Statoil's Q1 Results Show Improving Reserves And Growth Prospects

| About: Statoil ASA (STO)

Statoil ASA (NYSE:STO) announced its first-quarter 2012 results on May 8, 2012. These were very good results and show early signs that Statoil has begun to succeed in its growth ambitions. Here are some of the highlights from the first quarter:

  • Net operating income was NOK 57.9 billion ($9.9 billion). This represents a 14% increase from the NOK 50.8 billion that the company earned in the prior-year quarter.
  • Adjusted earnings in the first quarter were NOK 59.2 billion ($10.1 billion), up 25.4% from the prior-year quarter. This is the highest adjusted earnings number that Statoil has ever presented and thus represents a new record.
  • Cash flow from underlying operations was NOK 70.8 billion ($12.1 billion). This represents an increase of 25.5% from the NOK 56.4 billion that the company reported in the prior-year quarter.
  • Average equity production was 2,193 mboe per day in the first quarter. This represents an increase of 11.3% over the prior-year quarter.
  • Adjusted earnings after tax in the first quarter were NOK 16.8 billion ($2.87 billion). This was an increase of 41.2% over the prior-year quarter.
  • Net income in the first quarter of 2012 was NOK 15.4 billion ($2.63 billion). This was a small decrease from the prior-year quarter. The primary reason for this decrease was the absence of the one-time gain associated with the divestment of 40% of the Kai Kos Dehseh property that was on the company's results in the prior-year quarter.

Overall, these were very good results that reinforced my positive outlook for this company. With the exception of net income, all of the company's financial numbers were up significantly from the prior-year quarter. The primary reason for these higher numbers was higher gas and oil prices in the first quarter of 2012 compared to the first quarter of 2011, but the company's higher production volumes certainly played a role as well.

Statoil enjoyed total production entitlement in the first quarter of 2012 of 1,970 mboe per day, an 11.6% increase over the previous quarter. Total equity production was up 11.3% over the prior-year quarter, growing to 2,193 mboe per day from 1,971 mboe per day.

Click to enlarge image.

Source: Statoil ASA.

One of Statoil's biggest problems up until recently was its declining reserve base. The company reversed that trend last year with a tremendously successful exploration program that managed to increase the company's reserves for the first time in several years. Statoil continued with that momentum into the first quarter with three high-impact discoveries, eight discoveries, and two more potential discoveries awaiting final confirmation.

Statoil has been making a strong push over the last few years to expand its resource base beyond the mature areas of the North Sea and the Norwegian Continental Shelf. The company's results from the first quarter show that these efforts are paying off. The company's international operations achieved record production in the first quarter, producing 662 mboe per day. This represents an increase of 26% from the previous quarter. The company either saw first production from or ramped-up production at many of its international fields (outside of Norway), including Pazflor offshore Angola, the Eagle Ford and Marcellus shale in the United States, Leismer in the Canadian oil sands, and the Bakken shale in the United States, which the company acquired through last year's purchase of Brigham Exploration (BEXP).

Statoil looks well-positioned to grow its international production even more going forward. Earlier this year, Statoil announced that it has achieved first production from the Caesar Tonga project in the Gulf of Mexico. This project is part of Statoil's ambition to increase their production from the Gulf of Mexico. Statoil had total average daily production of 50,000 boe per day from the Gulf of Mexico. Caesar Tonga is expected to produce approximately 40,000 boe per day from the three wells that have already been brought online, and the project plan calls for the drilling of a fourth well which should increase the expected production further. Statoil holds a 23.55% partner stake in this project. Despite not having a huge stake in this project, Caesar Tonga looks likely to provide a significant production boost from the Gulf of Mexico for Statoil.

Statoil discovered a giant gas field off of the coast of Tanzania in late February. This discovery, which occurred at the Zafarani well, has been proven to contain up to five trillion cubic feet of gas. This discovery gives Statoil much of the same potential to profit from the growing demand and high prices for natural gas in the nearby Asian continent that Eni (NYSE:E) has with the Mamba Field in Mozambique (although the Mamba Field is far larger).

Statoil had two other high-impact discoveries during the quarter. The Havis field in Norway is estimated to contain between 400 and 600 million barrels of oil equivalent and the Pão de Açúcar in Brazil is estimated to contain approximately 250 million barrels of oil equivalent. These discoveries will provide a source of new growth for Statoil going forward as the company develops and begins producing from these fields. The sheer size of these fields should also bolster Statoil's reserves, something that the company needs. Despite last year's exploration successes, Statoil's three-year reserve replacement ratio stood at 92% at the end of 2011. If the reserve replacement ratio is less than 100%, then the company is taking more oil and gas out of the ground than it is discovering. Obviously, Statoil needs to work on increasing this ratio, and these large fields should help it accomplish that.

I have stated several times in previous articles (most recently here) that Statoil has the long-term ambition to grow average daily production to more than 2,500 mboe per day by 2020. That would represent an increase of 13.9% from this quarter's average daily production levels. The company looks to be on track to achieve this goal.

Disclosure: I am long STO.