Norway slaloms back and forth between treating its oil industry as a branch of state and as private market-listed companies. On Dec. 18, it made another big turn when Statoil (STO), the government-controlled but publicly listed oil company, announced that it would buy the oil and gas assets of the smaller Norsk Hydro (NHY) for about $30 billion.
The deal represents an effort to create a major-league oil and gas national champion that is capable of competing against ExxonMobil (XOM) and Royal Dutch Shell (RDS.A) in the international arena. The new company would have production of about 1.9 million barrels per day of oil equivalent, or about half that of Exxon or BP (BP).
But the Norwegians get high marks in offshore technology and say that the combined company would be the largest global offshore operator. It would have 6.3 billion barrels of proven reserves. "The combined companies will be better able to [take on] challenges than the two companies have been able to do alone," said Statoil CEO Helge Lund on Dec. 18. He will retain that position in the new company, while Norsk Hydro's Eivind Reiten will become chairman of the oil company while remaining CEO of what is left of his own company.
Norwegian Prime Minister Jens Stoltenberg said in a press conference on Dec. 18 that he had received signals from "the Russian side" that the two companies lost out on the recent bid to develop the Shtokman field in the Russian Arctic with Gazprom because they were competing against each other. Other sources, however, say that Gazprom is probably going to move ahead with Shtokman slowly, if at all.
Combining the two companies should also lead to greater efficiencies in extracting the remaining oil and gas on the Norwegian continental shelf. The two companies share many tracts and are often in joint ventures together, so potential cost savings are likely due to more efficient deployment of equipment and personnel and reduced administration. One obstacle to any cost cutting will be the strong Norwegian unions. Both companies were notably vague in spelling out any specifics on savings. The new oil company will have 31,000 employees.
Questions also abound about whether existing management is capable of running a much larger and more ambitious company. Statoil has been plagued by management turmoil over the last few years. One problem is the government, which is sometimes hands-on and sometimes hands-off. Statoil's efforts to expand out of Norway have sometimes led to pratfalls. The company acknowledges paying bribes to an Iranian official in 2002 and 2003 in an effort to land an Iranian oil and gas deal that has proved a complete write-off. This fall, Statoil paid a $10.5 million fine to the U.S. Securities & Exchange Commission to draw a line under this case.
In a note, Citgroup (C) warned that "a number of cost overruns and project delays have crept into Statoil's portfolio." As its appetite grows bigger, its risks will rise. On the other hand, Citi rates the company a buy/low risk.
A Win-Win Deal?
The move is also part of Reiten's efforts to focus Norsk Hydro's diverse activities. The company will now focus on its aluminum-making business.
The theory is that Hydro shares have been dragged down by a "conglomerate discount" that makes the company difficult for investors to evaluate. Hydro had already spun off its fertilizer business, now called Yara, in 2004. Certainly, the markets welcomed the latest deal as an early holiday present. On the New York Stock Exchange, Norsk Hydro was up 18.71% to $29.50 while Statoil was down 2.53% to $26.93, on Dec. 18. Through Sept. 30, 2006, Statoil earned $4.59 billion on revenues of $51.59 billion. The remaining assets of Norsk Hydro earned $1.67 billion on revenues of $12.2 billion.
Norsk Hydro shareholders will wind up with 32.7% of the stock in the new company, while Statoil shareholders will have the remaining 67.3%. The Norwegian government's stake will be 62.5% in the oil company.
The overall deal appears to make a lot of sense for Statoil. It is acquiring what amounts to a midsize oil company with production of 570,000 barrels per day—comparable to that of Occidental Petroleum. Payment will be in shares of the as-yet-unnamed new company. There will be little or no premium, according to someone close to the transaction. The deal might also turn out well for Norsk Hydro shareholders, who will have the opportunity to participate in any upside created by better management of the combined oil and gas assets and improved results at what remains of Norsk Hydro.