Why Did This Stock Jump?

02/11/2014 11:00 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

Despite the fact that fourth quarter earnings were a full 15% below expectations, this Norwegian oil giant's stock gained nearly 6% last Friday, and MoneyShow's Jim Jubak thinks there are two reasons why.

Seems odd, no?

On Friday, Statoil (STO) announced fourth quarter earnings a full 15% below Wall Street expectations. Production for the full 2013 year at Norway's state-owned oil and natural gas company fell 3%.

And yet shares gained almost 6% on the day.

What gives?

Two things. Both really important to shareholders.

First, the jump in the stock was a recognition of the company's extraordinary exploration success over the last three years and its prospects going forward. In 2013, Statoil accounted for 10% of all new resources discovered by the entire global oil industry. In 2013, Statoil discovered new reserves of 1.25 billion barrels, a hefty amount for a company that produced 700 million barrels in 2013. For the last three years, the discoveries come to 3.9 billion barrels. Over that period, Statoil's average annual reserve replacement ratio is 119%. Among the global oil majors, only Chevron (CVX) has a higher reserve replacement ratio. And the company's success in finding more oil than it pumps looks set to continue going forward: Credit Suisse estimates that Statoil will grow production by 3.5% a year for the rest of the current decade. (Chevron is, again, the only global major projected to beat this production growth.)

Second, management is finally saying very shareholder friendly things.

Statoil is an extremely undervalued stock. By some measures, it trades at a 40% discount to other oil majors. But the stock has been undervalued for years—and looked stuck at that discount because management seemed all too willing to go for growth at just about any cost.

But that seems to have changed, and the news out of the company's analyst day, on February 7, was a serious confirmation of that change. The company announced that, because of its strong production profile and a backlog of high quality discoveries waiting for development, it would cut capital spending by 8% to an annual $20 billion from 2014 to 2016. With the help of cost efficiencies, cash flow would improve to the point that Statoil could raise its dividend in 2014 and still hit positive cash flow after dividends in 2016, the company said. The company has announced that it will add two extra dividend payments in 2014—taking dividends from a twice a year schedule to quarterly. The additional payments represent a 50% dividend increase from the 2013 level, set by the company last week, of $1.14 a share. The increase would take the dividend yield to 6.85% from the current 4.53% at the February 10 close for the New York ADR.

Put it all together—a Top 2 in the world track record for discovery and production increases, a shift toward a much more shareholder friendly strategy, and a good chance that those two parts of the story will close some of the discount to its oil industry peers.

I'd say that's worth more than a one-time 6% pop. I'd call the stock, a member of my Jubak's Picks portfolio, a buy at its current price (even though I don't see the price of oil moving up significantly in 2014). As of February 10, I'm moving up my end of 2014 target price to $31 a share, from my current target of $27.50.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Statoil as of the end of December. For a full list of the stocks in the fund, see the fund's portfolio here.

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