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Statoil Starts New Project in Midst of Crash

The new norm for the oil sector is slashed capital spending, canceled projects and, in some cases, lowered dividends in an effort to conserve cash.

So when a company is, at least partially, going against the tide, we should take note. That company is Norway’s oil champion, Statoil ASA (STO).

Yes, Statoil is lowering capital expenditures this year to $18 billion from its prior target of $20 billion. And part of those cuts will be here in the United States, where the company will reduce the amount of drilling rigs in use by 20% to 25%.

But more importantly, the company said it would preserve and protect its current dividend rate.

Even though it did abandon its previous policy of dividend increases, Statoil says its dividend is “very competitive,” and the company is right. The current yield is still around 5%.

The Real Difference

The major stand-out move here is that Statoil is proceeding with a major oil development project.

The project in question is the Johan Sverdrup field in the Norwegian part of the North Sea, of which Statoil owns 40%. The partners are Lundin Petroleum (LNDNY.PK), Det Norske (DETNF), Maersk Oil, and Petoro.

Statoil estimates that the field will cost $31 billion to develop, the most expensive energy project in Europe. That seems crazy in today’s market environment, right?

Not really…

The field is actually a rare “elephant” find, containing anywhere from 1.7 billion to 3 billion barrels of recoverable oil. It’s also located on Norway’s continental shelf, and not miles beneath the ocean floor.

A truly unusual find.

Malcolm Dickson, an oil analyst at Wood Mackenzie, told the Financial Times that “Johan Sverdrup is unique in the global oil industry. Oil fields of this size are not found in benign regions in shallow water anymore.”

Working the Current Market

The field is expected to come online in 2019 and will produce 600,000 barrels of oil per day at its peak. In the 2020s, the output of Johan Sverdrup will equal about 40% of all Norwegian oil production.

But the truly important part of this project is that the field will be profitable even at current oil prices!

The company’s new CEO, Eldar Saetre, said in a news conference, “The field has robust economics with a break-even price at below $40 a barrel.”

That’s at least partially due to a $1.2-billion reduction in anticipated drilling costs, thanks to the benign drilling environment.

And things should get even better once the project is up and running. Estimated operating costs will be less than $5 per barrel!

Johan Sverdrup seems to be a safe bet for Statoil, even if oil prices continue to sag. That makes the company an interesting one to look at on any price weakness.

And the chase continues,

Tim Maverick

Tim Maverick

, Senior Correspondent

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