Currency Risk is Rearing its Head for Statoil Investors

The Norwegian kroner declined significantly against the U.S. dollar from the beginning of November to the end of January. This will have a negative effect on investors who are attempting to compare Statoil to American alternatives and for those who are depending on the company's dividend to derive income.

Feb 20, 2014 at 12:49PM

One risk that investors in foreign companies take on is currency risk. This is the risk that the currency of the country in which the foreign company is located will depreciate against the currency of the country in which the investor is located. The decline of a foreign currency could reduce the revenue and profit of a foreign company as viewed by investors in terms of their own currency even if the company actually did increase its numbers when denominated in its own currencies. For an example of this, let's take a look at the Norwegian energy giant Statoil (NYSE:STO).

About Statoil
Statoil is one of the largest energy companies in the world. According to Forbes, Statoil is the 26th most profitable company in the world regardless of industry. It was originally founded in the early 1970s by the Norwegian state in order to develop the country's massive offshore oil and gas reserves. The company was quite successful at developing these resources and, in fact, these offshore deposits located mostly in the North Sea and on the Norwegian Continental Shelf are still responsible for approximately 60% of the company's total oil and natural gas production.

Although the company has been greatly expanding its production activities to nations outside of Norway, Statoil still remains a Norwegian company and so reports its results and pays its dividend in the currency of its homeland. This currency is the Norwegian kroner (NOK).

The decline of the kroner
Early in November, the Norwegian kroner suffered a significant decline against the U.S. dollar, although it has begun to reverse this decline recently. This means that after this decline occurred, it took many more kroner to equal one U.S. dollar. This chart shows the magnitude of the decline:

Nokusd Exchange Rate

Source: OANDA (NOK per USD)

This decline has served and will serve to have an adverse effect on Statoil's earnings and dividends.

Impact on revenues
The decline has had an adverse effect on Statoil's results, at least from the perspective of an American investor that is trying to compare it to an American oil company such as ExxonMobil (NYSE:XOM) or Chevron (NYSE:CVX).

Statoil announced its third quarter 2013 results on October 30, 2013.  Here are its key figures from that quarter as well as their U.S. dollar equivalents as of 12:00 noon on November 4:

Figure Reported Value (in NOK) U.S. Dollar Equivalent
 Net Operating Income NOK 39.3 billion  $6.56 billion 
 Adjusted Earnings NOK 40.4 billion  $6.76 billion 
 Adjusted Earnings After Tax NOK 12.1 billion  $2.02 billion 
 Net Income NOK 13.7 billion  $2.29 billion 

The company announced its fourth quarter results on February 7. This report was somewhat disappointing, but it was even more so after converting its reported figures into their U.S. dollar equivalents. Here are the same figures from Statoil's fourth quarter results along with their U.S. dollar equivalents as of 11:00 a.m. EST on February 19:

Figure Reported Value (in NOK) U.S. Dollar Equivalent
Net Operating Income NOK 43.9 billion $7.2 billion
Adjusted Earnings NOK 42.3 billion $6.97 billion
Adjusted Earnings After Tax NOK 11.0 billion $1.81 billion
Net Income NOK 14.8 billion

$2.44 billion

As you can see, Statoil's net operating income increased by 11.7% when measured in Norwegian currency but it only increased by 9.8% when measured in U.S. dollars. This difference is due to the Norwegian kroner losing value against the U.S. dollar. The same would be true when measuring the percentage change quarter-over-quarter of any of the company's other figures.

Impact on the Dividend
The decline of the Norwegian kroner also has an impact on Statoil's dividend. This is because Statoil announces and pays its dividend in Norwegian kroner. Of course, most Americans that buy the stock do so using the ADR that trades on the New York Stock Exchange and not the company's ordinary shares that trade on the exchange in Oslo. For ADR holders, the bank that acts as a sponsor for the ADR will convert the Norwegian kroner into U.S. dollars before paying out the dividend. This is why you receive your dividends in U.S. dollars. The amount of dividend received depends on the U.S. dollar to Norwegian kroner exchange rate, however.

Following its fourth quarter results announcement, it announced that it is increasing its annual dividend by 3.7% to NOK 7.00. This would be $1.15 at the current exchange rate. However, last year's dividend in U.S. dollars was $1.16 according to Yahoo! Finance. This dividend was paid prior to the kroner falling in value relative to the dollar.

This is perhaps the best illustration of the currency risk that investors take on when investing in foreign companies since, even though Statoil increased its dividend, the amount that would actually be received by American investors actually went down. The reverse would also be true. For example, if the kroner had gone up in value against the dollar instead of down then Statoil's dividend would have increased more than 3.7% for American investors.

Take the worry out of dividend investing

Dividend stocks, as a group, have historically outperformed their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it’s true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor’s portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

 

Daniel Gibbs has a long position in Statoil (ADR). His research firm, Powerhedge LLC has no position in any stocks mentioned. Powerhedge LLC has a business relationship with a registered investment advisor whose clients may have positions in any stocks mentioned. Powerhedge LLC is not a registered investment advisor. The Motley Fool recommends Chevron and Statoil (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers