We are maintaining a long-term Neutral recommendation on Statoil ASA (STO), following its lukewarm third quarter results.
Statoil’s earnings lagged the Zacks Consensus Estimate in the third quarter but improved year over year on the back of higher liquids prices. Total revenue increased on higher liquids and gas prices, partially offset by a lower USD/NOK exchange rate and higher depreciation, depletion and amortization and impairments.
Going forward, Statoil targets to hit an equity production of above 2.5 million barrels of oil equivalent in 2020. The growth is expected to come from new projects from 2014 to 2016 that would result in a compound annual growth rate (CAGR) of 2% to 3% for the period 2012 to 2016. The second stream of projects is expected within the 2016-2020 period that would likely lead to a CAGR of 3% to 4%.
In an attempt to restructure its asset portfolio, Statoil has been divesting low-profit generating assets that do not fit into its long-term growth plan, over the past few quarters. We believe that these divestments will render Statoil financial flexibility to focus on the high yielding projects or share buybacks.
On the other hand, Statoil has been collaborating on lucrative deals that will enhance its operating base. Recently, Statoil won exploration bids for Canada’s East Coast along with U.S.-based Chevron Corporation (CVX) and Spain’s Repsol YPF SA. This bid is expected to fortify Statoil’s presence in the Canadian energy sector and enable it to build strong positions in new offshore clusters.
However, our optimism is clouded by the weak reserve replacement ratio exhibited by Statoil. Despite a number of major acquisitions, Statoil has not been able to meaningfully improve its reserve-replacement performance.
We also apprehend that Statoil’s performance will likely be affected by the volatile macro environment, fluctuating oil and natural gas prices and geo-political disturbances. Moreover, the Norwegian state’s concentrated ownership in the company significantly reduces the stock’s liquidity and attractiveness, relative to other European integrated players.
Hence, we foresee limited upside potential of the stock and expect Statoil to perform at par with the broader industry. Statoil currently retains a Zacks #3 Rank, which is equivalent to a short-term Hold rating.
