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Pramod Thammaiah

STO AT A GLANCE

P/E ► 76.0 VERY HIGH EV/EBITDA ► 4.49 AVG ROA ► 2.3% AVG ROE ► 3.1% AVG Debt to Equity ► 1.97 HIGH Current Ratio ► 1.11 AVG Interest Coverage Ratio ► 11.5 AVG

 

 

 

 

 

 

Statoil ASA (STO) is the national oil company of Norway, which holds a majority share in the company. Statoil generates revenue in the exploration and production of oil and natural gas.^[1] The company is the largest offshore operator in the world, and as such, the prospect of extracting petro-chemicals out of the ground is becoming increasingly more difficult. Its success in turning its reserves into bottom line profits will likely depend on drilling in very deep water, which is an expensive proposition. Statoil has also diversified its exploration to politically unstable areas, where the benefits of discovering large reserves are tempered by the risk of instability.

What makes both geographic expansion and deepwater drilling financially enticing is the increasing appetite for energy throughout the world, especially in rapidly growing economies such as China, where growing demand has bolstered high oil prices.

As with most traditional fossil fuel companies, the prospects of alternative energy sources such as biofuels, nuclear, solar, wind and even clean coal will be a long-term threat to the company's business. While Statoil experienced increases in operating margin from 2004-2006 because of high prices for its products, fundamentally higher oil prices will enable alternative energy technologies to become more affordable.

Business Financials

Statoil is involved with all stages of oil and natural gas production, including exploration, drilling, refining, and marketing. It also owns and operates 1,803 Statoil-branded service stations in eight counties, primarily in Scandinavia and Eastern Europe. ^[2]

While revenue increased by 35% from 2004 to 2006, operating income increased by over 70%, as operating margins steadily increased during this time.^[3]. The return on average capital (after tax) also over the past few years, demonstrating that the company is operating more efficiently. The main drivers of this increased efficiency can be explained by rising oil prices caused by increasing global demand for energy.

The graph below depicts the company's oil and gas reserves, which have remained relatively stable over the past few years and indicating that Statoil is acquiring new reserves at approximately the same rate as production. The oil/natural gas reserves are measured in units of millions of barrels of oil equivalent (boe).

Key Trends and Forces

• Political Instability in Production Areas: Statoil has reserves in many potentially unstable areas. The Caspian Sea region endured warfare through much of the 1990's and even today the countries bordering the sea dispute ownership over seabed resources. The Persian Gulf region is susceptible to instability and violence as a result of the Iraq War and terrorism. Also, other areas such as Venezuela, Nigeria, and Angola are susceptible to civil strife, nationalization of property, and insurrections ^[7]. These are all areas in which Statoil either has or is in the process of acquiring oil/gas reserves. Thus, political instability in these volatile areas could lead to substantial losses for Statoil. Political instability could lead to Statoil not being able to conduct operations in these areas because of safety concerns, loss of property by the local government nationalizing it, or other reasons.

• Government Regulation: Statoil operates in 34 different countries and is susceptible to changes in regulation and tax laws in those countries. Concerns over global climate change can lead to increased regulations and thus, higher costs ^[8]. Another specific cause for concern is U.S. sanctions against Statoil for its operations and investments in Iran. According to the Iran Sanctions Act of 1996, the U.S. President can impose sanctions on a company that invests more than $20 million in the development of Iran's petroleum resources. In October 2002, Statoil signed an agreement with Petropars of Iran to help with the South Pars project in the Persian Gulf and as of 2007, Statoil had invested $394 million. It is uncertain whether or nor the U.S. will see this as grounds for imposing sanctions on Statoil^[9].

• Ownership by the Norwegian State: The Norwegian state is a majority shareholder of Statoil and thus, can make decisions in conflict with the interests of other shareholders unilaterally. The Norwegian state requires Statoil to market Norwegian State's oil and gas with Statoil's oil and gas as one economic unit. Also, before making any decisions concerning the development of the Norwegian Continental Shelf (NCS), Statoil must take into account the interests of the Norwegian State's oil and gas operations, which may not always align with Statoil's interests^[10].

• Deepwater Drilling: As the world's largest offshore operator, Statoil conducts some of its oil and gas production in environments that can make it difficult to carry out drilling, construction, and transportation. ^[11]. Many such areas are located in deep water and require new and advanced technologies that have been proven (for example, Statoil encountered construction challenges in the Snohvit project). Additionally, in some remote locations, transportation infrastructure does not exist for taking oil and gas for refinement or is very difficult to obtain. Thus, Statoil may not be able to utilize all of its potential production capacity^[12].

• Alternative Fuels: Because of the decreasing availability of oil and concern for the environment, there has been greater pressure on the development of Renewable Energy. Also, rising oil and gas prices are making it more economically feasible for alternative energies to be used. New sources of energy include: biofuels; clean coal; nuclear energy, solar power, and wind energy. The long-term development of alternative energies can have a significant negative impact on Statoil's oil and gas operations^[13].

• Oil Prices: Statoil is extremely susceptible to changes in oil prices in the global market because they are involved in nearly all the stages of production of oil including exploration, drilling, transport, refining, and marketing--in 2006, Statoil's share price had a 62% correlation with oil prices. Also, oil prices correlate somewhat with natural gas prices because they are complementary goods. A fundamental driver of the increasing price of oil supply is the great global demand for energy.

• Foreign Exchange Rate Fluctuations: Most of Statoil's revenue is made in terms of the U.S. dollar, which is used to price the global oil market. However, most of Statoil's costs are paid with the Norwegian kroner. Thus, a decrease in the value of the dollar against the kroner can adversely affect earnings. Because revenue will decrease and costs will increase relative to each other. Conversely, an increase in the strength of the dollar versus the kroner will benefit profits ^[14]. The following table and chart show the kroner per dollar exchange rate over the past few years. The dollar has weakened relative to the kroner since 2002, thus, Statoil's profits have been adversely affected by foreign exchange rate fluctuations.

^[15]

Competition

Statoil is involved in every stage of production of oil and gas. It is primarily focused in the Norwegian Continental Shelf and accounts for 60% of Norway's oil and natural gas production. However, Statoil has increased its exploration in foreign international reserves, bringing it into direct competition with the global supermajors who have more resources, expertise, economies of scale, and capital than Statoil.

The 2006 merger with Norsk Hydro will enable Statoil to better compete and established it as the world's largest offshore operator, ahead of Stock:Royal Dutch Shell (RDS'A) (No.2) and Petrobras Energia Participaciones SA (PZE) (No.3). The following is a table comparing various statistics of Statoil and its competitors ^[16]:

Market Share

Statoil is a major supplier to the European market. It has a market share of approximately 10% in the natural gas market there. Including a 15% market share in Germany and 25% market share in France^[17].

In Scandinavia, Statoil has a 40% market share in the Liquid Petrol Gas(LPG) market^[18].

Additionally, Statoil is a owns many gas stations in Europe. It's market shares are 28% in Norway, 24% in Sweden, 17% in Denmark, 40% in Estonia, and 29% in Latvia ^[19].

Notes

1. ↑ Statoil(STO) Annual Report, Fiscal year 2006, "Facts", p.17
2. ↑ Statoil (STO), Form 20-F, Fiscal year 2006, "Manufacturing and Marketing", p.53
3. ↑ Yahoo Finance: STO Income Statement
4. ↑ Yahoo Finance: STO Income Statement
5. ↑ Statoil (STO), Annual Report, Fiscal year 2006, "Key Figures", p.3
6. ↑ Statoil (STO), Annual Report, Fiscal year 2006, "Key Figures", p.3
7. ↑ Statoil (STO), Form 20-F, Fiscal year 2006, "Risk Factors", p.15
8. ↑ Statoil (STO), Form 20-F, Fiscal year 2006, "Risk Factors", p.17
9. ↑ Statoil (STO), Form 20-F, Fiscal year 2006, "Risk Factors", p.16
10. ↑ Statoil (STO), Form 20-F, Fiscal year 2006, "Risk Factors", p.18
11. ↑ Statoil (STO), Form 20-F, Fiscal year 2006, "Risk Factors", p.16
12. ↑ Statoil (STO), Form 20-F, Fiscal year 2006, "Risk Factors", p.15
13. ↑ Statoil (STO), Form 20-F, Fiscal year 2006, "Risk Factors", p.13
14. ↑ Statoil (STO), Form 20-F, Fiscal year 2006, "Risk Factors", p.16
15. ↑ Statoil (STO), Form 20-F, Fiscal year 2006, "Exchange Rates", p.12
16. ↑ Yahoo Finance and Google Finance
17. ↑ Statoil(STO), Annual Report, Fiscal year 2006, "Natural Gas", p.25
18. ↑ Statoil (STO), Form 20-F, Fiscal year 2006, "Manufacturing and Marketing", p.53
19. ↑ Statoil (STO), Form 20-F, Fiscal year 2006, "Manufacturing and Marketing", p.53

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