Current STO Stock Info

Believes peak production from the Johan Sverdrup offshore field could reach 380 MBOPD

Norway-based Statoil (ticker: STO), the largest acreage holder on the Norwegian Continental Shelf (NCS), added to its portfolio by acquiring more than 37 million shares of Lundin Petroleum (ticker: LUPE).

The acquisition, announced on January 14, 2016, is valued at SEK 4.6 billion (roughly US$540 million) and consists of nearly 12% of Lundin’s outstanding shares. According to the Statoil release, “The investment in Lundin Petroleum will increase Statoil’s indirect exposure to core assets on the Norwegian Continental Shelf.” Statoil says it does not intend to increase its shareholding in Lundin.

Lundin Petroleum Snapshot

Lundin Petroleum is based in neighboring Sweden and lists the Norwegian shelf as its principal area of operations. The region represents 94% and 64% of the company’s reserves and 2015 production guidance, respectively. LUPE is in the midst of an exploration program and planned on drilling 12 exploration/appraisal wells last year.

The first stage of its development program, named Phase 1, was given final approval in August 2015. Gross capital expenditure estimates for the Phase are NOK 117 billion (about US$13.3 billion), and completion is expected by late 2019. Peak gross production rates are estimated at 315 to 380 MBOPD. Average regional net production for the first nine months of 2015 was 18.9 MBOEPD.

The company has the second-largest interest in the Johan Sverdrup field offshore Norway. The only superior holder is Statoil, with a 40% interest. In an email to UPI, Alex Schneiter, Lundin’s chief executive officer, said the acquisition is a “Vote of confidence in Lundin Petroleum and a further sign of us being one of the most attractive players on the Norwegian continental shelf.”

Statoil Offshore Position

Statoil Offshore Position

Statoil’s “Backbone”

Geographic difficulties and a tough commodity environment have not deterred STO from ramping up its position in the NCS, which consists of the Barents Sea, the Norwegian Sea and North Sea.

The company applied for the 23rd NCS licensing round last month, already targeting for operations to begin as early as next year. Jez Averty, Senior Vice President of Exploration for Statoil, addressed market situations in the company release. “There is a debate where some say that these resources will not be commercial. We believe otherwise and our application is proof enough of that. Statoil’s preparations for our 23rd round application have included developing technology solutions that will reduce the break-even price per barrel for the significant discoveries we hope to make in the Barents Sea.”

Its NCS target is not going to slow down any time soon: Statoil has the area highlighted as its growth driver through the year 2030.

north-seaAnalyst Reception

The timing comes as no surprise, considering the opportunities surfacing in an energy market that closed on one of its worst stock performing years in history. Shares of Lundin have fallen by about 20% since the commodity crash in 2014 – which, all things considered, is not bad at all considering the average United States E&P share price (based on EnerCom’s Weekly Benchmarking Report) has fallen by more than double that amount in the last six months alone.

However, analysts like Biraj Borkhataria of RBC Capital Markets said the long-term aim of the acquisition may carry some short-term risk. “We are surprised by this move,” Borkhataria said by email. “Lundin is one of the more expensive stocks in the International exploration and production universe.”

Trond Omdal of Pareto Secutiries AS in Oslo applauded the announcement, saying these particular assets are simply not marketed for sale. “They’re buying a company whose main assets they know really well.”

Eldar Saetre, Chief Executive Officer of Statoil, told Reuters earlier this month that oil prices will rise, it’s just a matter of when.  “It’s difficult to predict how the price will develop in the short term,” he said. “There will probably be volatility and big swings. We firmly believe prices will rise because there is little new production capacity entering the market.”

Omdal says Statoil’s interest in Lundin echoes that sentiment. “It shows that Statoil believes in higher oil prices than where they are currently.”

The company’s outlook on North Sea development is truly unmatched, even though the majority of offshore operations have been scrapped due to simple economics. Don’t count Statoil in that group: last February, management asserted that the Johan Sverdrup field of the NCS has “robust economics with a break-even price at below $40 per barrel.”

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