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For Statoil, Less Oil Production, More Shareholder Value

Stocks in this article: STO RDS.A XOM

NEW YORK (TheStreet) -- It sounds crazy, but Norway's biggest energy firm Statoil (STO - Get Report) could boost shareholder return despite shrinking income.

The oil giant is focusing on increasing its buybacks and dividends, as it struggles to increase its output in the face of rising costs and a soft pricing environment. In order to do that, Statoil is strengthening its cash flows by selling its assets, reducing its production targets and cutting down on capital expenditures.

Statoil is concentrating on value creation, rather than producing record levels of output. The markets seem optimistic about Statoil's future, and the company's American depositary receipts are up 11.4% this year to $26.87.

The state-owned firm could continue going higher due to the new focus on cost discipline. The company, which has significant exposure to U.S. shale plays, could also benefit from strength in U.S. oil and natural gas prices. Moreover, a possible reduction in the government's stake could turn into an upward catalyst.

Last month, Statoil reported its quarterly results. Adjusted income fell 12.4% from the same quarter last year to $7.88 billion, which missed analyst estimates of $8.32 billion. The company's total revenue fell 1% to $29.5 billion.

This decline stemmed from a larger share of natural gas in the total output, weakness in oil and gas prices and higher depreciation costs. Daily production also dropped by 4% from last year to 1.95 million barrels.

Statoil isn't the only oil company that has struggled with growth amidst a tough business environment. Other oil majors, such as Royal Dutch Shell (RDS.A) and Exxon Mobil (XOM), have also reported significant drops in quarterly earnings.

Although Statoil's results were not particularly impressive, the company is looking to boost shareholder returns. That is encouraging.

For 2013, Statoil increased its dividend to 3.5%, or $1.17 per share. The company will start paying dividends on a quarterly basis, too. The company has also announced that it will become more aggressive with buybacks.

To support higher dividends and buybacks, Statoil will continue selling assets. So far, since 2010, Statoil has sold assets worth $18 billion, including the recent sale of 10% of the Shah Deniz project and the Caucasus pipeline for $1.45 billion.

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