Online Extra: Statoil Eyes Gas-Powered Growth

The Norwegian energy outfit is exploiting the rising demand for the fuel, and its falling state ownership makes it even more attractive

By Ariane Sains

Norway's Statoil is a rare type of corporate beast: A state-controlled oil company that's increasingly run like a private business, which is good news for investors. Ranked at No. 24 in BusinessWeek's European BW 50 listing of top European companies, based on the Standard & Poor's Europe 350, Statoil went public in June, 2001, with the Norwegian government selling off 17.5% of its stake for $2.9 billion. Norway subsequently sold slightly more of the outfit and now owns 81.8%. Although the state retains majority control, it has pulled back from what many analysts considered to be a provincial, meddling approach to it and the wider Norwegian oil industry.

The transition to that hands-off approach has been rocky. In 1999, then-CEO Harald Norvik resigned, ostensibly at the government's urging, for cost overruns on several oil and gas development projects. But industry sources say Norvik pushed the state too hard on privatization. The government was also on record criticizing decisions not to develop some oil and gas fields, publicly questioning management's acumen.

GOOD BUY.

  Looking ahead, analysts think the state should and likely will reduce its holding even more in the months ahead to give Statoil more freedom. Nick Griffin, an oil industry analyst with Deutsche Bank in London, predicts that such a sale could come within 6 to 18 months. By law, Norway can sell down to a 66% holding.

Since it went public, Statoil's shares have ranged between a high of $9.26 and a low of $6.68 on the Oslo Stock Exchange. On the New York Stock Exchange, Statoil's stock has fluctuated between $7 and $8.60. Analysts consider it a good buy at about $7.60 a share.

Driving Statoil's desire to privatize is its bid to become a major international energy player. It's the dominant outfit in the Norwegian sector of the North Sea, which accounts for more than 50% of its production. In June, Statoil paid British Petroleum (BP ) $740 million for a 31.8% ownership in the Salah gas field and 50% in Amenas, both in Algeria.

"HUNGRY FOR GAS."

  Investors and analysts generally praised it as a good move, but their enthusiasm was tempered by political uncertainty in Algeria, as well as the investment needed to develop the fields. Still, the purchase means Statoil's production estimates for 2007 have increased by 50,000 barrels of oil equivalent (BOE) daily, upping its annual growth target from 5% to 6%.

More important, analysts say the move to gas is smart and timely. "Europe is hungry for gas," says Deutsche Bank's Griffin. "Statoil wants to internationalize. As an investor, you'd want them to expand into things they know something about, and Statoil knows a lot about European gas. It makes more sense than high-risk exploration in faraway places."

Besides Algeria, gas will come from Norwegian fields. Snow White, Statoil's latest development, is set to start shipping liquid natural gas in 2006. A big boost also will come if plans for a gas pipeline from Norway to Britain materialize. The fuel is poised to replace coal as the energy source of choice, with Europe looking for ways to reduce greenhouse-gas emissions, and Statoil is poised to take advantage of that.

MORE PARTNERSHIPS?

  "Natural gas is gaining market share," says Statoil CEO Olav Fjell. Over the next 10 years, he expects natural-gas production to be 40% of Statoil's total production and for natural gas to account for 60% of total booked reserves, up from 30% now. Fjell admits that to develop the gas business, investments through 2007 will need to be higher and that "the capital expenditures required will put a modest strain on our return, but it's only temporary."

Analysts say Statoil needs to cut development and exploration costs further, but that could be difficult. They would also like to see more partnerships of the kind it has forged with BP. Through 2007, Statoil is aiming for a 12.5% return on employed capital, compared with 12% now; average development costs over three years of less than $6 per BOE, compared with $6.20 today; and average production costs of less than $3.20 per BOE, compared with $3.10 in 2002.

Those estimates seem reasonable in the context of Statoil's recent performance. Although net financial income for 2002 was down 2.3%, total revenue was up by 3%, to $35 billion. Income was up sharply in the fourth quarter, to $613 million, compared with $354 million for the same quarter in 2001. While the weakening of Norwegian krone against the dollar hurt profit margins, it helped Statoil pay down debt.

FURTHER SELL-OFFS?.

  First-quarter earnings in 2003 hit $188 million, up 38% from the same period in 2002. Oil and gas production was up 7% in 2002, thanks in part to better technology that allows Statoil to profitably extract more oil from older fields. Overall, Statoil increased income through cost-cutting by $218 million at the end of 2002, with a goal of $477 million in savings by the end of 2004.

Analysts say Statoil's performance could be significantly improved if it meets its goals. And that could pave the way for a further state sell-off, benefiting current shareholders and opening the doors to new investors.

Sains contributes to BusinessWeek from Stockholm

Edited by Beth Belton

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