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?

Oil

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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.