We maintain our long-term Neutral recommendation on the world’s largest offshore operator, Statoil ASA (STO). While the company is fairly active in its development operations, we remain on the sidelines due to its weak production profile.
Norway-based Statoil operates in all major hydrocarbon-producing regions of the world with a major emphasis on the Norwegian Continental Shelf (NCS). The company intends to generate 4.2 billion barrels of oil in the coming years and targets an oil recovery rate of 50% by 2020. Significant discoveries in the mature North Sea as well as in the Barents Sea reaffirm the potential of the NCS.
We appreciate Statoil’s upstream endeavors in the Caspian Sea, West Africa and the deepwater U.S. Gulf of Mexico (GoM) and hold a favorable outlook on its long-term production growth. The company aims to achieve an equity production of above 2.5 million barrels of oil equivalent in 2020 that is expected to come from new projects between 2014 and 2016.
Recently, Statoil announced the commencement of production from its Caesar Tonga deepwater project in the GoM that will aid in driving the development and expansion of Statoil’s international asset portfolio. Caesar Tonga field, located in the Green Canyon area of the deepwater GoM, is estimated to have a reserve potential of 200-400 million barrels of oil equivalent (MMBOE). This development assumes significance for the company as it demonstrates its move to significantly grow its production level in the GoM region over the next several years.
On the flip side, we remain cautious about the company’s weak production profile, which experienced a marginal increment in the fourth quarter of 2011. In the reported quarter, equity and entitlement production increased only by 2% and 1%, respectively, from the year-earlier period.
Although management pointed out that it would deliver a compound annual production growth rate (CAGR) of around 3% between 2010 and 2012, the company remains skeptical over the uncertainty surrounding gas value over volume, start-up and ramp-up, as well as operational regularity. Notably, the company expects planned turnarounds to have an adverse effect of around 20 MMBOE/d on its first quarter 2012 production.
Again, although the company’s capex expectation (US$17 billion on an organic basis for 2012) reflects higher activities, its weak reserve replacement ratio, lower production target and rising production costs (which leaped 13% year over year in the fourth quarter 2011) remain causes of concern.
Statoil, which competes with Eni SpA (E), holds a Zacks #3 Rank (short-term Hold rating).
To read this article on Zacks.com click here.
Zacks Investment Research
