Update: July 28, 2015. Statoil (STO) reported second quarter results today (July 28) that beat consensus estimates on both earnings (NOK3.15 a share vs. the NOK1.62 consensus) and revenue (NOK138.5 billion vs. NOK124.8 billion analyst consensus.)
That doesn’t mean Statoil has found some way to magically sell oil for a higher price than competitors. Second quarter earnings may have exceeded analyst estimates but they still fell 27% year over year.
What’s the secret to the Norwegian oil company’s relative success at a time when oil continues a collapse from $108 a barrel in January 2014 to a July 28 close at $53.15 (for European benchmark Brent crude)?
Statoil’s quarter is a checklist for what an oil company has to do right these days to stand a chance of navigating a plunge in oil prices that still has a while to run. (Statoil is a member of my Jubak Picks portfolio. The position is down 36.4% since I added it on May 10, 2012. )
First, Statoil announced a further cut to its capital-spending budget to $17.5 billion for 2015. That’s down from $20 billion in 2014 and a projected budget of $18 billion reported last quarter. At the same time as the company continued to cut capital spending production climbed with second quarter production, adjusting for asset disposals, up 7% year over year.
Second, Statoil has been able to cut costs—and increase efficiency—so that it is finding and producing more oil even with lower capital spending. Unplanned losses (that is production losses that aren’t the result of planned events such as maintenance but are the result of accidents or weather) have fallen from 12% in 2012 to 5% in 2014. Efforts to increase the percentage of oil recovered from mature and declining off shore fields on the Norwegian Continental Shelf have pushed the recovery factor up to 50% with the company targeting 60% recovery. (Increasing oil recovery is an especially profitable endeavor since the company has already built out necessary infrastructure in the region.) Operating expenses fell an additional 15% quarter to quarter.
Third, Statoil has either been very lucky or very good at finding new oil to diversify its asset base beyond its traditional concentration in the Norwegian Continental Shelf. The company has announced promising finds in the deep-water Gulf of Mexico, off the east coast of Canada, and off both coasts of Africa (Angola and Tanzania.) Statoil has also recently added U.S. shale assets in the Marcellus, Eagle Ford, and Bakken geologies.
All this is backward looking, of course. Looking toward the future, Statoil has potentially lucrative positioning as a major supplier of natural gas to Europe at a time when Western European countries are looking to reduce their emissions of green house gases and to find alternative sources of natural gas to reduce reliance on Russian supplies.
Looking that that same direction, the big uncertainty is whether Statoil can continue to reduce costs and increase production at rates that will enable the company to maintain the current $0.221 quarterly dividend. Right now the company’s payout ratio is running at 80% to 100%, which doesn’t leave Statoil with a huge margin for further drops in the price of oil. In the conference call, the company said that it projects that it can maintain the current dividend payout (for 2015, management said) while reducing the payout ratio. The stock currently yields 5.4%.
As of July 28, looking at the likelihood that oil prices will stay low for a while, I’m cutting my target price to $24 a share by June 2016 from a prior $28 a share. Statoil closed at $16.48 in New York trading on July 28.
Update: April 14. The acquisition of BG Group by Royal Dutch Shell (RDS.A) has grabbed all the oil sector headlines. $51 billion deals will tend to do that—especially when they’re priced at a 52% premium to the pre-deal market price for BG Group. The acquisition makes Royal Dutch the biggest player in the world in the liquefied natural gas sector, expands the company’s presence in Brazil’s pre-salt oil projects in the South Atlantic, and gives Royal Dutch a big presence in waters off the east coast of Africa, one of the world’s most promising new areas for exploration. In short it’s not a bad deal although it is expensive: Credit Suisse calculates that the deal will dilute earnings at Royal Dutch by 10% in 2016, the year the acquisition will close, 5% in 2017, and then 1% in 2018, the year when the acquisition turns earnings positive.
The big deal headlines have overshadowed a series of announcements from Norway’s Statoil (STO) that on a smaller scale promise to continue the transformation of Statoil from a company focused on the North Sea to one with a major presence in the Gulf of Mexico, the Arctic frontier, and the same East African waters that Royal Dutch has just bought into.
For example, on March 30, Statoil announced the discovery of an additional 1 to 1.8 trillion cubic feet of natural gas at an exploration well in the water off Tanzania. That brings the company’s discoveries in the area to 8. I think Statoil’s discoveries, the much bigger finds by Italy’s ENI (ENI), and BG Group’s exploration success in the area has put the natural gas reserves of East Africa over the top. There’s now clearly enough natural gas in the area to make the investment in liquefied natural gas facilities to export LNG to Asia a viable and attractive proposition. Statoil already exports liquefied natural gas from its fields on the Norwegian continental shelf. Now it will be able to export LNG to the highly lucrative Asian markets from fields much closer to those markets.
Shortly after that announcement, Statoil reported another find, this one in the Gulf of Mexico. Statoil, the operator of this well has a 50% interest in its oil production with Anadarko Petroleum (APC) holding a 37.5% interest.
And then, finally, today, April 14, Statoil announced another natural gas find near its Aasta Hansteen field in the Norwegian Arctic. Statoil put the find at 2 billion to 7 billion cubic meters of natural gas. In the last year Statoil has increased its estimates of the size of this field by about 25%.
It’s hard to tell if it’s time to buy Statoil. The company’s total costs are relatively high because of taxes imposed by the Norwegian government and hefty depreciation. That has helped push Statoil’s New York traded ADRs down 26% in the last 12 months, as of April 13, but it also means that Statoil is very highly leveraged to any recovery in the price of oil that takes the Brent benchmark back towards $65 a barrel.
The ADR’s chart looks like it shows a pattern of higher highs and higher lows over the last six months but the pattern isn’t especially strong with the December 2014 high at $18.55, the February high at $19.62 and the ADRs closing at $19.55 on April 14. The dividend yield is 4.84% at the moment but Statoil isn’t covering that dividend from operating cash flow—and won’t until 2016—so it’s not clear how safe it is.
I’ve owned this stock in my Jubak’s Picks portfolio since September 2009 and it is down 14.02% in that time. Certainly I can’t tell you when the plunge in oil prices is over, but I think the odds are good that we’ll finish 2015 near the $65 a barrel level that would work well for Statoil. I am cutting my target price today since I think $37 is a bit ambitious. The new target is $28 a share by October 2015.
I don’t see a lot of situations where I’d be willing to put money on a company beating analyst expectations for first quarter earnings and raising guidance for the rest of 2015. Earnings and economic trends in the first half of the year don’t make the odds on that kind of good news especially favorable across the market.
Marathon Petroleum (MPC) is an exception, however. I think the refiner has a good chance to surpass expectations for earnings of $2.33 a share on revenue of $19.68 billion when it reports earnings on April 30.
Refining margins per barrel are likely to come in above the current $17 a barrel consensus—and could be as high as $19 a barrel. The company’s Speedway retail unit’s recent acquisition of 1,256 retail outlets from Hess (HES) effectively doubles the number of Marathon’s retail outlets (and makes Speedway the largest U.S. convenience store chain by revenue) and comes as low gasoline prices—down to a projected average of $2.45 a gallon from last summer’s $3.59, according to the U.S Energy Information Administration–are forecast to put more Americans on the road and to increase gasoline purchases by volume by 1.6%. Those extra gasoline purchases will put more people into Speedway’s convenience stores. In addition, the company will see lower maintenance costs (about $350 to $400 million) in 2015 thanks to a heavy maintenance program in 2014. And the company is on track to expand refinery volumes in 2015.
A little more detail on that last point: The company has two new condensate splitters adding to refining capacity in 2015. Condensate splitters are less costly refineries that take advantage of the easier to refine light oil coming out of the U.S. oil shale production boom. In addition, the ability to relatively quickly run light crude through a splitter will increase Marathon’s export capacity since this lightly refined oil can be exported while unrefined crude can’t thanks to a 1970s ban on crude oil that remains in place. And finally, Marathon’s purchase of BP’s Texas City refinery shifts Marathon’s refinery profile toward the Gulf Coast and away from its past emphasis on mid-continent capacity just as the trend in U.S. oil production makes the Gulf Coast the place to be. (The purchase will result in 62% of Marathon’s capacity coming from the Gulf Coast.)
All this is projected to lead to a huge increase in operating cash to $14.32 a share in 2015, Credit Suisse projects, from an actual $10.85 a share in 2014. It’s certainly not implausible to believe that the company will chose to return some of that cash flow to investors via share purchases or an increase in the current 2.01% dividend yield.
I’ll be adding Marathon Petroleum to my Jubak’s Picks portfolio tomorrow, April 9 with a target price of $125 a share. The shares closed at $98.56 today, April 8 with a gain of 0.32%. (Crude oil prices plunged today on a bigger than expected build in U.S. crude inventories. U.S. benchmark West Texas Intermediate fell 5.59% to $50.96 a barrel.) Marathon Petroleum shares trade at 12.99 times trailing 12-month earnings per share and 9.79 times projected 2015 earnings per share.
Update April 29, 2015. Marathon Petroleum (MPC), a member of my Jubak’s Picks portfolio since April 8, today announced a two-for-one stock split. The shares will begin trading on a split-adjusted level on June 11. The company’s board of directors also voted to maintain the current pre-split dividend of 50 cents a share. (The record date on the dividend is May 20.)
The company is due to report first quarter earnings tomorrow, April 30. Since a split doesn’t change anything about the company, except the share price, I’m keeping my target price at the current pre-split $125 a share. After June 11 that will become an effective target of $62.50.
At 3 p.m. New York time today, Marathon Petroleum traded at $102.30.
On May 11 I posted that I would sell Ensco (ESV) out of my Dividend Portfolio on May 12. I’ve been slow in posting the actual sell, however, and the usual recap of my logic. My apologies. Here’s that sell post now. On May 11, the shares closed at $26.13. On May 12, the close and sell price for the shares was $26.79. Today, the shares closed at $25.26. I missed the local high with my May 12 sell by a day. The shares closed at $27.35 on May 13.
The logic of the sell was simple: The rally in the shares of land-based and deep water drillers that went along with the rally in oil prices had gotten ahead of itself. Before a slight retreat on May 11, Ensco had been up 16.6% in the month.
The fundamentals of the deepwater drilling companies look likely to continue to deteriorate into 2016 as oil producers negotiate aggressively to cut their costs and a big back log of new rigs ordered near the market peak is set to hit the water in 2015 and 2016 before the schedule gets much lighter in 2017.
I suggested taking profits here before those fundamentals reasserted themselves in investors thinking.
Ensco’s quarterly earnings report, released on April 30, filled in some of those fundamentals. Ensco shows that 20 rigs (6 floaters and 14 jackups), roughly 30% of the company’s fleet, will roll off contract in 2015. Even if all of those rigs find new work, they’ll find it at lower day rates. Producers are determined to reduce costs by squeezing suppliers so that they can make money at $70 a barrel or lower and don’t need a return to $100 a barrel oil to turn a profit. In addition, drillers face a huge bulge of new construction. Estimates for the sector show 19 new rigs under construction for delivery in 2015 and 14 in 2016 before dropping to 4 in 2017 and 1 in 2018. (These figures don’t include rigs under construction in China.) Some of these will undoubtedly be delayed or even canceled, but their existence will help push down prices. Ensco itself has 3 drill ships and 3 jackup rigs under construction.
Total spend by oil producers on floaters will fall to $34 billion in 2015, down 8% from 2014, according to Credit Suisse with the analyst projections looking for another 10% to 15% drop in 2016 to $30 billion. If that projection turns out of be accurate, then I think we’re looking at capital spending on rigs bottoming in 2016 and a more sustainable rally emerging later in 2015 when that projection gets some confirmation from the data. I’d look to rebuy Ensco on that schedule.