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Why Statoil Earnings Fell

Norway's state-owned oil giant Statoil (NYSE: STO  ) reported its second-quarter financial results on July 25. Let's take a closer look at why the company's earnings fell and what its future may hold.

Why Statoil earnings fell
Statoil's adjusted after-tax net income for the quarter came in at NOK 11.3 billion, or $1.9 billion, down from NOK 11.5 billion in the year-earlier period, while revenues plunged 26% year over year to NOK 148.3 billion, or $25 billion.

The main culprits behind the decline were decreased oil and gas volumes and lower prices for both natural gas and oil. For the quarter, Statoil saw a 5% year-over-year decrease in average realized oil prices, which averaged $93.90 per barrel and an 11% fall in average realized gas prices, which came in at NOK 1.98 per standard cubic meter. The company's total quarterly production was 59% oil and 41% natural gas.

Production decline
Of the oil majors that have reported financial results so far, Total (NYSE: TOT  ) saw a similar decline in second-quarter profits due to lower realized oil and gas prices, which resulted in the French oil giant posting a 3% decline in quarterly profits.

But unlike Total, which reported its first production gain in three years, Statoil reported a 1% decrease in total oil and gas production due mainly to natural production declines at some of its mature fields in the North Sea. Were it not for the impact of these maturing fields, the company would likely have registered a solid production increase, given that it reported record output from its fields outside Norway.

The outlook for Statoil
Despite the earnings miss, Statoil's outlook remains quite favorable. The company maintains strong positions in various frontier ventures around the globe including the U.S. Gulf of Mexico and offshore Africa. It is also expanding its presence in onshore U.S. oil plays, having recently assumed operational control over a portion of acreage in the prolific Eagle Ford shale of Texas that it operated jointly with Talisman Energy (UNKNOWN: TLM.DL  ) .

Statoil currently holds about 73,000 net acres in the Eagle Ford and plans to add more if the price is right. It also maintains positions in other major U.S. oil and gas plays, including the Bakken shale in North Dakota and the Marcellus Shale in Pennsylvania, where it initially purchased a stake in acreage operated by Chesapeake Energy (NYSE: CHK  ) back in 2008 and has since acquired acreage that it operates independently.

To offset production declines at its mature North Sea fields, the company plans to drill 50 wells and allocate roughly $3.5 of its $19 billion capital budget to exploration activity this year. For the remainder of the year, investors may want to watch the company's progress in four crucial projects, including its Barents Sea drilling campaign, its operations in the Bay du Nord on the Canadian east coast, its Sake prospect in the Gulf of Mexico, and its Cachalote & Buzio ventures in Mozambique.

In addition to these ventures, Statoil has major projects due to start up in 2013-2016 and in 2017-2020 that should provide additional installed capacity of nearly 2000 mboe per day and help the company boost production from 2 million barrels of oil equivalent a day to 2.5 million by 2020.

However, further cost inflation and delays in project start-ups are two major risks to consider. If any of its major growth projects get delayed, the company likely won't cut its dividend but may be forced to resort to additional asset sales or new equity issuances to compensate for the reduction in expected cash flow.

Though falling oil prices in the second quarter hurt Statoil, prices are back near $110 a barrel now. If you're on the lookout for some currently intriguing plays, check out The Motley Fool's "3 Stocks for $100 Oil." For FREE access to this special report, simply click here now.

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Comments from our Foolish Readers

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  • Report this Comment On August 04, 2013, at 7:43 AM, EllenBrandtPhD wrote:

    Once again:

    The - still misunderstood in North America - story for STO now has nothing to do with traditional methods of trading based on earnings.

    STO now needs to be seen in light of CURRENCY and the UPCOMING NORWEGIAN ELECTION, only about 4 weeks away.

    To repeat the points I made in earlier articles:

    *** STO already moves with the NOK, the Norwegian Krone, on a day to day basis, in anticipation of the election. When the NOK weakens against the USD and EUR, STO is generally down. When the NOK strengthens against the USD and EUR, STO is generally up. (Test this for yourself, and you will easily see the almost exact correspondence.)

    *** In recent weeks, the NOK has rebounded very nicely off its annual lows, because the Norwegian election is closer and closer.

    *** Erna Solberg, the Christian Democrat, is leading the incumbent Social Democrat, Jens Stoltenberg, by as much as 30 points in many polls.

    *** Solberg wants a stronger NOK, possibly a much stronger NOK. Think of her as the Norwegian Angela Merkel.

    *** A Solberg election will bring in the most business friendly - and Statoil friendly - Norwegian government in over 50 years, perhaps 70 years.

    *** Solberg wants to slash business taxes, including STO taxes. With a decisive victory, she will have the mandate to do so.

    *** The main reason STO has lagged its European peers the past half year is because of the last round of highly confiscatory taxes imposed against it by the socialists and Stoltenberg.

    *** STO would have had a much better earnings quarter announced last week, if not for humongous derivatives trading losses totally linked to an abysmally low NOK against the EUR and USD.

    *** In addition to a Solberg victory bringing lower taxes for STO and a possibly much stronger NOK, Solberg has made it a campaign plank - a promise - to spin off a substantial share of the Norwegian government's stake in Statoil.

    *** Solberg has vowed to get a "very good price" - her words - for this spun-off stake, which most analysts who have commented on it believe would be at least 30 dollars in USD terms - maybe more.

    *** The stock is under 22 now. And the stake spinoff will start being a hot topic in earnest immediately upon Solberg's election next month.


  • Report this Comment On August 04, 2013, at 7:47 AM, EllenBrandtPhD wrote:

    This is actually a pretty easy stock to trade now.

    If you believe the polls are wrong, that the incumbent Social Democrats will pull a rabbit out of a hat, and that a miracle will occur, you need to be Short both the NOK and STO.

    (And possibly you are Dick Morris.)

    If you believe polls showing a 30 point lead for the Christian Democrats are almost certainly right, that Erna Solberg will win in a landslide, and that neither in Markets nor in Politics do miracles often happen, then you should be Long both the NOK and STO.

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