Statoil (STO, Financial) has corrected by nearly 24% from its 2014 peak levels of $31.91 to current levels of $24.35. I strongly believe that the correction is an excellent long-term buying opportunity. My opinion on the stock is backed by some important shareholder value creation measures the company has been taking.
Statoil today announced that the company will be selling 15.5% participating interest in the Shah Deniz production sharing agreement, 15.5% share in the South Caucasus Pipeline Company, 15.5% share in the SCPC holding company and 12.4% share in the Azerbaijan Gas Supply Company to the Malaysian oil and gas company PETRONAS. The transaction value is $2.25 billion.
I believe that the stake sale is important for shareholder value creation for the long-term as it would allow Statoil to focus its resources on some of the big developments the company will be undertaking in the next 1-2 years.
In particular, Statoil will need significant funds for the development of Johan Sverdrup and the divestments will help the company have strong financial flexibility for the big development, which has 1.8-2.9 billion barrels of gross reserves.
In September 2014, Statoil farmed down in Aasta Hansteen, Asterix and Polarled and exited two assets on the NCS for a consideration of $1.3 billion, including contingent payment.
These two transactions in two months confirm the point that Statoil is looking to divest non-core assets and also farm down or divest assets with relatively low return on investment to accumulate funds for the big developments.
I believe that there is likely to be few more divestments over the next 6-12 months as the development for Johan Sverdrup is likely to start in 2015 after necessary approvals. While the first oil from Johan Sverdrup will come only in 2019, the company’s progress in the asset will be shareholder value creating for the immense long-term potential the asset holds.
From an investment point of view, Statoil will be investing $20 billion annually between 2014 and 2016. With this amount of investment needed for new projects, divestment in non-core assets is necessary as it will keep the leverage in check.
The company’s balanced growth strategy is one of the key reasons to be positive on the stock for the long term. The recent oil price decline has shown that over leverage can be dangerous in volatile markets for all asset classes. Statoil is moving in the right direction from that perspective, and the company is also likely to sustain the current dividend yield, which is at a healthy 3.8%.
The current decline in oil prices is a challenge for Statoil as it is likely to impact the company’s cash flows. I believe that, if oil prices remain depressed, Statoil is likely to cut back on its capital expenditure for 2014-16. The 24% correction in the stock in the last few months has been discounting lower cash flows and a possible cut in capital expenditure.
However, even with this near-term negative, I strongly believe that the long-term prospects remain healthy and the correction is an excellent buying opportunity. Another big advantage with Statoil is that the company’s core assets are away from the regions with high geo-political tensions. This is critical as tensions in the Middle-East are likely to escalate and will result in more demand for oil from other parts of the world. Statoil, with assets in NCS and U.S. shale is perfectly positioned to benefit from the demand coming primarily from emerging economies.
Therefore, my conclusion is that Statoil has taken positive steps in the form of asset divestment to create long-term shareholder value and the current deep correction is an excellent opportunity to buy this long-term value creator.
