Statoil – Norwegian would
State oil group’s cheap valuation has caught the market’s eye
Woulda, coulda, shoulda. Oil exploration is about opportunities seized or missed. Statoil, Norway’s state oil company, has taken some big punts in the past – from the Norwegian North Sea to Tanzania to US shale plays. Some were too expensive; some fizzled. But proven reserves are rising now and despite six months of strong performance, its shares remain very cheap. Time to take a chance?
Friday’s fourth-quarter results were below expectations. Net earnings of NKr11bn ($1.8bn) were short of the expected NKr12.8bn ($2.1bn). Production for the full year fell 3 per cent. A painful 8 per cent drop in realised natural gas prices probably caused the most damage over the past year.
Yet the shares traded up nearly 6 per cent on Friday. Statoil’s cheap valuation seems to have caught the market’s attention. Its ratio of enterprise value to earnings before interest, taxes, depreciation and amortisation, at 2.5, is more than 40 per cent below its global peers. But this discount has persisted for years as the company has serially disappointed investors. The difference now may be that expectations for production growth are outstripping those of most rivals.
Statoil’s three-year average reserve replacement rate – a metric that indicates how much oil and gas it has discovered in excess of what it has extracted – is 119 per cent. Among the oil majors that have reported their reserve numbers, only Chevron has done better. Credit Suisse forecasts that Statoil will average 3.5 per cent production growth for the rest of this decade. Again, Chevron is the only major expected to better this figure.
Statoil’s US assets should drive most of this growth, though the Norwegian field Johan Sverdrup will also have a healthy impact late in the decade.
Statoil could and should trade closer to its peers. If management can deliver current projects, plus book reserves from recent discoveries, this Norwegian would.