Buy Norway's oil champion

Norway's next oil frontier just got a little closer -- and there's only one stock to play it.

By Jim J. Jubak Sep 23, 2009 6:12PM

Jim JubakI don't follow Norwegian politics very closely, so you'll have to forgive me if I've been a little slow on the uptake.

 

But the re-election of Norwegian Prime Minister Jens Stoltenberg on September 14th moves the country a little closer to opening the oil-rich but environmentally fragile Lofoten Islands to oil and natural gas drilling.

In the country's general election, parties that favor exploration and production in Norway's share of the Arctic waters, including the Barents Sea, added seats. The government is still a coalition with a fragile majority, so no one expects quick movement on the contentious issue of drilling in this area, one of the most pristine in Norway.

 

But with Norway's management plan for the area -- which is currently out of bounds for drilling -- up for review in early 2010, the odds are that Norway will get more aggressive in exploiting the potential reserves in the waters of the Arctic continental shelf. On the latest numbers, a majority of voters is not opposed to drilling in this region.

 

And the prime beneficiary of any expansion of drilling in the area will be Statoil Hydro (STO), Norway's national oil company. I'm buying it for the Jubak's Picks portfolio today.

 

(For how this fits into my grand strategy, see this post.)

 

Shares of Statoil have been depressed by questions about how the oil company will replace production from its old, declining oil and gas fields off the Norwegian coast. The company doesn't have a stellar record in finding reserves outside its home waters, so expanding production from Norway's Arctic continental shelf is critical for Statoil. Estimates say the Lofoten region holds two billion barrels of oil equivalent.

 

You can see the potential upside for Statoil in the Arctic continental shelf in the Shtokman project of Russia's Gazprom (OGZPY). Statoil Hydro and Total (TOT) are partners with Gazprom in the company building the infrastructure to develop the field. (Gazprom owns the gas.)

 

Thanks to the 2006 merger of Statoil with Hydro, the joint company is one of the world's leading oil infrastructure providers. The giant Shtokman field is projected as the world's largest offshore gas field with natural gas reserves of 3.8 trillion cubic feet. Gazprom projects that gas will flow in 2013 if the construction partners can solve the infrastructure problems posed by one of the world's most hostile climates. (For example, how do you protect drilling platforms from giant icebergs set loose by global warming?)

 

Nothing that Statoil has discovered in these waters in recent years rivals Shtokman. But the company has added about 233 to 335 million barrels of oil through discoveries in the Norwegian Sea. (On the plus side, nothing Statoil has discovered will be nearly as expensive to develop as Shtokman, where final costs are estimated at $30 billion.) And all these discoveries are close to existing infrastructure.

 

At the current price of about $23 a share, the market is assuming that Statoil Hydro will collect cash flows from its proven reserves for another ten years at a price of about $58 a barrel. That pretty much ignores the potential in the Arctic continental shelf and of the company's other drilling ventures, including the Gulf of Mexico and the Caspian basin.

 

It also, I think, undervalues Statoil Hydro's oil infrastructure business (with its deep sea drilling expertise) and its natural gas pipeline system. With Gazprom, the company essentially has a duopoly on delivering natural gas to Europe. (The company recently constructed its first floating wind turbine. I don't know how to value Statoil's business in this area.)

 

I think you can take your time in accumulating this one, since the long-term story is unfolding slowly. I'm adding the shares to Jubak's Picks today with a target price of $28 a share by July 2010.

 

Jim Jubak owns shares of Statoil Hydro in his personal portfolio.

 

Related reading:

Why China is the next big oil play

The new energy crisis

5 oil stocks for slick profits

Mixing oil and water to make hay

2Comments
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

108
108 rated 1
257
257 rated 2
439
439 rated 3
626
626 rated 4
499
499 rated 5
530
530 rated 6
713
713 rated 7
522
522 rated 8
339
339 rated 9
136
136 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
UPLULTRA PETROLEUM Corp10
EOGEOG RESOURCES Inc10
SWNSOUTHWESTERN ENERGY COMPANY10
TAT&T Inc9
COPCONOCOPHILLIPS9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.