Statoil's Third Quarter Earnings Took a Surprising Dip, Here's Why

By Markets Fool.com

Slowly but surely, there has been some modest uptick in oil and gas prices over the past couple quarters. Based on this, one might assume that we would have expected a slight uptick in Statoil's (NYSE: STO) most recent quarterly results. That wasn't the case, though, as a few things got in the way. Let's take a look at the most recent quarter and try to make sense of the unexpected decline in earnings.

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Image source:yvind Torjusen/Statoil.

Statoil's results: The raw numbers

Results* Q3 2016 Q2 2016 Q3 2015
Revenue $12.106 $10,895 $13,614
Net income ($427) ($302) ($343)
Earnings per share ($0.14) ($0.10) ($0.11)
Cash flow from operations $3,480 $3,026 $5,085

* In millions, except per share data. Data source: Statoil earnings release.

Statoil's decline in earnings took the market a bit by surprise since we have started to see a modest uptick in oil and gas prices across the board in recent quarters. The thing that most likely threw a big wrench in that assumption was a modest decline in production for turnaround maintenance as well as a large decline in natural gas prices in Europe. The average invoiced gas price in Europe declined from $6.96 per million BTU in 2015 to $4.85 million BTU this past quarter. Keep in mind that 77% of Statoil's revenue comes from its Norway operations, and selling natural gas to Europe is a large part of it. The bulk of this change shows up in the company's marketing, midstream, and processing business.

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Source: Statoil earnings releases, author's chart.

Like the prior quarter, Statoil continues to lower its operational and administrative expenses that help to offset the declines in prices as well as the temporary decline in production. Operational expenses for both its Norway and international development segments declined by a total of $286 million compared to the same quarter.

What happened with Statoil this quarter?

  • Production for the quarter was 1.80 million barrels of oil equivalent per day compared to 1.91 mmboe/d this time last year. As management noted, though, a large portion of this was because of planned downtime for maintenance in its Norway operations. When adjusting for the losses from maintenance, management estimates that total production would have been 5% higher than this time last year.
  • Management projects that cost cutting efforts by the company will result in a pre-tax cash flow gain of $2.5 billion for the entire year as the company scales back on production growth and focuses more on production value versus overall volume growth.
  • Capital expenditure guidance was lowered again this year, this time to $11 billion from the $12 billion to $13 billion range in the prior quarter. Exploration activity expenses are expected to be $1.5 billion for the year as well.
  • Statoil agreed to purchase a 66% interest in a Brazilian offshore license from Petrobras for $2.5 billion. The payment for that license hasn't been booked yet, so it should show up in the coming quarter's results.
  • Net debt ticked down ever so slightly to 30.3% as the company lowered its long term financial debt to $28.6 billion. However, its current portion of long term debt has ticked up considerably over the past year to $4.7 billion.
  • The board of directors has elected to keep its dividend payout the same. It will also continue with its scrip dividend program that offers a 5% discount on newly issued shares in lieu of a cash payment.

What management had to say

The most surprising thing in Statoil's results was that the company decided to scale back on its capital spending plan after revising it as recently as the prior quarter. CEO Eldar Saetre wanted to set the record straight, however, and highlighted that the decline in spending is more because of efficiency and not a scaling back of activity.

The financial results were affected by low oil and gas prices, extensive planned maintenance and expensed exploration wells from previous periods. We delivered solid operational performance with strong cost improvements and progress on project execution. Strict prioritization and continued good results from our improvement program allow us to further lower our 2016 capex and exploration guidance

10-second takeaway

Overall, Statoil's results don't look great on paper, but there are signs it's doing the right things like lowering costs and keeping spending in check while oil and gas prices are low. It's hard to do an apples-to-apples comparison this quarter, though, because so much production was shut in for maintenance. Management expects that there will be a 40,000 barrel of oil equivalent per day impact on production in the fourth quarter as it wraps up this maintenance work. Once we get to see a quarter without any intentional production shut in, we will get a clearer picture as to how these cost savings initiatives are impacting the company's bottom line.

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Tyler Crowe has no position in any stocks mentioned.You can follow him at Fool.comor on Twitter@TylerCroweFool.

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