We are maintaining our Neutral recommendation on Norway-based Statoil ASA (STO - Analyst Report), a major international integrated oil and gas company.
Recently, Statoil and Russian state-owned oil company OAO Rosneft entered into an agreement to 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, 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. This enhances the companies’ exploration activities and bodes well for future growth.
Statoil has also discovered a huge gas and condensate deposit at the King Lear prospect in the southern part of the Norwegian North Sea. Among the string of discoveries made by Statoil over the last 15 months, the King Lear discovery represents the eighth high impact find. This goes to show the company’s steady focus on achieving success in high impact prospects and expanding its operations worldwide.
The King Lear discovery follows other high impact finds in mature regions of the Tanzania (Lavani well), North Sea (Johan Sverdrup), the Barents Sea (Skrugard and Havis,) Tanzania (Zafarani) and Brazil (Peregrino South and Pão de Açúcar).
In another significant development, the Oslo-based firm emerged as the highest bidder on 26 leases in the first auction for offshore drilling rights in the Gulf of Mexico’s (GoM) prolific central region following the BP plc (BP - Analyst Report) oil spill in 2010. Given the ramp-up of capital outlays in North America for liquid-rich areas, the company aims to generate about 500,000 barrels of oil equivalent per day (BOE/d) in the region by 2020, up from the first quarter 2012 level of 149,000 BOE/d.
The company’s North American portfolio experienced a compound annual growth rate of more than 20% in the last decade. Statoil has vast experience in developing new discoveries in the region such as, Jack, St. Malo, Julia, Vito and Logan. It holds a key position among the world’s largest offshore operators and in subsea technology.
While the company is fairly active in its development operations, a higher capex remains a concern. Additionally, Statoil’s performance will likely be affected by the volatile macro environment, fluctuating oil and natural gas prices and geo-political disturbances.
Statoil’s production costs have already touched NOK 48 per BOE in first quarter 2012 up around 12% from the year-ago level of NOK 43 per BOE. Therefore, we believe that the key risk is the basic operating cost.
Statoil, which faces competition from Eni SpA (E - Analyst Report), holds a Zacks #3 Rank (short-term Hold rating).