Statoil’s second-quarter earnings fell sharply as the decline in oil prices since last year more than offset the growth in production and improved downstream results. After-tax adjusted earnings (excluding the benefit of asset sales during the quarter) fell 27% to NOK 7.2 billion from NOK 9.9 million a year before. On a positive note, equity oil and natural gas production increased 4% to 1,873 mboe/d thanks to the start-up of new projects, higher gas sales, and lower maintenance activity. Full-year equity production growth guidance remains at 2% (adjusted for divestments). Statoil also made solid progress in its efficiency improvement and cost reduction efforts. It reported an approximate 15% decline in upstream operating expenses and SG&A since the second quarter last year.
Meanwhile, the downstream segment saw earnings increase to NOK 3.7 million from NOK 0.7 million last year on stronger refining margins. Management expects the segment to generate earnings of approximately NOK 3.0 million in “normal” conditions. Earnings in recent years have fallen short of this level, however, as refining conditions in Europe were challenging. The decline in oil prices though has bolstered European refining margins which should result in earnings continuing to exceed normalized levels for several more quarters.
We plan to update our model with the latest results and guidance, including a slight reduction in capital spending in 2015, but do not expect a change in our fair value estimate or moat rating.
Through the first half the year, Statoil nearly achieved its goal of being cash flow neutral, only running a NOK 1 billion deficit, albeit with the help of NOK 24 billion in asset sales. As a result Statoil was able to maintain its NOK 1.8 per share dividend while reducing net debt levels from the first quarter. Of further benefit was the deterioration in the krone relative to the dollar, which reduced the dollar dividend to $0.2201 per share from $0.258253 last year. Going forward this lower dollar dividend rate will be the basis for future changes as Statoil moves to using dollars for its presentation currency next year. Absent more asset sales though, we expect Statoil to fall short of funding its dividend until 2017 when production is higher, costs are lower, and it has greater capital spending flexibility to match a variety of oil price environments.
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