The past two years have resulted in a lot of changes to the way that Statoil (EQNR 2.77%) does business. Like many of its peers, it has reconfigured its portfolio to focus on its most profitable oil and gas prospects and control costs to what seems to be down to the penny. This past quarter was a product of that work as the company posted a drastic turnaround in its net earnings results. It helped that oil prices rose considerably over that time as well.
Let's sift through Statoil's most recent earnings report to see what the company has been doing to improve its profitability and how it plans to carry that success into the next couple of years.
By the numbers
| Metric | Q4 2017 | Q3 2017 | Q4 2016 |
|---|---|---|---|
| Revenue | $17.1 billion | $13.6 billion | $12.7 billion |
| Net income | $2.57 billion | ($478 million) | ($2.78 billion) |
| EPS | $0.77 | ($0.15) | ($0.87) |
| Operating cash flow | $1.67 billion | $2.77 billion | $2.03 billion |
Source: Statoil earnings realease. EPS = earnings per share.
Statoil has two things working in its favor compared to most of its integrated oil and gas peers this quarter. Since the company is heavily weighted toward upstream production, its earnings weren't as adversely affected by narrowing refining margins that hurt the downstream segments of other Big Oil companies. Also, Statoil's presence in the U.S. is quite small compared to the rest of its holdings, so there were only marginal impacts from changes in U.S. corporate tax rates.
In addiiton, as you might have guessed, having a high exposure to production meant some considerable gains for its upstream production segments. A vast majority of the company's production is outside North America, so it has a much higher exposure to international crude prices that are much higher than domestic prices. Statoil's realized price for liquids was $56 per barrel. Thanks to management's efforts to reduce costs, the company can generate rather impressive earnings at this price level.
With the business generating enough cash to cover its capital spending and dividend, management used the extra cash to pay down $3.5 billion in debt this quarter. Even though total debt was lower than the prior quarter, the use of cash to pay it down meant its net debt ratio ticked up to 29%.
Source: Statoil earnings release. Chart by author.
The highlights
- Total production for the fourth quarter was 2.13 million barrels of oil equivalent per day (mmboe/d), which was a modest 1.8% increase from this time last year. For the full year, though, Statoil's average production of 2.08 mmboe/d was 5.1 higher than 2016.
- Even after two straight quarters of revising down its capital spending guidance for the year, the company ended up spending below its 2017 target with $9.4 billion in capex.
- Management projects that it will spend $11 billion in capital spending for 2018, with $1.5 billion of that going toward its exploration budget. Statoil intends to drill 40 exploratory wells this year, which is a drastic improvement from the prior year.
- The company won a total of 31 exploration licenses in the most recent offshore auction in Norway as well as two onshore licenses in Argentina's Vaca Muerta shale, one of the most promising shale formations outside the U.S.
- Statoil also signed a deal with Petrobras (PBR 1.43%) to take a 25% working interest in the Roncador field in Brazil. This offshore part of Brazil's pre-salt formation is one of the earliest reservoirs to produce in this region and is starting to deplete. Statoil is looking to use its mature field management to improve recovery rates, which will also grow the company's total production in the region to 110,000 barrels per day.
- Statoil acquired Total's (TTE 1.39%) equity stakes in two development phase projects on the Norwegian continental shelf for $1.45 billion.
- The company is also looking to up its offshore wind stake by submitting a bid to build and operate a 760 MW wind farm in the North Sea for the Netherlands.
Image source: Getty Images.
What management had to say
Here's CEO Eldar Saetre on Statoil's outlook for 2018 through 2020.
We expect to increase returns and can deliver 12 billion dollars in free cash flow from 2018 to 2020. With solid operational performance and realised efficiencies, we are a stronger and more competitive company. We have radically improved our next generation portfolio, and Johan Sverdrup phase 1, has now a break-even below 15 dollars per barrel. We will profitably grow production, strengthen our balance sheet, and increase the cash dividend.
The Norwegian continental shelf is the backbone of our business, where we develop new ideas and technologies, and scale them industrially to create even more value. Internationally we are increasingly targeting opportunities where we can leverage our key value drivers with an even stronger Statoil-operated footprint.
What a Fool believes
While Statoil's production increases aren't eye-popping, the combination of modest production growth and an ambitious cost-cutting program means that Statoil is able to make quite a bit of money at today's oil and gas prices. With Brent crude oil prices higher so far in this first quarter, chances are we are going to see even better results in the next earnings report.
Overall, Statoil looks to be executing its strategic plan well. It's delivering good results in its home country and intends to use those lessons to apply to other places such as Brazil. That will be important for the company's success longer term because its international segment has been a bit of a drag on profitability as of late. If it can continue on this path, it should have a good 2018 and beyond.
