is highly experienced in drilling oil from the ocean, and it might get some projects from Russians as well. Furthermore, Statoil has many ongoing partnerships with other oil giants such as PetroBras (NYSE:PBR), ExxonMobil (NYSE:XOM) and Total (NYSE:TOT) in multiple parts of the world.
The company is also heavily involved in the natural gas business. While natural gas prices are currently low due to abundance of reserves in comparison to demand, the demand is expected to grow significantly in years to come. By 2020, gas demand in Asia is expected to nearly double, and by 2030, it is expected to increase nearly three-fold from today. Similarly gas demand in U.S. and Europe is expected to increase significantly in the following decades as well. Statoil has diversified gas reserves to meet the increased demand at the moment. For example, the company currently has 300 running wells and 400 drilled wells in the northeast region of the U.S. alone.
When investing in oil companies, the safety record is very important as one unfortunate event may cost a company earnings for many years. Generally, Statoil has a relatively clean safety record. The company hasn't experienced any large accidents, however it had to close down a number of wells near Norway temporarily as regulators found a number of safety flaws in those wells. This move hurt the company's production significantly in 2011. Statoil usually extracts oil in geographies with very harsh temperatures, which may increase the risk factor of the company.
Statoil has one of the lowest P/E ratios among large oil companies. The company enjoys a P/E ratio of 6.42. The company is currently benefiting greatly from high oil prices. Of course this also indicates some risk as the company's earnings are highly related to oil prices. For example, in 2008 Statoil earned 43.27 billion, in 2009 it earned 18.31 billion, next year it earned 38.08 billion and in 2011, it earned 78.79 billion (all currencies in Norwegian Krone). In the long term, rapidly increasing energy demand in the developing nations should keep oil prices relatively high (i.e., above $90 per barrel) and this should help Statoil's earnings for years to come.
The company explicitly voiced its commitment to paying dividends. This tells me that the company's dividends aren't going anywhere anytime soon. The company has been raising dividends for several years in a row in Norwegian Krone, however this might not reflect well for U.S. investors due to fluctuations in currency exchange values.
In 2007, Statoil's dividend yield was 3.16%, in 2008 it was 2.00%, in 2009 it was 2.25%, in 2010 it was 4.65% and in 2011 it was 4.64%. Remember though, dividend yield is not only a function of dividend rate, but also a function of share price. In the last decade, the company's share price appreciated by 254%. With dividends reinvested, the 10-year return jumps to 345%. Normally, Norway withholds 25% from dividends in taxes. However American citizens get to enjoy a reduced rate of 15% due to existing treaties between the two countries.
I believe that Statoil presents a good investment opportunity as energy demand in the world is increasing each year. It is one of the cheapest, cleanest oil companies with a nicely diversified portfolio. The company should continue to result in handsome returns for investors.