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Statoil Asa (STO): Worth a Look

April 06, 2012 | About:
David Chulak

David Chulak

29 followers
Background: Statoil, a Norwegian company, was formed in 1972 by the Norwegian parliament or Storting and was initially added to the New York Stock Exchange in 2001. Originally incorporated as a limited liability company, its original stated purpose was to become Norway’s instrument in the development of gas and oil.

Becoming listed on the NYSE in 2001, the company was known as Statoil, ASA (STO) and since, has become known for development of the Norwegian Continental Shelf (NCS), becoming one of the world’s foremost petroleum sectors. They are the world’s No. 1 offshore operator and the second largest exporter to Europe for gas.

They currently have operations in 41 countries, truly making them an international company. They have developed a reputation as a great company that is used to drilling under the most extreme weather conditions.

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The government currently owns 67% of the total shares through their Ministry of Petroleum and Energy. Approximately 10.2% of the shares are owned in the U.S., while the remainder is made up of Norwegians, the UK and the remainder of Europe.

Statoil’s recent discoveries in the Barents Sea, acquisition of Brigham Exploration, the Angola presalt, investment in Chesapeake Energy’s Marcellus shale, along with the Talisman’s Eagle Ford property, has placed the company in a position to expand greatly and has added a huge dimension by entering the U.S. markets. Statoil is positioning itself for great expansion.

Competitors:

It would be easy to list all oil companies with similar makeup, but suffice it to say that it’s a very competitive business. Notice, however, the edge Statoil holds in some of the key metrics. Because of the harsh weather in the region and their reputation for safety in such a harsh environment and the Norwegian Continental Shelf in general, this provides the company with a narrow moat at best. Below are some of the most notable competitors and some key metrics to compare them.

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Management:

Statoil Asa has had the same CEO and President, Helge Lund, since 2004. Lund had previously served as a CEO to a Norwegian gas and oil company. Lund runs the company, along with eight other executives.

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Their compensation package is based upon a combination of a base salary, along with inducements to increase their package by requiring them to purchase shares of the company’s stock. Shareholder total return gauges the success or failure of the top executives. Helge Lund’s base salary is less than his peers in the industry:

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Dividend:

Statoil has consistently paid a yearly dividend, though the dividend amount is not consistent. Currently, the company offers a dividend of .97 cents with a dividend yield of 3.6% and a payout ratio of 19%.

Gurus:

Though several investment gurus have purchased and sold their shares, currently the stock is owned by Mario Gabelli with 24,250 shares and David Dreman with 117,762 shares. The combination of low P/E, P/B and P/S, a P/CF of 2.1, increasing margins and a somewhat unknown stock, makes this a great contrarian/value play.

Valuation:

Valuation of this stock is an interesting exercise because their cash flow, while positive and growing overall, has been inconsistent year to year. This is not necessarily unusual for this industry. Total (TOT) and others have experienced the huge ups and downs, so trying to average out the free cash flow to determine a discounted cash flow value is somewhat difficult.

With that said I typically use several methods in order to determine intrinsic value and try to throw out some extreme numbers that may skew the overall average of the methodologies used. Using the DCF Calculator from GuruFocus will give us a starting point of a value of $75.28 and a margin of safety of 65%. Based upon this methodology, Statoil has a margin of safety greater than that of most of its competitors.

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I often like to begin by comparing enterprise value to both EBIT and free cash flow and get a feel for cheapness. Enterprise value to EBIT is just under 3, which is a great number, only to be disappointed with the high free cash flow ratio (depending on your FCF number you use). No matter what number, you choose to input, it’s not great. So we have one metric indicating that the stock is very cheap and another that it is somewhat expensive.

From there, I used some other methods which include discounted earnings, discounted book value, and the Graham number. These gave me values between $64 and $74. I then went to Buffett’s owners earnings, which I calculated to be $54. At a current price of $26.42, it still becomes obvious that we have a decent margin of safety of at least 50% and therefore appear to have a potential buy.

Why Invest:

(from their Factbook 2011):

We deliver strong cash flow and have a sound financial position that provides for an attractive and growing dividend. Our diverse and promising exploration programme is yielding world-class discoveries, making us even more confident in our ability to provide future growth through exploration.

In 2011, the reserve replacement ratio (RRR) 1.17 and is the result of focused performance over years through project sanctions, new fields on stream and improved oil recovery (IOR) efforts. To achieve long-term sustainable growth, we will continue to mature our strong project portfolio and resource base. We believe that the NCS will provide long-term value creation. We are well positioned to create value in a growing gas market, and we will continue to grow our international operations.

We will continue to mature our large portfolio of exploration assets and expect to complete around 40 wells with a total exploration activity level in 2012 similar to the 2011 level.

Conclusion:

Statoil enters 2012 with some great opportunities, even given the macroeconomics of the day. Their new discoveries and entry into the U.S. markets should allow them to grow for some time. While some have questioned their debt level, it is clearly manageable and the prospects look very good.

Disclosure: Long on STO

About the author:

David Chulak
David Chulak is a private investor that uses a value approach to investing in the styles of Graham & Dodd and Warren Buffet. Looks for that margin of safety in an effort to preserve capital and attempts to guard against short term market fluctuations by having clear rules laid down in advance for selling an equity. Likes to visit the company's where his investments are in order to understand the business better.

Rating: 3.7/5 (14 votes)

Comments

cnorthmsu
Cnorthmsu - 2 years ago
First, I want to say that I think StatOil does look like a reasonable value opportunity based on some of the other digging I've done on it.

Comparing to the supermajors such as ExxonMobil, Chevron, BP, and Total may understate the value of StatOil when looking at the comparative ratios. The supermajors have large chemical company and/or refinery operations. StatOil has one refinery and some limited processing. They are closer to a pure exploration/production company. I suggest StatOil is more comparable to companies like Noble Energy (NBL), Devon Energy (DVN), and CNOOC (CEO).

Valuations on the E&P companies tend to be higher, making StatOil look to be even more of a bargin than suggested above.
Patience Investing, Inc.
Patience Investing, Inc. - 2 years ago
i did my own analysis. except FCF, everything seems alright. it has only 6% margin of safety based on my FCF valuation as opposed to Guru Focus margin of safety.

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