We view the hire positively, albeit with some ambivalence. Positively, BG removes an element of uncertainty about the future leadership of the company by hiring a known industry veteran. On the other hand, Statoil's operational and financial performance has deteriorated under Lund's leadership the past five years, leaving the share price unchanged during that period. Like many of its peers, Statoil saw returns decline as greater investment failed to increase production. To Lund's credit, however, earlier this year Statoil abandoned previously aggressive growth targets and committed to trimming investment.
BG also faces different challenges than Statoil as its opportunity set is among the largest of its peers, but execution has been poor with an inability to deliver on production targets the past several years. In this case, Lund could prove an asset as Statoil is known as a quality operator. Another key to BG's future lies with its ability to realize value through asset monetization. In this respect, Lund could be valuable as well, since Statoil has regularly sold mature or lower-quality assets in recent years. In fact, the previous CEO's inability to do this effectively created a conflict with the board that ultimately contributed to his resignation.
Our fair value estimates and moat ratings are unchanged for BG and Statoil.
While we rate the appointment as slightly favorable, we don't think it will act as a near-term catalyst. Asset sales, on-time startup of QCLNG, and continued production growth in Brazil remain much bigger factors in driving BG's shares to our fair value estimate. With Lund not taking the reins until March, his influence over these issues will be limited. That said, the weakness in oil prices has weighed on BG's shares so that they are now just trading above 5-star territory. Combined with our expectation for margin expansion, production growth, returns improvement, and higher free cash flow in the next several years, we think BG presents a compelling opportunity.
For Statoil, Eldar Saetre, former CFO and current president of the downstream segment, will assume the role of interim CEO until a replacement for Lund can be found. In the meantime, we expect Statoil will continue on its current course and follow the plan to stabilize returns announced earlier this year. A new CEO is likely to stick with some form of that plan, given the positive market response it received.
