Statoil Looks Too Cheap to Ignore

NEW YORK (TheStreet) -- Since reaching a 2013 high of $27.01 on Feb. 1, shares of Statoil (STO) have fallen by as much as 26%.

Investors have grown concerned about the company's near-term struggles with operating expenses and production growth. But I believe these concerns are overblown, especially given Statoil's strong history of profitability.

What's more, given this company's ability to develop energy reserves in tough locations, I believe patient investors can do well buying here on the dips.

I won't disagree that Statoil's less-than-5% gains in the trailing 12 months have been a disappointment, especially when compared to Chevron ( CVX) and Exxon Mobil ( XOM), which have posted gains close to 30% and 20%, respectively. But it's also clear Wall Street has exaggerated much of Statoil's near-term growth woes, especially in recent months.

From my vantage point, though, I would buy this company in anticipation that management will figure out ways to turn the company's luck around. To that end, Monday's $2.65 billion deal to divest minority interests in the Gullfaks and Gudrun fields was just the beginning. The company also agreed to exit the non-core, non-operated Schiehallion and Rosebank fields, which are located west of Shetlands.

This deal with Austrian oil and gas company OMV makes sense on many levels. The agreement essentially reduces Statoil's ownership stake in Gullfaks from to 51% from 70 %, while shedding its Gudrun position by 21% to 51%. The good news is that in the process management still retains Statoil's "operatorships" in both fields by virtue of its 51% ownership.

What's more, this deal will help Statoil redeploy roughly $7 billion of its expenses, of which $5.5 billion will be available over the next seven years. It certainly looks as if Statoil's troubles with liquidity and production costs, which weren't really that troubling to begin with, have now been resolved. It seems investors sometimes forget that this company already had a conservative fixed operating expense structure.

Now, with this new deal firmly in hand, it's safe to assume things will get meaningfully better. It's tough not to like the company's prospects on that basis. This is not a situation where I am downplaying other concerns that the company has had. Unplanned outages still cause some anxiety. But this has become a story about value.

I don't believe that Statoil, which is trading on par with Exxon Mobil and ConocoPhillips ( COP) presents the extraordinary level of risk that's presumed by its recent declines.

Let's not forget, this industry is about exploration and gas discoveries. I don't believe that there are many companies that have performed as well as Statoil when it comes to operating in brutal conditions. The company has a way of overcoming difficult environments. So with such a strong legacy of productivity, it doesn't make sense to continue to expect the worst, especially on the heels of the company's new deal, which now presents management with more flexibility to improve oil recovery technologies.

If there are any questions remaining, it would center on how well management can increase profitability through operational improvements. It certainly doesn't seem as if the Street believes much of this is possible. This is where I disagree. If the stock was trading at 20% higher, it would be a tough one to recommend. But that's not the case.

Seeing how much shares have underperformed the rest of the sector, Statoil seems grossly undervalued. Plus, given the company's strong exploration program, I believe that on the basis of its new deal, Statoil will be able to now outperform what seems as very low production growth expectations. With a bit of luck and rising free cash flow, this stock can trade at $30 over the next 12 months.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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