Please ensure Javascript is enabled for purposes of website accessibility

Is Statoil a Buy Following Second-Quarter Weakness?

By Arjun Sreekumar - Jul 29, 2014 at 12:48PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Despite a 3.5% decline following the release of its second-quarter earnings, Statoil doesn’t look cheap.

Statoil on Friday reported an underwhelming second quarter that saw earnings fall 15% as the company held back on producing natural gas because of low prices. Another pressing concern was an impairment charge it took on the value of its onshore U.S. shale assets. The markets responded by sending shares 3.5% lower on the day. Is it a buying opportunity, or was the pullback warranted?

Source: Wikimedia Commons

Second-quarter highlights
Statoil reported second-quarter adjusted earnings of 32.3 billion Norwegian kroner, or NOK, down 15% from the second quarter of 2013 and well below analyst expectations of NOK 36.9 billion. The primary culprit was lower production, which fell 9% from a year earlier largely because of the company's decision to hold off on producing more gas because of low prices. Recent divestments of producing assets and natural declines from mature fields also weighed on output.

However, on the plus side, the company's operating cash flow more than doubled to NOK 18.1 billion from NOK 8.2 billion in the prior-year quarter. The main reason was because of relatively lower adjusted earnings from the Norwegian Continental Shelf, or NCS, where income is subject to higher tax rates. This resulted in lower overall taxes paid.

Statoil also performed well from an operational perspective, delivering consistent production from the NCS and achieving project deadlines on time and on budget. Its world-class exploration program also made a high-impact discovery in Tanzania, which may lay the path for a future large-scale gas infrastructure development project. However, the company's Apollo well in the Barents Sea turned out to be a major disappointment, as it failed to yield commercial quantities of oil and gas.

Asset writedown
Perhaps the biggest letdown from the quarter, however, was an impairment of NOK 4.3 billion on Statoil's onshore U.S. assets in the Marcellus, Bakken, and Eagle Ford, which wasn't enough to offset a gain of NOK 3.6 billion from the farm-down of the Shah Deniz field in Azerbaijan and the South Caucasus Pipeline.

The writedown was due mainly to infrastructure constraints that prevented it from selling its output to higher-paying markets. While Statoil expects gas prices to rise in coming quarters and years, more writedowns could follow and production could come in lower than expected if gas prices remain low -- perhaps one of the biggest downside risks to the company right now.

New strategy
Despite these challenges, the company still expects its adjusted production to rise 2% this year. It's also making good progress on its new strategy, which calls for major reductions in spending and an emphasis on capital efficiency in order to improve shareholder returns. To that end, it plans to reduce its capital spending to $20 billion for the three years through 2016, down $5 billion from its previous target.

To achieve that goal, the company has already cut some 1,000 workers from staff and support services and plans to let go an additional 1,100 to 1,400 workers, according to CEO Helge Lund. "We have also established six specific high-impact projects addressing technical efficiency across the company, and we are now executing the first wave," Lund added.

So is Statoil a buy?
While Statoil looked quite attractive last year and even earlier this year, it doesn't anymore. Shares have surged by about 25% this year and currently trade at 11 times forward earnings, higher than the company's historical five-year P/E multiple. Unless gas prices in Europe and the U.S. rally or the company makes a major, high-impact discovery, I don't see much upside at current levels.

Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Statoil. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.