2 Undervalued Oil Mini-Majors: Statoil And Lukoil

 |  Includes: LUKOY, STO
by: Dan Naumov

While the majority of articles about oil stocks on Seeking Alpha seems to focus either on the supermajors such as Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and BP (NYSE:BP) or the oil utility companies such as Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI), I believe that mini-majors are unfairly underrepresented in the discussions.

In this article, I would like to discuss two such companies that I believe should be considered for an investment portfolio: Statoil ASA (NYSE:STO) and Lukoil OAO (OTCPK:LUKOY).

Name Price Market cap P/E P/B
Statoil ASA $25.17 $80.08bn 6.12 1.57
Lukoil OAO $58.82 $49.99bn 4.42 0.63
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Statoil logo

About the company:

Statoil is a fully integrated Norwegian oil and gas company and is the largest company in the Nordic region by revenue, profit and market capitalization. The Norwegian government is the majority owner, holding 67% of the company shares.

In addition to its home market of Norway, the company's shares are listed on NYSE under the ticker STO. The company pays a dividend that currently yields 4.24% (1.068 USD gross per ADR, before 15% foreign withholding tax) with a payout ratio of 26%.

What makes it exciting:

Statoil's share price suffered a massive 66% decline during the 2008-2009 financial crisis, falling from a mid-2008 high of $41.70 down to $13.96 at the year end. The share price recovery has been seriously hindered by the fact that their reserve replacement ratio has been below 100% for many years.

In 2011, Statoil has achieved a 117% replacement ratio - the first time the ratio has exceeded 100% in a decade. More success followed and the company has now had 7 high-impact discoveries over the past 1 1/2 years. Approximately 85% of Statoil's proved reserves are located in politically stable countries within the OECD. Norway is by far the most important contributor in this category, followed by the U.S., Canada, Ireland and the U.K. This somewhat shelters the company from the potential negative impact of Middle East conflicts.

Statoil is a best-of-breed company with a great safety record and lots of experience in working offshore and under extreme environmental conditions. If you take the long-term view, the company is also well positioned to take part in exploring the Arctic shelf.

What are the risks:

Make no mistake about it, this is a slow growth company: Statoil sees its hydrocarbon production growth at close to 2% the coming decade and to remain at this level also in the 2020s. Should the European crisis develop into a longer recession or long-term depression, this would also no doubt have an impact.

Lukoil logo

About the company:

Lukoil is a vertically-integrated Russian oil and gas company, accounting for 2.2% of global output of crude oil and is the largest privately-owned oil and gas company in the world by proved oil reserves with 90.5% of company's proved reserves and marketable hydrocarbon production being in Russia.

While it can be hard to find good data on many Russian companies, Lukoil provides good data in abundance, for example: here are the 2012 Analyst Databook, 2011 Annual Report and 2011 Fact Book.

In addition to the Russian MCX exchange, the company shares are also traded OTC in the U.S. under the ticker LUKOY, as well as on the London and Frankfurt stock exchanges. The company pays a dividend that currently yields 3.46% (2.04 USD gross per ADR, before 15% foreign withholding tax) with a payout ratio of 19%.

What makes it exciting:

Earlier this year, Lukoil has unveiled its ambitious 2012-2021 Strategic Development Program. The main goals are:

  • Hydrocarbon production CAGR > 3,5%
  • Dividend/share CAGR no less than 15%
  • Notable increase in international reserves and production
  • Notable decrease in capital expenditures and increased free cash flow

Lukoil is truly unique in the space of publicly traded Russian companies, as the company management owns more than 50% of the company shares, making their personal financial well-being strongly tried to the well-being of the company.

Lukoil looks extremely undervalued compared to its peers:

Name P/E P/B P/S
Lukoil OAO 4.42 0.63 0.35
TNK-BP (OTC:TNKBF) 3.91 1.40 0.66
Gazprom Neft' (OTCQX:GZPFY) 5.98 0.96 0.75
Rosneft' OAO (OTC:RNFTF) 10.26 0.81 0.96
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The company sports a solid dividend yield, has consistently increased its dividend payout for 14 years in a row, and is committed to increasing it even faster in the future.

What are the risks:

The fate of Yukos is still fresh in the memory of investors that own shares of Russian companies. As such, energy and natural resource companies that the government has no stake in trade at significant discounts compared to those with implicit government backing.

Whether this discount is justified or not depends on your view on how likely the government is to make a powergrab for the vast resource reserves of the company.

The second long-term risk and a factor in the low valuation of Lukoil is the fact that as the old Siberian oil fields will begin to dry out, more and more emphasis is going to be placed on the vast Arctic shelves and at present the law limits involvement in the Arctic offshore development to state companies, meaning Gazprom and Rosneft. However, there are positive signs that this might eventually change.


The two mini-majors presented are very different on the basis of their geographic footprint and risk/reward profile, and I believe that either one can fill and niche in one's portfolio, but I see no reason why you wouldn't want to simply own both.

Disclosure: I am long OTCPK:LUKOY.

Additional disclosure: I have owned STO in the past.