by Aaron Levitt | February 14, 2012 11:13 am
Given the hardships facing the downstream segment of the energy sector, earning announcements for variety of American integrated oil majors has been mixed. The same has held true for Europe as well, with giants Royal Dutch Shell (NYSE:RDS.A, RDS.B) and BP (NYSE:BP) reporting OK earnings thanks to difficulties in the refining sector. Looking at the energy majors as a whole, there has been very little to excite investors with such a refining drag on earnings.
That is, until Norwegian producer Statoil (NYSE:STO) reported earnings this last Wednesday. The latest earnings announcement is exactly what investors want to hear from the oil and gas sector.
Statoil, the state-owned enterprise responsible for more than 80% of Norway’s oil and gas production, reported record financial results for the fourth quarter of 2011. Statoil reported a 42% increase in net operating income of 60.7 billion Norwegian crowns. This compares to NOK 42.8 billion in the fourth quarter of 2010. The increase was a result of higher average prices for both oil and gas and the divestment of the company’s 24.1% stake in the Gassled natural gas transport infrastructure joint venture.
Unlike many of the other energy firms reporting troubled earnings, Statoil owns only two refineries as part of business mix and was able to avoid the margin squeeze facing other integrated majors. The avoidance helped Statoil report earnings of 79 cents per share, besting analyst consensus estimates of 73 cents. For full-year 2011, the company saw record profits of $2.84 per share, beating 2010’s full-year earnings of $2.19 per share.
Statoil also was able to deliver on another key metric: increasing reserves. The E&P firm’s new resources from exploration topped production for the first time since 2005, according to Bloomberg. Its reserve replacement ratio climbed to 1.17 as new reserves rose above 1.1 billion barrels of oil equivalent (BOE) throughout the year. This compares to just 300,000 BOE worth of new reserves added in 2010.
As Norway’s North Sea deepwater fields have matured, the nation has seen its oil output fall by 50% since 2000. As the nation’s chief producer, Statoil has struggled to replace these legacy fields and overall reserves. That is, until the firm decided to focus on unconventional assets. During the past few years, the company has made some strategic moves acquiring these fields. Most recently, Statoil became one of the largest holders of Bakken shale acreage with its $4.4 billion acquisition of Brigham Exploration. In June 2011, it bought shale acreage in the Eagle Ford from SM Energy (NYSE:SM), and in 2008, Statoil purchased $3.38 billion worth of Marcellus shale assets from Chesapeake Energy (NYSE:CHK). These buys have helped Statoil reach that 1.17 replacement ratio.
Those reserve replacements will keep coming as the Norwegian firm plans on raising 2012 CAPEX spending by $1 billion to reach $17 billion. Following both BP’s and Shell’s footsteps, the firm has highlighted increased exploration as a necessity going forward, and CEO Helge Lund during the earnings report said, “Unconventional resources will play an increasingly important part in global energy supply. We want to play there.”
For investors, Statoil’s latest earnings report highlights why the global E&P giant should be part of any energy portfolio. The firm has the ambition to grow its total production to 2,500,000 BOE per day by 2020. This is roughly an increase of 35% over 2011’s production numbers. So far, the energy company looks to be on pace to achieve that goal.
Also, the main concern for many analysts was the lack of replacement reserves. Statoil’s acquisitions in various shale plays have seemed to silence that worry.
Finally, the lack of refining capabilities is working in the company’s favor as it experienced zero drag on overall earnings due to decreasing margins. That could be a major plus in the long term as analysts expect margins in the refining sector to continue to dwindle.
Shares of Statoil currently can be had for cheap P/E of 8, and despite trading near their 52-week high, they represent a long-term bargain as management works toward its compound annual growth rate goal of 4% annually till 2020. Add in Statoil’s growing dividend (currently above 4%), and you have a long-term energy winner.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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