For Statoil, Less Oil Production, More Shareholder Value

NEW YORK (TheStreet) -- It sounds crazy, but Norway's biggest energy firm Statoil (STO) 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.

Due to these massive asset sales, the company continued paying dividends despite aggressively growing its capital expenditure program. Statoil's capital expenditures climbed more than 70% since 2009, to record levels of $19 billion in 2013.

The company is now putting an end to this momentum. In other words, Statoil's annual capital expenditure will increase by just 5.3% in 2014 to $20 billion. Then it will remain at this level through 2016.

Then this will be followed by an aggressive $1.3 billion per year cost cutting program from 2016 onward. Meanwhile, Statoil will move forward with more asset sales, which will support its cash flows.

Meanwhile, Statoil is delaying the development work on some of its biggest projects. Last year, Statoil postponed the development of its $7 billion Bressay heavy oil field project at the North Sea. Its $15.5 billion Johan Castberg project in the Arctic Barents Sea, which was already delayed, is now looking even more doubtful after some recent setbacks.

With the delays and drops in capital expenditure, Statoil has now pushed its 2020 production target, of producing 2.5 million barrels a day, further by 3 to 4 years.

With massive asset sales and a modest increase in capital expenditure, the company expects its daily output in 2014 to fall to 1.88 million barrels.

On the other hand, the reduction in capital expenditure, divestitures and delays will help the company  improve its liquidity.

As per its recent quarterly results, Statoil gets a fifth of its output from North America. The company is one of the biggest players at the Bakken, Marcellus and Eagle Ford shale plays in the U.S. The increase in the U.S. oil and natural gas prices will improve Statoil's profitability.

Currently, the Norwegian state owns 67% of Statoil. However, according to Bloomberg, the newly elected conservative government could reduce the stake to as low as 51%. Any news of reduction in the government's stake in Statoil will be welcomed by the market. If and when that happens, that too could turn into a positive catalyst for shareholders.

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

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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