Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Exxon Mobil Corporation (XOM): Time to Buy Statoil ASA (ADR) (STO)?

Page 1 of 2

While I was in Stavanger, Norway during a recent vacation, Statoil ASA (ADR) (NYSE:STO), the Norwegian-controlled oil company, was making news, selling some of its North Sea interests for cash to invest elsewhere.

The shares had fallen in value recently, so while those who like Exxon Mobil Corporation (NYSE:XOM) have broken even over the last year, investors in Statoil ASA (ADR) (NYSE:STO) are out 12.7% on their stake.

So, should you buy your oil stocks in Norway or in Texas? Let’s take a look.

How Statoil stacks up
One point that was made to me repeatedly as I traveled Norway is that Statoil ASA (ADR) (NYSE:STO) is the country’s patrimony, that everyone knows it is losing steam in the North Sea, and that it must diversify in order to maintain the high standard of income the country’s 5.5 million citizens have become accustomed to.

Statoil ASA (ADR) (NYSE:STO)Thus, it wants to be a growth stock. In recent weeks it has announced strikes in Newfoundland, and said it has high hopes for new discoveries in Angola and Russia.  It’s primarily going after elephants here, deep-water discoveries that it has experience developing, rather than shale plays in older fields. It likes Tanzania, it likes Brazil, and its push in Russia is primarily in the Arctic, where it feels there remain vast resources.

The risk-reward here is different from what you would find in America. The fields are unproven, they are often in dangerous waters, but they can be much bigger than an American shale play.

While many analysts have focused on Statoil ASA (ADR) (NYSE:STO)’s interests in the Bakken and Marcellus plays, these seem to be aimed at exploring that technology cheaply, for use down the line, rather than for current growth. It wants major growth in reserves to power the country for the decades after the North Sea play is done, currently estimated at 2030.

The man behind the strategy is Helge Lund, a 50-year old trained at McKinsey who was briefly an advisor to the country’s government before getting into the oil business in 2002. He brings in about $2.5 million/year, a pittance by American standards, but he seems in little danger of being poached by an American rival.

Statoil by the Numbers
This means that Statoil ASA (ADR) (NYSE:STO) is a more aggressive exploration play than you would imagine, and that it’s willing to spend big in order to bet big on the future.

This is a relatively recent direction, reflected in the numbers, which mainly show declining revenues, and declining profits. The balance sheet, however, remains strong, with debt of roughly $25 billion matched against assets of $147 billion. (The company reports results in Norwegian kroner, which trade at roughly 5.5 to the dollar.) Operating cash flow is currently averaging about $5.5 billion each quarter.

Investor skepticism about Statoil ASA (ADR) (NYSE:STO)’s business model and aims has turned the stock into a relative bargain, with a yield of 5.12% and a price/earnings multiple of just over 11.

Other Ways to Play
Generally, Statoil ASA (ADR) (NYSE:STO) is being dismissed by American investors because they prefer the way American oil companies have been going after profits, separating growth from yield.

The way it works is that an exploration company will drill and develop a field, then place that asset in a master limited partnership, or MLP, focused on maximizing yield. This means the exploration companies are speculative, investors like the action, while the yield goes through an MLP for maximum tax advantages and income.

You can see this at work with Linn Energy LLC (NASDAQ:LINE), which is yielding a fat 11.97%. The sustainability of that yield depends on its buying more producing assets to maintain it.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!