The oil and gas sector is one of the key sectors I have been following. Even in challenging times for the industry, there are stocks in the sector that are worth accumulating. One of the names on which I have been consistently bullish is Statoil (STO, Financial).
I remain bullish on this Norwegian oil and gas major, and the stock has not disappointed with 17% upside in just over two months from year-to-date lows. The positive momentum for Statoil is likely to sustain in the long term. In sync with this view, I advise exposure to this 4.6% dividend yield stock for the next three to five years.
Bullish on oil
Oil has been trading in the range of $45 to $50 per barrel, and this is a good consolidation zone before any potential upside toward the end of fiscal 2017 and in fiscal 2018.
According to EIA, Brent is likely to average around $52 in 2018, and $50-plus oil is positive for Statoil.
Just as an example, the company’s game-changing asset (Johan Sverdrup) has break-even below $25 per barrel; as this asset is operational in fiscal 2019, EBITDA and cash flow will be robust even at $55 to $60 per barrel of oil.
Coming back to bullish triggers for oil, heightened geopolitical tensions will also keep oil firm and I don’t see any de-escalation in geopolitical concerns globally.
At the same time, it is important to mention that economic factors can potentially take oil higher. Growth in China has bottomed out and GDP growth in India is also likely to trend higher after the demonetization impact. These two countries, with low per capita consumption of oil, are likely to be key demand drivers in the next three to five years.
Overall, I don’t see oil going below $40 per barrel, and I see high probability of oil trading in the range of $55 to $60 per barrel in the next 12 to 24 months. This is likely to ensure that momentum remains positive for Statoil, which has some attractive IRR assets.
Johan Sverdrup is 60% complete
Johan Sverdrup is one of the biggest oil fields in the Norwegian Continental Shelf with resources of 2 billion to 3 billion barrels of oil equivalent.
Johan Sverdrup will be developed in several phases, and Phase 1 is expected to start up in late 2019. Production capacity is estimated at 440,000boepd with Statoil having a 40.02% stake. Phase 2 is expected to start up in 2022, and full field production is estimated at 660,000 barrels of oil per day.
As mentioned earlier, the oil break-even for Phase 1 is below $25 per barrel and with robust production estimates, the asset is likely to be a cash flow game changer for Statoil.
It is important to mention here that Statoil announced on Sept. 4 that the Phase 1 project is nearly 60% complete and ahead of schedule. With further lowering of investment in Phase 1 coupled with accelerated development, Statoil stock will see strong momentum in fiscal 2018 and fiscal 2019.
Strong credit profile for growth
Even as challenging times continue for the industry, Statoil has maintained a strong credit profile and that allows the company to invest in growth projects.
Further, Statoil has been adding exploration licenses in appealing geographies and the company’s recent acquisition of two offshore frontier blocks in South Africa is just an example.
Coming back to the company’s credit profile, Statoil is rated A-plus and Aa3 from Standard & Poor's and Moody’s.
With robust cash flow from assets in North America, among others, the company is likely to maintain a strong credit rating in the coming years even if oil trades in the range of $50 to $60 per barrel.
Conclusion
Statoil has been a value creator in terms of robust dividends and as oil remains firm, I expect Statoil to trend higher in the coming years. Projects such as Johan Sverdrup will contribute significantly to the stock upside momentum, and current levels are attractive from a two- to three-year investment horizon.
While broad markets are trading at premium valuations, I still recommend fresh exposure to Statoil at current levels.
Disclosure: No positions in the stock.
