Three months after a second-quarter result that showed Norwegian oil and gas giant Statoil (NYSE:EQNR) was starting to turn the corner, the company reported a bump on that road that put it back into the loss column for the third quarter. The underlying reasons for that aren't dire, though, and there were some positives to be gleaned from its recent earnings release.

Ship loading oil platform in dockyard.

Source: Statoil/Lee Hyungjin

By the numbers

Metric Q3 2017 Q2 2017 Q3 2016
Revenue $13.6 billion $14.9 billion ($12.1 billion)
Net income ($478 million) $1.46 billion ($427 million)
EPS ($0.15) $0.44 ($0.14)
Cash flow from operations $2.77 billion $3.96 billion $3.66 billion

Source: Statoil earnings release. EPS = earnings per share.

When any company as large and diverse as Statoil reports its results, there is going to be a lot to unpack. But in this case, one figure pops out almost instantly: the surprising decline in net income and cash flow from operations. It especially stands out considering that the prices of oil and gas haven't changed that much over the past two quarters.

The two most significant factors propelling that substantial sequential decline in earnings were a $900 million write-down on its North American assets and a higher tax bill for the quarter. It paid $1.58 billion in taxes compared to Q2's tax bill of $1.12 billion. Were it not for these charges, Statoil would have solidly been in the black in Q3.

On top of the write-down, Statoil's international business segment continues to be its weakest performer. Equity and entitlement production was down 5% and 8%, respectively. The company was able to make up for some of that poor performance, though, with better results from its Norway exploration and production, and its downstream operations. 

STO adjusted earnings by business segment for Q3 2016, Q2 2017, and Q3 2017. Shows gains for Norway E&P and downstream operations.

Source: Statoil earnings release. Chart by author.

Quarterly report highlights

  • Even though international production slipped, overall production rose 13% to 2.045 million barrels of oil equivalent per day thanks to a 27% increase in production in Norway. That higher production derived from higher off-take volumes at some of its gas fields, better operational efficiency, and the ramp-up at several of its new fields. 
  • In Q2, management announced a $1 billion reduction to 2017 capital spending guidance. It did so again this quarter: 2017 expenditures are now expected to be $10 billion. Management noted that these savings are a direct result of bringing projects to fruition under budget, and should not change Statoil's production growth.
  • This was a quiet few months regarding final investment decisions for oil projects, but management did announce several alternative energy projects. Statoil took a 42% interest in a 162 megawatt (MW) solar facility in Brazil, and started producing power at its Hywind project off the coast of Scotland.
  • Statoil announced an oil discovery on the U.K. Continental shelf. The reservoir could have somewhere between 25 million and 130 million recoverable barrels. There are no plans yet to develop the discovery.
  • It announced it had reached an agreement to explore offshore blocks adjacent to South Africa. It also agreed to team up with Argentinian oil company YPF to develop 38,000 acres in the Vaca Muerta shale formation.
  • Even with its lower cash flows for the quarter, the company was able to reduce its debt load by $1.25 billion and boost its cash reserves to $6 billion. Net debt to capital stood at 27.5% at the end of the quarter. 

What management had to say

Cash flow, or the lack thereof, has been a problem for integrated oil companies lately. So in his prepared remarks, CEO Eldar Saetre made a point of noting that his company is producing more than enough cash flow to cover its obligations:

Our solid earnings and underlying cash flow from operations are driven by good operational performance with high production and continued efficiency improvements. In the quarter, we delivered 15% production growth and 11% reduction in underlying operating cost per barrel. In addition, we see strong contribution from our liquids trading and refining business.

With an oil price below $52 per barrel, we have generated $3.6 billion in free cash flow so far this year, based on good contributions from all business segments. This has further strengthened our financial position.

What a Fool believes

Statoil's Norway operations are to be admired, but it's apparently still struggling to turn a profit when it gets away from its home waters. Hopefully, in the coming quarters, management can find a way to get its international business in order. If it can, then we could see even better cash flows at $50 a barrel than we already have today. If it can't, though, the company could wind up carrying a lot of dead weight around for a while, which will drag on bottom-line results. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.