Norsk Hydro Scores Coup

The day after Statoil STO and Norsk Hydro NHY announced plans to merge their oil and gas activities, the deal is being widely viewed as a coup for Norsk Hydro's shareholders.

The deal is expected to unleash the "hidden value" of Norsk Hydro, whose oil and gas assets have been trading at a deep discount because they are bundled up with the value of the company's aluminum operations. Norsk Hydro is currently the world's third-largest producer of aluminum, trailing Alcoa AA and Alcan AL.

"The deal will form a pure-play oil and gas company out of Hydro, which right now is an industrial conglomerate," says Arnstein Wigestrand, an analyst for the Scandinavian investment bank SEB Enskilda AS.

Wigestrand also saw the pairing of the two companies' oil and gas operations as a potential cost saver. "Statoil and Norsk Hydro have been competing for the same assets, which has probably ended up with larger prices for some of those assets," he says. "This deal will create a larger and stronger company which will be able to win international assets more successfully."

In Norway Tuesday, DnB NOR Markets downgraded its recommendation on Statoil to hold from buy, while reiterating its buy stance on Norsk Hydro and lifting its price target on the stock by 21% to 215 Norwegian kroner, or about $35.50 for the ADRs.

UBS and Dresdener Kleinwort cut their stances on Norsk Hydro to neutral and sell, respectively, after Monday's big rally but upped their price targets for the company to 200 Norwegian kroner and 170 Norwegian kroner respectively. (In U.S. trading, Norsk Hydro ADRs jumped 19% Monday and closed up another 3% to $30.48 Tuesday. Statoil shares dipped 3.2% Monday but closed up nearly 1% to $26.97 Tuesday.)