Statoil (STO, Financial), which is engaged in the exploration and production of petroleum and petroleum-derived products in Norway and internationally, is an excellent stock to consider with a time horizon of 5 years. The reason for writing about Statoil is the fact that the stock has declined by 31% in the last year and this correction is an excellent opportunity to consider exposure to a company that is developing one of the biggest assets in the North Sea. This article will focus on the recent developments related to the asset and this discussion will also explain why the asset is important for Statoil.
On Feb. 13, Statoil submitted the development plan for the Johan Sverdrup oil field to the Norwegian Ministry of Petroleum and Energy. According to the plan, the capital expenditure for phase one is estimated at kr117 billion and the expected recoverable resources are projected at between 1.4-2.4 billion barrels of oil equivalent. This provides an idea of the size of the asset. Further, the full field development plan will require a capital expenditure of $170-$220 billion with recoverable resources of between 1.7-3.0 billion barrels of oil equivalent.
To put things into perspective from a production point of view, the development in phase one has a production capacity in the range of 315,000-380,000 barrels per day. While the first oil is planned for late 2019, I believe that Statoil will start discounting the positive that will come from the field once oil prices start to trend higher. The first reason is that as oil prices trend higher, the value of the recoverable resources will increase. The second reason is that the company’s development activity for the field will commence as soon as the plan is approved. I believe that as the development progresses, the recoverable resources can potentially increase considering the fact that Statoil had earlier provided a higher resource estimate for Johan Sverdrup.
Discussing further on the progress related to Johan Sverdrup, Statoil has already awarded a kr8 billion contract to Aibel for the construction of the deck for the drilling platform on the field. Further, Statoil has signed a contract with Allseas for installation of three platform topsides.
Therefore, all the contracts are getting in place and once the approval is received, I expect the development work to commence even if oil prices remain at current levels. Over a 3-4 year horizon, I do expect oil prices to move back to $100 per barrel levels on geo-political factors and due to incremental demand from Asia. Therefore, when production commences in 2019, Statoil will be positioned to generate a strong EBITDA margin from this prized asset.
The reason for considering Statoil as a stock to buy at these levels is the point that lower oil prices have depressed stocks to levels that are value buys. I can say with some conviction that Statoil will not be trading at an EV/EBITDA of 2.6 anytime in the future. I expect oil prices to recover in 2016 and the company’s valuations will adjust higher.
Therefore, current levels are too attractive to be ignored. Besides the valuation factor, I must add here that Statoil has a focus on the Norwegian Continental Shelf and I consider this as a big positive from a geo-political tension-free region focus. Further, in addition to the NCS, Statoil has 290,000 net acres in Bakken, 59,000 net acres in Eagle Ford and 605,000 net acres in Marcellus. These assets are also attractive from a long-term perspective and can generate strong EBITDA once oil prices trend higher.
In conclusion, Statoil is trading at very attractive levels and the company has some big assets that can be game changers for the stock over the next 3-5 years. In my view, the stock is worth accumulating over the next few quarters.
