Business Context and Reporting Period
Company: StatoilHydro ASA (formerly Statoil ASA)
Reporting Period: Third Quarter and Nine Months Ended September 30, 2007
Key Context: The financial statements for Q3 2007 reflect only the former Statoil group. The merger with Norsk Hydro's oil and gas operations became effective on October 1, 2007. Consequently, Q4 2007 will be the first period reporting the merged entity. The company operates in four segments: E&P Norway, International E&P, Natural Gas, and Manufacturing & Marketing.
Key Financial Metrics
| Metric | Q3 2007 | Q3 2006 | 9M 2007 | 9M 2006 |
|---|---|---|---|---|
| Revenues (NOK bn) | 109.2 | 108.1 | 318.2 | 327.4 |
| Net Operating Income (NOK bn) | 24.4 | 30.2 | 74.2 | 93.1 |
| Net Income (NOK bn) | 10.7 | 8.5 | 29.5 | 29.1 |
| Earnings Per Share (NOK) | 4.94 | 3.82 | 13.52 | 13.16 |
| Operating Cash Flow (NOK bn) | 29.5 | 16.8 | 66.5 | 51.9 |
| Gross Investments (NOK bn) | 10.4 | 9.9 | 47.3 | 30.2 |
| Net Debt to Capital Employed (%) | 24.0% | 9.3% | 24.0% | 9.3% |
| ROACE (12 months) (%) | 21.5% | n/a | 21.5% | 26.4% |
Material Changes vs. Prior Period
- Net Income Increase: Q3 net income rose 26% to NOK 10.7 billion, driven primarily by a NOK 5.5 billion gain in net financial items (currency gains) which offset a 19% decline in Net Operating Income.
- Operating Income Decline: Net operating income fell to NOK 24.4 billion in Q3 (from NOK 30.2 billion) due to a 15% decrease in gas prices (NOK), lower downstream results, and higher operating expenses. This was partially offset by increased lifted volumes in International E&P.
- Production Trends: Total oil and gas production decreased 2% in Q3 to 1,056,000 boe/day, mainly due to reduced production on the Norwegian Continental Shelf (NCS), offset by new fields internationally. Liftings increased 2% to 1,078,000 boe/day.
- Investment Surge: Gross investments for the first nine months increased 57% to NOK 47.3 billion, including a NOK 12.1 billion acquisition of North American Oil Sands Corporation (NAOSC) assets.
- Liquidity Shift: Net interest-bearing debt increased to NOK 23.9 billion (from negative NOK 7.1 billion in Q3 2006) due to decreased liquid assets funding investments and acquisitions.
Guidance, Outlook, and Risks
- Merger Integration: The company is transitioning to reporting the merged StatoilHydro entity starting Q4 2007. Pro-forma financial information is expected November 12, 2007.
- Project Deliveries: Significant milestones achieved include the start of LNG production at Snøhvit, gas production at Ormen Lange, and the Statfjord Late Life project. The company signed an agreement for a 24% stake in the Shtokman development (Phase 1) with Gazprom.
- Exploration Success: High exploration activity continued with 11 wells completed in Q3 (8 discoveries). The company secured winning bids for 49 leases in the US Gulf of Mexico.
- Risks and Contingencies:
- Venezuela: Ongoing regulatory challenges regarding the Sincor joint venture, including increased royalty rates and the migration to a mixed company structure with 60% state ownership.
- Legal: An external review has been initiated regarding consultancy agreements and transactions associated with the former Norsk Hydro international operations.
- HSE: One fatality occurred during the installation of the Tordis subsea separator; the incident is under investigation.
- Outlook: Management expects continued strong financial results but notes that ROACE decreased to 21.5% due to lower oil/gas prices in NOK and higher capital employed.
Investor Verification Checklist
- Merger Accounting: Verify the pro-forma financial impact of the Norsk Hydro merger to be released in November 2007, as Q3 figures exclude Hydro operations.
- Debt Normalization: Review the reconciliation of "Net Debt to Capital Employed," noting the significant increase to 24.0% is partly due to the timing of tax payments and the NAOSC acquisition.
- Non-GAAP Measures: Confirm the calculation of ROACE and Normalized Production Cost (NOK 31.3/boe), as these exclude currency effects and are key management metrics.
- Downstream Volatility: Assess the impact of currency losses on inventories and lower refining margins on the Manufacturing & Marketing segment, which reported a loss in Q3.
- Regulatory Exposure: Monitor the status of the Sincor joint venture in Venezuela and the outcome of the external review into former Norsk Hydro transactions.