Statoil Has Capitalized On Russian Sanctions With Lithuanian LNG Deal

About: Equinor ASA (EQNR)
by: Khuldune Shahid

Sanctions on Russia have pressed Vilnius into action as STO has entered the Lithuanian natural gas arena.

STO would be delivering 540 million cubic meters worth of gas to the LNG terminal in Klaipėda every year.

The current oil and gas production of STO is comparable with the 80s.

Lithuania has been dependent on Russian gas - Gazprom to be precise - since forever. This 100% dependence on Moscow has meant that Vilnius pays 15% more than its European counterparts most of whom are dependent on Russian gas as well. What this also means is that whenever there's a global political crisis involving Russia, the Lithuanian energy sector feels the heat immediately. The ongoing Ukraine crisis and the ensuing sanctions on Russia have pressed Vilnius into action as Statoil (STO) has entered the Lithuanian natural gas arena, which in turn is whetting the appetite of the company's investors.

Deal with STO

Lietuvos Energia's (Lithuanian Energy) gas trading arm Litgas has signed a five-year deal with STO for LNG supply, which is believed to be worth around 3 billion litas ($1.15 billion). Vilnius has negotiated a competitive price, which has been linked to the UK NBP index, making the deal worth over a billion dollars.

STO would be delivering 540 million cubic meters worth of gas to the LNG terminal in Klaipėda every year, which is the minimum operational capacity for the facility if it is to be financially self-sufficient. The Klaipėda facility would be launched before the end of this year, with Lithuania planning on importing over a billion cubic meters of gas through the terminal, eying a capacity of 4 billion cubic meters in the not-too-distant future. The terminal would be responsible for a quarter of Lithuanian energy needs with another terminal being constructed to cater to the energy needs of Lithuania, Estonia and Latvia as well.

Considering the LNG price and reinforcement of energy security, Litgas's agreement with STO is a timely maneuver for Vilnius, with Ukraine simmering and jeopardizing European gas prospects. And while Lithuania gets independence from Russian gas, STO can showcase more business which in turn would translate into revenue hikes next year onwards. Increasing revenue has for long been at the top of the priority list for STO, and the Lithuanian gas deal is a statement of intent.

Record Activity

Ivar Aasheim, Norway's head of field development for STO, stated that the company's activity level is at its apogee, with over the number of projects in three figures. The current oil and gas production of STO is comparable with the 80s when the company was witnessing the realization of Oseberg, Snorre and both Gullfaks.

61 of STO's projects are in the execution phase taking the capital expenditure to around $33.23 billion. Norwegian continental shelf has been STO's production vanguard with the company witnessing oil and gas output of nearly 2 million barrels per day last year, which was a 5.5% hike as compared to 2007. Already posting hefty numbers domestically, STO plans on enhancing international production, especially since the number of really opulent mature fields in Norway is decreasing.

STO's success stories in the recent past include discoveries in Barents Sea's Johan Castberg field and North Sea's Johan Sverdrup field. Furthermore, augmenting its technological repertoire has allowed STO to capitalize on the previously deemed 'unprofitable discoveries' of previous decades. The increasing oil prices have further aided the company's quest by constantly boosting its revenue.

Among other notable projects contributing to STO's record activity, there's Aasta Hansteen in the Norwegian Sea, which is believed be the deepest field ever discovered off Norway. Old fields like Gullfaks and Troll and the British wind power project at the Dudgeon offshore are also boosting outputs and revenues. This reveals the company's wide gamut of energy projects, with the oil prices providing STO with the impetus to keep the momentum going and high higher profits.

Promising Outlook

While increasing oil prices enhance revenues, they also augment the expenses. This means that STO's LNG deal with Litgas becomes even more crucial, and the company needs to ensure that its gas maneuvers in Lithuania generate additional revenue, especially with the skepticism being generated about how STO might have sold itself cheap. Even so, STO now has the technology in place to minimize costs and make the most of the LNG deal, which in turn would help the company improve on its second quarter earnings report.

STO's earnings released on July 25 showcased earnings per share of $0.50, which was below the consensus estimates. The company's price as of August 29 is $28.46, with STO's one-year low being $21.01 with the corresponding high being $31.95. STO's 50-day moving average is $29.6 with its 200-day morning average being $28.8. The company's market cap is $89.265 with its P/E ratio being 8.53. The Q2 numbers don't reflect the company's prospects with most of STO's projects coming to fruition next year onwards.

By capitalizing on the Russian sanctions and striking a deal with Litgas, STO has manifested itself to be a promising investment, especially with the company's claim of record activity coinciding with the Litgas agreement. While the numbers should remain flat in the ongoing quarter, Q4 and beyond should provide serious growth to STO's revenues and a lucrative opportunity for investors.

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