Will Norway's Green Aspirations Hurt Statoil?

The Norwegian government is looking at making more green investments. Seeing as Norway runs a sovereign wealth fund worth around $700 billion and is the majority owner of the oil major Statoil (NYSE: STO  ) , its investment decisions impact the real world. It is unlikely that Statoil would be forced to make unprofitable investments just to tickle Oslo's fancy, but it is still important to examine all of the options.

Statoil's history in renewables
The company has had small interests in renewables for a number of years. The encouraging news is that a number of its green investments are in wind-related resources. It recently acquired a 70% interest in the Dudgeon wind project in the U.K. It also has joint ownership of the Sheringham Shoal offshore wind farm.

Wind is quite promising
Recent U.S. levelized costs of energy (LCOE) estimates place onshore wind as one of the cheapest resources, right after advanced combined cycle natural gas plants. These estimates do not include tax credits, allowing for government rebates to make wind even more attractive. 

In the long run Statoil's renewable investments are a risk mitigation technique. Statoil is a major natural gas producer. In the second quarter of 2013 it produced 1967 thousand barrel of oil equivalent per day (mboe/d), and 807 mboe/d of its production was from natural gas. In many markets wind is the cheapest fuel after natural gas, and Statoil is hedging its bets by investing in wind assets and gaining experience in the field. If natural gas prices soar worldwide, Statoil would already have its hands on one of the next best alternative resources. 

Statoil is very conservatively run with no debt and a healthy upstream portfolio. It expects to increase upstream production to 2,500 mboe/d by 2020. The company is growing and profitable, but it does face some threats from the expanding LNG market based on volatile spot rates. Regardless, growth in oil and liquids helps to reduce Statoil's dependence on natural gas.

Big oil can invest profitably in green energy
There is historical precedent that big oil can invest profitably in renewable energy. The French major Total (NYSE: TOT  ) took a majority position in the solar manufacturer SunPower (NASDAQ: SPWR  ) and has helped provide financing on SunPower's latest unsubsidized utility projects. Total is a large integrated oil firm, and its profit margin of 4.8% and EBIT margin of 10.8% are thinner than Statoil's, but Total's revenue is so large that it has no trouble financing medium size solar plants. 

Energy inflation is boosting solar's prospects around the global. In some areas like Chile's Atacama Desert, unsubsidized solar projects can offer a big advantage over imported energy sources. Even with all of this growth, solar is still a small side show for Total. SunPower's market cap of $3.8 billion is less than 3% of Total's market cap. 

With a boost from strong rooftop demand, SunPower is expected to return to profitability in 2013 with earnings per share of $1.05. By investing in SunPower, Total is hedging its other unconventional bets like the Fort Hills oil sands project.

The other side of the coin
Success in green investments is not universal. As the world moves closer to 2030, BP  (NYSE: BP  ) projects that renewables will provide a greater share of primary energy than uranium. Even with this positive outlook, BP shut down its solar operations and tried to sell of its U.S. wind assets.

It is important to remember that BP faced a huge bill from the Macondo disaster and had to sell off a number of assets to help cover damages. Its profit margin of 6.6% and EBIT margin of 9.2% are not horrible, but Macondo is estimated to cost the company up to $65 billion and may cripple the company's growth for years to come. 

Bottom line
Norway's government is pushing for renewables, and it is highly likely that Statoil will be pressured to make more green investments. Given the precedent set by Total and SunPower, this should not be a big cause for concern for Statoil's minority investors. Considering Statoil's large size, it can easily invest in a few wind farms here and there while it continues to grow its traditional hydrocarbon-based assets.

Bad news for OPEC?
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!


Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 22, 2013, at 2:24 PM, Oilvet wrote:

    Statoil is a very forward looking government oil company and if the greenie political hacks in Oslo don't mess it up the Norwegian Treasury will do quite well.

    This is the ONLY oil company I ever worked for that was thinking and looking 25 years into the future rather than the next quarter's financial status.

    Maybe a good reason it has grown in less than 30 years from an idea to the 39 th largest company in the world.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2691597, ~/Articles/ArticleHandler.aspx, 11/25/2014 7:26:24 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement