Statoil Q1 14: helped by weaker local currency

Investment Research 29 April 214 Statoil Q1 14: helped by weaker local currency Statoil delivered a good Q1 14 result from a credit perspective. Group entitlement production was unchanged y/y. Coupled with higher achieved liquids prices measured in NOK, this resulted in Statoil reporting good progress in both revenues and earnings. In addition, with a decent release of working capital Statoil was able to reduce its net debt and thereby take adjusted credit metrics to somewhat stronger levels. These should now be back in line with their current AA- rating from S&P. The group outlook remains unchanged. We still expect rising risks to margins and higher shareholder friendliness. Along with tight prices, this leads us to maintain our Sell recommendation on its bonds where especially the long end looks expensive. Stronger prices measured in NOK boost earnings The Q1 14 result from Statoil was a positive surprise relative to expectations. Group equity production fell 1% y/y to 1,978mboe owing to the natural decline of mature fields on the Norwegian continental shelf and to lower reserves y/y because of field redetermination (i.e. Statoil having to surrender parts of the Ormen Lange gas field). Entitlement production was unchanged y/y, because of a lower decline in production sharing agreements y/y. The average liquids price fell 4% y/y measured in USD/bbl. However, due to a weaker NOK during the quarter, the average liquids price was up 4% in Statoil s reporting currency. This, coupled with somewhat higher gas prices, caused group revenues to rise 5% y/y. Despite higher exploration costs, Statoil managed to present an 8% increase in comparable clean EBITDA. Net income was NOK24bn, which was affected by one-off positives such as a NOK3bn settlement in a commercial dispute. On comparable numbers, net earnings beat market expectations by 28%. Credit metrics recover this quarter Statoil was able to generate cash flow from operations of NOK55bn due to the strong EBITDA and release of working capital. With tempered capex this quarter and due to one-off cash additions to the balance sheet, it reduced reported net debt by 49% q/q to NOK49bn. This left adjusted net debt to LTM EBITDA at.7x, down from 1x after the year-end report. Adjusted LTM FFO to net debt rose to 71% from 52% q/q which takes Statoil back to comfortable territory in terms of maintaining its current ratings. Overview (NOKbn) Q1 13 Q4 13 Q1 14 y/y q/q Net sales 162 158 17 5% 7% EBITDA 53 63 67 28% 8% EBITDA (clean) 57 61 62 8% 2% Capex 24 2 27 13% 34% Total debt 117 183 181 54% -1% Net debt 53 97 49-7% -49% Equity 337 356 376 11% 6% FFO 41 24 5 2% 17% SELL Sector: Energy, Oil Corporate ticker: STOIL Equity ticker: STL NO Market cap: NOK573bn Equity book value: NOK376bn Ratings: S&P rating: AA- / S Moody s rating: Aa2 / S Fitch rating: NR Analysts: Jakob Magnussen, CFA jakob.magnussen@danskebank.dk +45 45 12 85 3 Louis Landeman louis.landeman@danskebank.se +46 8 568 8524 Profitability NOKm 18 16 14 12 1 8 6 4 2 Financial metrics NOKm 4 35 3 25 2 15 1 5 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 8% 7% 6% 5% 4% 3% 2% 1% % Net sales EBITDA EBITDA-margin (rhs) Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 X.5 Net debt Equity net debt/ltm EBITDA (rhs).4.3.2.1 Important disclosures and certifications are contained from page 4 of this report. www.danskeresearch.com

Apr-3 Aug-3 Dec-3 Apr-4 Aug-4 Dec-4 Apr-5 Aug-5 Dec-5 Apr-6 Aug-6 Dec-6 Apr-7 Aug-7 Dec-7 Apr-8 Aug-8 Dec-8 Apr-9 Aug-9 Dec-9 Apr-1 Aug-1 Dec-1 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Current Statoil Quarterly divisional overview (NOKm) Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 E&P Norway Net sales 5 49 53 53 51 EBIT 35 31 37 37 34 EBIT margin 7% 64% 69% 7% 67% E&P International Net sales 19 2 2 25 21 EBIT 5 4 1 6 7 EBIT margin 26% 21% 3% 24% 33% Marketing, etc. Net sales 158 144 161 148 165 EBIT 3 1 1 3 6 EBIT margin 2% % 1% 2% 4% Outlook Statoil maintained its outlook and guidance given in the 213 year-end report. In the years 214-16, Statoil will spend around USD2bn a year. Statoil continues to target 2% CAGR in equity production. In our view, this signals that exploration capex could be trending up as future reserves will become increasingly expensive. Statoil also flags that scheduled field maintenance will affect Q2 14 production by around 11mboe per day, which is roughly 5% of the production seen in Q1 14. Quarterly dividends commenced In connection with the FY 13 report, Statoil said that it will increase its dividend per share from NOK6.75 to NOK7. This was manifested in the Q1 14 report where Statoil announced a NOK1.8 per share dividend. Annualised, this corresponds to NOK7.2 per share. Crude oil price and historical EBITDA NOK m USD/b 9 EBITDA (clean) (Quarterly) 16 8 European Brent Blend Crude Oil Spot Price (rhs) 14 7 12 6 1 5 8 4 6 3 4 2 1 2 Source: Bloomberg, Danske Bank Markets Statoil has also announced that, going forward, the group will be using share buybacks more actively in connection with asset sales and with an eye to maintaining balance sheet strength. Overall, these actions and statements add to our picture of Statoil increasing its shareholder focus, following the divestment of its more stable business activities. Oil and gas price volatility highlights the relatively high business risk profile The continued volatility in the oil price has a significant impact on Statoil s earnings. Statoil does not hedge its oil and gas price exposure and as such its earnings tend to show a high correlation to the price of oil (see chart to the right). A couple of years ago, Statoil cited a Brent oil price level of around USD8/bbl as a breakeven level for new investments. While the current level of USD18/bbl currently ensures profitability, we stress that volatility in oil and gas prices could impair Statoil s cash flow in the future. Recommendation Earnings were decent this quarter, but we note that this was mainly due to one-offs and a weaker NOK/USD. The underlying challenges for Statoil remain, with higher costs and declining reserves. Furthermore, we still feel that Statoil has shareholder friendliness high on its agenda, as evidenced by today s relatively high quarterly dividend announcement. The stronger metrics, as a result of solid cash flow, makes us less confident that a downgrade of Statoil is imminent, although we believe that Statoil would not consider a downgrade to high A territory a disaster. Our fundamental view on Statoil as a strong and well run energy group is unchanged after today s report. That said, we still think that the slowly building earnings pressure coupled with higher shareholder focus makes Statoil s bonds look quite tightly priced. Especially the long end of the curve looks expensive. We subsequently maintain our Sell recommendation. 2 29 April 214 www.danskeresearch.com

Fixed Income Credit Research Thomas Hovard Head of Credit Research (+45) 45 12 85 5 hova@danskebank.com Louis Landeman TMT, Industrials (+46) 8 568 8524 llan@danskebank.com Åse Haagensen High Yield, Industrials (+47) 22 86 13 22 ha@danskebank.com Mads Rosendal Industrials, Pulp & Paper (+45) 45 14 88 79 madro@danskebank.com Jakob Magnussen Utilities, Energy (+45) 45 12 85 3 jakja@danskebank.com Brian Børsting Industrials (+45) 45 12 85 19 brbr@danskebank.com Lars Holm Financials (+45) 45 12 8 41 laho@danskebank.dk Gabriel Bergin Strategy, Industrials (+46) 8 568 862 gabe@danskebank.com Kasper From Larsen High Yield, TMT (+45) 45 12 8 47 kasla@danskebank.com Bjørn Kristian Røed Shipping (+47) 85 4 7 72 bred@danskebank.com Nils Henrik Aspeli Real Estate, Industrials (+47) 8548433 nas@danskebank.com Wiveca Swarting Real Estate, Construction (+46) 8 568 8617 wsw@danskebank.com Sondre Dale Stormyr Offshore rigs (+47) 85 4 7 7 sost@danskebank.com Henrik René Andresen Credit Portfolios (+45) 45 13 33 27 hena@danskebank.com Find the latest Credit Research Danske Bank Markets: http://www.danskebank.com/danskemarketsresearch Bloomberg: DNSK<GO> 3 29 April 214 www.danskeresearch.com

Disclosures This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S ( Danske Bank ). The authors of the research report are Jakob Magnussen, Senior Analyst and Louis Landeman, Analyst. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority (UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Danske Bank on request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of highquality research based on research objectivity and independence. These procedures are documented in Danske Bank s research policies. Employees within Danske Bank s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Danske Bank, its affiliates, subsidiaries and staff may perform services for or solicit business from Statoil and may hold long or short positions in, or otherwise be interested in, the financial instruments mentioned in this research report. The Equity and Corporate Bonds analysts of Danske Bank and undertakings with which the Equity and Corporate Bonds analysts have close links are, however, not permitted to invest in financial instruments that are covered by the relevant Equity or Corporate Bonds analyst or the research sector to which the analyst is linked. Danske Bank, its affiliates and subsidiaries are engaged in commercial banking, securities underwriting, dealing, trading, brokerage, investment management, investment banking, custody and other financial services activities, may be a lender to Statoil and have whatever rights are available to a creditor under applicable law and the applicable loan and credit agreements. At any time, Danske Bank, its affiliates and subsidiaries may have credit or other information regarding Statoil that is not available to or may not be used by the personnel responsible for the preparation of this report, which might affect the analysis and opinions expressed in this research report. As an investment bank, Danske Bank, its affiliates and subsidiaries provide a variety of financial services, including investment banking services. It is possible that Danske Bank and/or its affiliates and/or its subsidiaries might seek to become engaged to provide such services to Statoil in the next three months. Danske Bank has made no agreement with Statoil to write this research report. No parts of this research report have been disclosed to Statoil. No recommendations or opinions have been disclosed to Statoil and no amendments have accordingly been made to the same before dissemination of the research report. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors on request. Risk warning Major risks connected with recommendations or opinions in this research report, including a sensitivity analysis of relevant assumptions, are stated throughout the text. 4 29 April 214 www.danskeresearch.com

Expected updates Credit Update: This research report will be updated on a quarterly basis following the quarterly results statements from Statoil. Scandi Handbook: This research report will be updated bi-annually, usually in April and October. See the front page of this research report for the date of first publication. Recommendation structure Investment recommendations are based on the expected development in the credit profile as well as relative value compared with the sector and peers. As at 31 March 214 Danske Bank Markets had investment recommendations on 48 corporate bond issuers. The distribution of recommendations is represented in the distribution of recommendations column below. The proportion of issuers corresponding to each of the recommendation categories above to which Danske Bank provided investment banking services in the previous 12 months ending 31 March 214 is shown below. Rating Anticipated performance Time horizon Distribution of recommendations Investment banking relationships Buy Outperformance relative to peer group 3 months 35% 24% Hold Performance in line with peer group 3 months 48% 22% Sell Underperformance relative to peer group 3 months 17% 13% Changes in recommendation within past 12 months: Date New recommendation Old recommendation 31 March 214 No Change General disclaimer This research has been prepared by Danske Bank Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ( Relevant Financial Instruments ). The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report. The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in this research report. This research report is not intended for retail customers in the United Kingdom or the United States. This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank s prior written consent. Disclaimer related to distribution in the United States This research report is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to U.S. institutional investors as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely to U.S. institutional investors. 5 29 April 214 www.danskeresearch.com

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