Cash in on Statoil

Statoil, which has shares listed in both Oslo (N:STL) and New York (US:STO) is focused on the Norwegian continental shelf (NCS), where it accounts for about three-fifths of production, although the group's global reach now extends to 35 countries. Around two-thirds of the group's shares are held by the Norwegian state and its home-grown operations are underpinned by a highly advantageous tax regime.

The group aims to grow its dividend payout (now distributed quarterly) in line with long-term underlying earnings. But in recent years Statoil has been subject to criticism that it allowed free cash flow to dry up as it ratcheted up spending to counter falling production from aging North Sea fields. The drain on cash resources forced the group to hive-off its downstream retail business, along with various oil and gas fields in order to help fund its dividend commitments.

This was hardly a sustainable practice, particularly in light of increased cost pressures and stagnant energy prices. Management duly changed tack earlier this year, scaling-back spending plans and re-jigging production targets in order to drive free cash flow and shareholder returns. Statoil has reduced its projected investment by 8 per cent to $20bn a year from 2014-16, which along with cost-saving initiatives, should result in positive free cash flow by 2016 even after forking out for its dividend.

However, with the reins pulled-in, it also means that the group should now take three to four years longer to hit its long-standing production target of 2.5m barrels of oil equivalent a day (boepd) original set for 2020. Importantly, though, production targets haven't been abandoned. And while asset sales meant combined NCS and overseas production fell 3 per cent in 2013 to 1.72m boepd, several new projects are coming on stream. Average annual production rises of 3 per cent are expected through 2013-16 and the rate of overall production should accelerate over the next 10 years on the back of several large-scale discoveries, including the Aasta Hansteen, Gina Krog and Johan Sverdrup fields.

We can also expect to see a steady increase in the proportion of earnings generated by Statoil outside the NCS. It currently boasts significant interests in the US, Angola and Azerbaijan, but perhaps the main focus ahead will centre on Arctic drilling projects. Statoil continues to work on this exploration projects with Rosneft, and some operational changes have had to be made to comply with international sanctions against Russia. Nevertheless, Statoil and Rosneft recently announced that they had identified a natural gas deposit in the Barents Sea, so you would have to assume that it's pretty much business as usual.