Adjusted earnings fell to NOK 3.7 billion from NOK 9.1 billion last year despite 4% growth in equity production volumes. Production volumes rose on new project startups in the last year and a sharp increase in gas production thanks to Statoil’s ability to flex its gas production to meet supply and demand changes in Europe. During the quarter, it capitalized on shortfalls from other suppliers to increase its own volumes.
Adjusted earnings for the Norwegian and international upstream segments fell 33% and 32% respectively, while the downstream and marketing segment earnings rose 39%. Positively, Statoil reported adjusted operating expense and selling, general, and administrative expenses are down 15% year over year, including 22% in the international segment, and it reduced 2015 capital expenditures spending by $1 billion to $16.5 billion. Additionally, it announced a 7% reduction to its cost estimate for Johan Sverdrup. However, it also announced a delay of more than a year to the Aasta Hansteen and Mariner fields due to cost increases to the original plans of about 10%. With industrywide costs falling, it’s surprising to see any project costs increasing, but we think that could be further evidence of the higher costs of operating in the North Sea and Norwegian Sea. That said, given the likelihood for continued cost deflation, the decision to delay construction is prudent and demonstrates Statoil’s commitment to value over volume. 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.
As we discussed in our recent (Oct. 27) research report on the integrated oil space, "Integrated Oil: New World Trumps the Old World," we think increasing capital flexibility should allow Statoil to cover its dividend and reduce its breakeven level to $60/bbl in 2017. Furthermore, Statoil holds the opportunity for meaningful operating cost reductions as it has demonstrated year to date. However, we think shares are fully valued based on our long-term oil price assumption of $70 and with assets primarily in higher cost regions, delivering future growth may be challenging.
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