Statoil

NYSE-listed Statoil is an integrated oil and gas company headquartered in Norway. We believe that Statoil is strongly placed among the majors to benefit from a high oil price environment over the long term. The company adopts one of the more conservative approaches to calculating reserves and has a high return on capital.

Statoil is the leading producer on the Norwegian Continental Shelf and accounts for around 50 per cent of Norway's total oil and gas production. International activities are located in Western Europe, Western Africa, Azerbaijan, and Venezuela. Statoil's gas business is one of the leading suppliers in Europe with market share of around 19 percent. World-wide trading of the company's own crude, as well as oil owned directly by the Norwegian state, makes Statoil's marketing arm the world's second-largest seller of crude.

The company recently released quarterly results to September 30 recording a robust 32 percent improvement in earnings before interest and tax (EBIT) to NOK16.1 billion (US$2.37 billion), when compared with the corresponding quarter in 2003.

Not surprisingly the largest single driver of Statoil's improved profitability has been an increase in oil prices. Over the quarter average realised oil prices were US$41.80 a barrel, compared with US$28.50 in 2003.

Quarterly oil production averaged 965,000 barrels of oil equivalent per day (boepd), however we expect this to recover strongly in the December quarter to an impressive 1.26 million boepd. The largest new field 'Kvitebjorn' in the North Sea came on stream in September, with Statoil's share of production expected to be 105,000 boepd. In addition the 'Sleipner Vest Alfra Nord' field commenced flowing on October and will contribute an expected 23,000 boepd. Internationally 'Kizomba' which is located off-shore Angola commenced producing in August adding 30,000 boepd.

Encouragingly, STO continues to invest heavily in exploration and production assets, targeting a spend of around NOK42 billion (around US$6 billion) in 2004. The company's third quarter return on average capital employed of 19.5 percent is one of the highest in the sector and in our opinion supports continued investment. We believe that the heavy investment programme will provide an extremely solid platform for earnings growth between 2005 and 2008.

In addition with gearing at 26 percent and Statoil now targeting debt to capital employed of between 40 and 45 percent, there remains ample room for further net investment.

We are heartened that Statoil's reserve booking policies are fairly conservative in comparison to peers. For instance the Ormen Lange field, is estimated to contain about 400 billion cubic metres of natural gas. Although all corporate partners agree on the total, differing interpretations of SEC rules have led to wide variations in reserves booked. BP has booked proved reserves of 80 percent, Norsk Hydro, 49 percent, Exxon Mobil 35 per cent compared to 25 percent by Statoil.

We regard Statoil as therefore having a quality reserve base with proven oil and gas reserves of 4,264 million barrels of oil equivalent (around 9 years of production). The company also expects to replace over 100 percent of oil and gas depleted in 2004.

We believe STO represents an ideal opportunity to gain access to an integrated oil and gas company in an expansionary stage. Going forward we expect the company to consolidate its position as the leading producer on the Norwegian shelf, as well as leverage gains from a growing international portfolio. We expect long-term earnings growth to also be underpinned by the company's expansion into the European gas market. At current levels we believe STO offers sound value with a prospective price earnings ratio of 10 times, and a yield of 3 percent.

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