Norway’s Statoil (STL.NO in Oslo and STO in New York) reported a brutal first quarter on May 2. Net income adjusted for one-time items fell to NKr 12 billion in the quarter from NKr 16.8 billion in the first quarter of 2012. Analysts had expected adjusted net income of NKr 13.7 billion for the quarter.
Lower oil and natural gas prices in the quarter were certainly part of the problem. So too were temporary production disruptions in Algeria, Norway, and Brazil. Production in the quarter fell to 1.998 million barrels of oil equivalent a day from 2.193 million barrels in the first quarter of last year. Statoil expects that production in 2013 as a whole will fall from 2012 levels because the company has sold some assets on the Norwegian outer continental shelf and because natural gas production from acquired U.S. shale assets has come on line more slowly than expected.
Which leaves investors trying to value a projected rebound in production in 2014 and later. Statoil has high volume projects scheduled to come into production in Brazil, the Gulf of Mexico, Tanzania, Mozambique, the Barents Sea, Indonesia, and eastern Canada beginning in late 2013 and stretching into 2020. The company projects that production growth will climb from a compound annual 2% to 3% from 2012 through 2016 to an annual 3% to 4% from 2016 through 2020. (Statoil is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )
The dangers are two-fold.
First, expected production could be delayed. This is business as usual in the oil industry, of course, but it still hurts when cash flow gets pushed off. It has already happened with Statoil’s Brazil project where the company has cut expected additions to production from 900,000 barrels per day in 2013 through 2016 from a September 2012 projection of 1 million barrels a day.
Second, costs will continue to climb—the only question is how fast. This isn’t a small matter at a company with the kind of big exploration and development program that Statoil has. Statoil plans a capital-spending budget of $19 billion this year. That’s up from $18 billion in 2012 and headed to $23 billion in 2016. According to projections by Credit Suisse that will leave Statoil with a funding gap until 2016—even if oil sells for $110 a barrel. It’s unlikely that the company will cut its dividend—right now the stock yields a little less than 4%. Companies that are two-thirds owned by their national governments—as Statoil is—don’t cut their dividends. So filling any funding gap is likely to mean more asset sales—probably of fields near Norway—and a visit to the financial markets for funding. Norway’s Conservative party has floated the idea of cutting the government’s stake back to 50%. That possibility, combined with the possibility that Statoil might have to tap the capital markets (although the odds say debt and not equity), does raise a risk that investors could see dilution of their equity stakes over the next few years—if costs in the oil industry continue to escalate.
So Statoil buy/sell/hold right now?
Looking at likely costs, production increases, and oil and natural gas prices, I get a 12-month target price of $27.50. That’s roughly a 15% gain from the May 6 close at $23.71 on the New York traded ADRs. Add in a dividend of 3.8% and you’re approaching a potential total return of almost 19%.
Remember all the worries that I’ve raised in this post. I’m willing to take a risk that Statoil will navigate them all safely—and I do think the company’s production schedule after 2014 is one of the best in the industry—but I’d like a little more potential return than 19%.
If I owned the shares, I wouldn’t sell here—there is that 3.8% dividend—and I’m not looking for the stock to drop much lower on the worries I’ve outlined above. But I’d get a whole lot more interested in adding to positions if Statoil trades at $22 or lower.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares in Statoil as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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