E ENI Spa

Statoil ASA’s (STO) first-quarter 2012 earnings of 91 cents per ADR marched past the Zacks Consensus Estimate of 78 cents. The quarterly result also showed a significant improvement from the year-earlier earnings of 65 cents per ADR, attributable to higher liquids and gas prices.

Adjusted net income after tax came in at NOK16.8 billion (US$2.9 billion), up from the year-earlier level of NOK 11.9 billion (US$2.1 billion).

Total revenue leaped 29% year over year to NOK195.4 billion ($33.7 billion), aided by higher liquids and gas prices as well as higher volumes of both liquids and gas sold.

Operational Performance

In the reported quarter, equity and entitlement production increased 11% and 12%, respectively, from the year-earlier quarter. The increase was attributable to the start-up of new fields Peregrino, Pazflor and Gulfaks, production ramp-up at existing fields, commissioning of the newly acquired Bakken field as well as higher gas sales. However, riser challenges, higher well maintenance charges and natural decline on mature fields partly offset the increase.

Total oil and gas equity production averaged 2.193 million barrels of oil equivalent per day (MMBOE/d) in the first quarter compared with 1.971 MMBOE/d in the year-earlier period. Of the total quarterly output, 55% was oil and 45% was natural gas.

Total oil and gas entitlement production averaged 1.970 MMBOE/d during the quarter (52% oil and 48% natural gas) compared with 1.765 MMBOE/d in the year-earlier period.

Total oil and gas liftings were 1.955 MMBOE/d, compared with 1.700 MMBOE/d in the prior-year quarter. The company’s realized oil prices averaged $111.5 per barrel, up 11% year over year, while natural gas price realization averaged NOK2.26 per standard cubic meter, up 15% from the year-earlier level.

Financials

During the quarter, total capital investment was NOK27.9 billion (US$4.8 billion) and operating cash flows were NOK 19.2 billion (US$3.3 billion). Net debt-to-capitalization ratio was 14.6% (versus 21.1% in the preceding quarter).

Guidance

Management said that it would deliver a compound annual equity production growth rate (CAGR) of around 3% between 2010 and 2012. Statoil aims to hit equity production of above 2.5 million barrels of oil equivalent in 2020. The growth is expected to come from new projects between 2014 and 2016, resulting in a 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%. 2013 production is expected somewhere around the 2012 level.

The company expects organic capital expenditures of around US$17 billion and exploration activity of about $3 billion for 2012.

Outlook

In the reported quarter, Statoil delivered strong exploration results, adding significantly to its resource base by making three high impact discoveries. The company made significant discoveries in offshore Norway, Tanzania and Brazil.

Recently, Statoil and Russian state-owned oil company OAO Rosneft have entered into an agreement under which the Norwegian oil giant will jointly explore and develop Russian offshore deposits in the Barents Sea and Sea of Okhotsk. The venture is expected to involve an investment of approximately $100 billion over decades.

Statoil intends to finance the initial exploration initiatives of the four licenses, covering more than 100,000 square kilometers of area, in order to validate the commercial viability. Importantly, the deal also enables the duo to conduct joint technical studies on two onshore Russian assets — West Siberia’s North-Komsomolskoye field and the Stavropol shale oil play in south-west Russia.

Following a surge in global oil demand, we see the Norwegian oil major as benefiting from this cooperation alliance with the world’s largest hydrocarbon-producing nation. The latest deal follows similar accords that Rosneft struck with Italy's Eni SpA (E) and U.S. energy behemoth ExxonMobil Corporation (XOM) for the exploration of oil in Russia's Arctic.

Of late, Statoil announced its plan to introduce a new rig concept to enhance the recovery rate of the mature fields on the NCS. The company has awarded an eight-year contract to Aker Solutions to attain heavy well intervention and light drilling services on the Norwegian Continental Shelf.

The technologically advanced Cat-B rig has been mainly designed for industrialization of drilling and intervention services in existing production wells. We believe Statoil’s venture to improve recovery of resources in mature fields is commendable.

Although near-term hiccups remain in the company’s production outlook, we have a favorable stance on Statoil’s long-term production growth given its growing upstream presence in the emerging basins of the Caspian Sea, West Africa and the deepwater U.S. Gulf of Mexico.

Our long-term Neutral recommendation remains unchanged and the company holds a Zacks #3 Rank (short-term Hold rating).

 
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