Statoil's Lack of Exposure to Refining Hurts Bottom Line

The Norwegian state-owned company battles low oil prices as production increases do little to halt slide in top and bottom lines.

Isac Simon
Isac Simon
Oct 29, 2015 at 10:30AM
Energy, Materials, and Utilities

Statoil's Asgard B platform. Source: Flickr/StatoilASA

Despite calling itself an integrated oil company, Statoil's (NYSE: STO) lack of a refining segment is hurting the company in the low oil price environment. The majority state-owned Norwegian oil and gas company reported a third quarter net loss of NOK 2.8 billion ($334 million) despite increasing production volumes.

The raw numbers
Revenue fell 24% from year ago values to NOK 112.2 billion ($13.4 billion) as the average realized liquids price fell 52% to $43.5 per barrel. Management hasn't been particularly efficient in lowering costs either, as net operating margin fell to 6.5% from 11.4% in the same period. This includes impairment costs of NOK 4.8 billion ($572 million), bringing up this year's total impairment charges to NOK 53.9 billion ($6.4 billion).

Statoil earned pre-tax income of NOK 7.3 billion ($870 million), down from NOK 17.0 billion ($2 billion) in the third quarter of 2014. Adjusted earnings after tax, which reflects core operations, they slipped 60%, to NOK 3.7 billion ($441 million).

Overall production volumes grew to 1.91 million barrels of oil equivalent per day, or BOE/d, compared to 1.83 million BOE/d in the year ago quarter. After adjusting for divestitures, the company recorded a solid 7% underlying growth.

A closer look at the segments
In Drilling and Production, Norway continued to execute strong performances by riding on a 10% underlying growth. The segment also benefited from higher European gas prices. After tax adjusted income stood at NOK 5.1 billion ($608 million), versus year ago values of NOK 6.6 billion ($786 million).

However, the international segment of Drilling and Production wasn't as fortunate as it registered an adjusted loss of NOK 4.5 billion ($536 million). Over and above low realized prices, a strong U.S. dollar adversely affected the Norwegian kroner, causing an additional drag on the bottom line.

The Marketing, Midstream, and Pipeline segment offset production losses somewhat by capturing higher refining margins prevalent in the European oil market. Adjusted income grew a whopping 83% to NOK 3.3 billion ($393 million).

All in all, had Statoil been a truly integrated oil company with a dedicated refining segment of its own, the results would've probably been stronger. 

Outlook for 2015 and beyond
Total organic capital expenditures for 2015 have been further cut by $1 billion to $16.5 billion. This includes exploration expenses of $3 billion. For the period of 2014-2016, production is expected to grow organically at a compounded annual growth rate of 2% from 2014 levels after removing divestitures.

The company is deferring its development of two major exploration projects -- the Mariner in the UK Continental Shelf, and the Aasta Hansteen in the Norwegian Arctic. The delay is expected to increase original cost estimates by 10% and 9%, respectively.

Foolish takeaway
Cash flows remain constrained due to reduced liquids prices. Operating cash flows -- excluding working capital and taxes paid -- fell 14% while investing cash flows have remained at elevated levels as capital expenditures increased NOK 5.9 billion ($7.2 million) from last year's third quarter. Bottom line: a lack of direct exposure to refining operations has been detrimental to Statoil's cash flows and bottom line.