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Statoil ASA’s (STO - Analyst Report) third-quarter 2012 adjusted earnings of 63 cents per ADR failed to match the Zacks Consensus Estimate of 66 cents. The quarterly result was also below the year-earlier adjusted earnings of 65 cents per ADR, due to lower revenues and higher operating costs.

Adjusted net income after tax came in at NOK11.9 billion (US$2.0 billion), higher than the year-earlier level of NOK 11.4 billion (US$2.1 billion).

However, total revenue dropped 0.1% year over year to NOK166.7 billion ($28.2 billion), mainly attributable to lower realized oil prices as well as lower volumes of liquids.

Operational Performance

In the reported quarter, equity and entitlement production increased a respective 3% annually, based on enhanced output from Gullfaks South Brent, production ramp up at existing fields as well as higher gas sales. However, natural decline on mature fields and higher maintenance charges partly offset the increase.

Total oil and gas equity production averaged 1.811 million barrels of oil equivalent per day (MMBOE/d) in the third quarter compared with 1.764 MMBOE/d in the year-earlier period. Of the total quarterly output, 58% was oil and 42% was natural gas.

Total oil and gas entitlement production averaged 1.624 MMBOE/d during the quarter (55% oil and 45% natural gas) compared with 1.573 MMBOE/d in the year-earlier period.
Total oil and gas liftings were 1.629 MMBOE/d, compared with 1.565 MMBOE/d in the prior-year quarter. The company's realized oil prices averaged $99.9 per barrel, down 7% year over year, while natural gas price realization averaged NOK2.16 per standard cubic meter, up 10% from the year-earlier level.

Financials

During the quarter, total capital investment was NOK28.9 billion and operating cash flow was NOK 84.1 billion. Net debt-to-capitalization ratio was 12.6% versus 12.5% in the preceding quarter.

Guidance

Management reaffirmed its production guidance for 2012. It had earlier projected a compound annual equity production growth rate (CAGR) of around 3% between 2010 and 2012. Statoil aims to achieve an 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 2016−2020 that would likely lead to a CAGR of 3% to 4%. 2013 production is expected to be lower on a year-over-year basis, due to the recent transaction with Wintershall as well as a cut in gas output by 25 Mboe/d in the U.S. onshore.

The company maintained its organic capital expenditures guidance of around US$18 billion and exploration activity of about $3.5 billion for 2012.

Outlook

In the reported quarter, Statoil delivered strong exploration results, adding significantly to its resource base by making eight high impact discoveries in total, since the last 18 months. The company also confirmed the prospects at Peregino South oil by discovering a new exploration well during the quarter.

Statoil also made additional strategic progress on the agreement with Russian state-owned oil company OAO Rosneft. They have entered into an agreement wherein 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.

Following a surge in global oil demand, we see the Norwegian oil major 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 - Analyst Report) and U.S. energy behemoth ExxonMobil Corporation (XOM - Analyst Report) for the exploration of oil in Russia's Arctic.

Although we have a favorable stance on Statoil's long-term production growth based on its growing upstream presence in the emerging basins of the Caspian Sea, West Africa and the deepwater U.S. Gulf of Mexico, we remain cautious about escalating production cost. Unit production costs jumped 8%-9% from the year-ago level related to costs from new fields coming online and improved activity related to well maintenance. Again, exploration expenses increased significantly to NOK5.2 billion from NOK3.3 billion in the year-earlier quarter. This was mainly due to higher seismic and field development expense.

Statoil, which recently hired Schlumberger Limited (SLB - Analyst Report) for electric wireline logging services on the Norwegian Continental Shelf, holds a Zacks #2 Rank (short-term Buy rating). Our long-term Neutral recommendation remains unchanged.
 

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