I have expressed my bullish view on oil for 2017, and I have discussed some stocks in the energy sector that are worth considering.
Among the bigger names in the industry, I am bullish on Statoil (STO, Financial) through 2017. The stock has returned 37% in the last 12 months, and I would not be surprised if similar returns are seen in the next 12 to 15 months.
One of the areas where Statoil has been working successfully is divestment of noncore assets in order to focus on some core assets that can be cash machines in the long term. A good example is the recent deal in which Statoil sold Northern Alberta oilsands assets to Athabasca Oil (ATH, Financial) for a consideration of $832 million.
With $435 million coming in cash besides issue of Athabasca Oil shares to Statoil, the company’s cash buffer will increase with closure of this transaction, and I expect this cash to be deployed in the North Sea.
Just to put things into perspective, Statoil recently announced that the company has closed the transaction for 25% interest in the Byrding project on the Norwegian Continental Shelf (NCS). As a result, Statoil’s operated interest in Byrding (PL090B) has increased from 45% to 70%. The field is scheduled to come on stream in the third quarter of 2017 and will provide production upside from the current year itself.
For the next two to three years, the project that will be in focus is the Johan Sverdrup development. The reason I want to discuss this project that will deliver first oil in 2019 is that as oil moves higher, the value of the field will also increase, and this will translate into higher stock price even as first oil is a few years away.
Further, when the Johan Sverdrup oil field's first estimate was drawn, the partners expected initial production to be in the range of 315,000 and 380,000 barrels of oil per day. However, it has been revised to 440,000 barrels of oil per day, and Statoil has a 40.3% stake in this giant asset. As oil trends higher, development in the asset is also likely to accelerate, and potential positive news in the coming years will take the stock higher.
Statoil has been increasing stake in Johan Sverdrup with the company increasing its ownership in Lundin Petroleum ABĂ‚ (OSTO:LUPE, Financial), which is one of the partners in development. With increasing financial flexibility through divestment of noncore assets, it would not be surprising if Statoil increases its stake in the asset. Any such development will take the stock higher considering the attractive IRR estimated for Johan Sverdrup.
Besides NCS, it is worth mentioning that Statoil has presence in prized assets in the U.S. that include Bakken, Eagle Ford and Marcellus. These assets will serve as cash flow generators in the foreseeable future, and I expect most of the cash flow to be deployed in NCS.
From a credit perspective, I don’t see any concerns, and my point is underscored by the fact that the company’s rated bonds have an Aa3 (“Stable Outlook”)/A+ (“Stable Outlook”) rating by Moody's and Standard & Poor's. Therefore, as momentum for oil remains positive, I see no hurdles on the financing front for Statoil.
Statoil is among the major oil and gas exploration companies that are well positioned to move higher as oil trends higher. The company has quality assets that can deliver robust IRR even at current oil price and if oil does move above $60 per barrel in 2017, it is entirely likely that the stock will surge higher by another 20% to 30% in the next 12 months.
Disclosure: No positions in the stock.
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