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Invest In Statoil For Premium Long-Term Assets

June 25, 2014 | About:
Faisal Humayun

Faisal Humayun

3 followers

Statoil (STO), an exploration & production major, has surged by 53% in the last one year and the stock looks excellent from a long-term investment perspective. This article discusses why the company can be a major value creator through some of its premium assets, which are likely to bring in robust cash flows in the long-term.

The Johan Sverdrup Asset

The Johan Sverdrup is among the largest oil fields on the Norwegian shelf, and will at peak contribute with 25% of the production from the Norwegian shelf. The giant field is expected to start production in late 2019. The field lifetime will be 50 years, with an anticipated plateau production of 550,000-650,000 barrels of oil equivalent per day.

Statoil has an operating share of approximately 40% in the field and this is significant considering the fact that the field has an expected resource range of 1.8-2.9 billion barrels of oil equivalent. A 40% stake in the field would imply that the company has 0.7-1.2 billion barrels of oil equivalent stake in the field.

What makes the field interesting is the fact that nearly 70% oil recovery is possible from the asset according to Statoil. Currently, the asset is at a concept selection phase and the production is still few years away.

However, the massive reserve profile will add to Statoil’s value and the cash flow from the field will be significant once in production. Further, it is entirely likely that the initial resource estimates are revised upwards and this should help the bullish momentum in Statoil’s stock to continue.

East Coast Canada Asset

Statoil has 65% working interest in the East coast of Canada asset and this asset is another big long-term value creator for the company. The discovery, made in September 2013, has between 300 million and 600 million barrels of oil at the company’s Bay du Nord prospect in the Flemish Pass, 500 kilometres northeast of St. John’s. This is one of the biggest discoveries in East Canada in recent years.

The discovery in 2013 was Statoil’s third in an area covering roughly 8,500 square kilometres after two discoveries called Harpoon and Mizzen. While Harpoon is still under evaluation, Mizzen may hold up to 200 million barrels of oil according to Statoil. Therefore, the region is resource rich and there can be more resource additions in the foreseeable future.

The company already has plans to increase its exploration efforts off Canada's east coast over the next few years. Therefore, Statoil has been tapping the right resources in the right regions and this will create long-term shareholder value.

Unlocking The Prospects In Tanzania

Statoil also has a strong asset presence in Tanzania and the natural gas prospect has strong cash flow potential for the long-term. Statoil operates the licence on Block 2 on behalf of Tanzania Petroleum Development Corporation (TPDC) and has a 65% working interest. Exxon Mobil Exploration and Production Tanzania Limited hold the remaining 35%.

In 2014, Statoil and partner, Exxon Mobil (XOM) made the sixth discovery and the fifth high-impact discovery in Block 2 offshore Tanzania. The discovery of an additional two to three trillion cubic feet of natural gas in place in the Piri-1 prospect well brings the total of in-place volumes up to approximately 20tcf in Block 2.

Since 2012 the company has had a 100% success rate in Tanzania and the area has become a core exploration area for Statoil. The resource unlocking in the African region can be another significant value creator for Statoil in the long-term.

Conclusion

Besides these excellent long-term prospects, Statoil plans to continue increasing its production over the next few years from producing assets. This will provide the necessary cash flow to develop the company’s high impact assets.

The company also plans to increase efficiency and a part of this plan is to have an annual saving of $1.3 billion from 2016. The savings are expected to come from lower maintenance expenditure, reduced rig commitment and lower facility cost from leaner concepts.

Therefore, there is a strong focus on shareholder value creation through cost reduction, production growth and a continuous search for game changing assets. Statoil also offers a dividend yield of 3.6% and certainly looks attractive at a current stock price of $31.3 and a trailing twelve month EV/EBITDA of 2.96.

About the author:

Faisal Humayun
Senior Research Analyst with experience in the field of equity research, credit research, financial modelling and economic research

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