Statoil ASA (STO)

In February, NYSE-listed Statoil Asa (US: STO) continued the recent run of record earnings results announced by several oil majors. The Norwegian integrated oil and gas group announced a 50 percent improvement in full year net income to NOK 24.9 billion (US$4.1 billion). The group benefited from higher realised oil prices, improved refining margins and a modest increase in production, in addition to a large realised non-operational foreign exchange gain.

All four of Statoil's operating divisions showed improvement in the year. By far the largest contributor was the Exploration and Production (E&P) Norway group. Income before financial items, income taxes and minority interest (adjusted income) was 35 percent higher in 2004 at NOK 51.0 billion. Driving this solid result was a 32 percent increase in the oil price and increased natural gas output which offset a modest decrease in oil production.

The International E&P division grew adjusted income by an impressive 135 percent to NOK 4.2 billion. Once again strong oil prices delivered significant gains but healthy 29 percent increases in production volumes also added to the exceptional performance.

Statoil's total oil and gas production for the year increased 2 percent to 1.1 million barrels of oil equivalent per day (boepd). Production from new wells at eight fields offset natural declining rates at mature sites, the disruption caused by a labour dispute, as well as temporary closures at the Snorre A and Vigdis fields. The company's healthy 106 percent reserve replacement ratio (RRR) in 2004 maintained a three year RRR average of 101 percent.

Maintaining such a stellar RRR record requires heavy investment in exploration and production. For the year, the company's investment programme amounted to NOK 42.8 billion. We believe these high levels of spending are very well directed as a 23.5 percent return on average capital employed (ROACE) suggests.

The oil and gas sector is a highly cash generative business, and Statoil is reaping the benefits. For the year, cash flow from operations increased a healthy 26 percent to NOK 38.8 billion. Gearing has fallen significantly from 22.6 percent to 19.0 percent. As a result the oil major's balance sheet is in excellent shape.

We have been very encouraged by Statoil's performance as encapsulated in these recent results. At Fat Prophets, we also expect the price of oil to stay stubbornly high in 2005 as supplies are placed under pressure by strong growth driven demand. While Statoil has outperformed the market by a wide margin during the last two years, we believe further share price gains are achievable. In our opinion, STO offers sound value with a prospective price earnings ratio of 11 times, and a yield of 3 percent.

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