Statoil to Increase Cash Flow by Cutting Investments & Expense - Analyst Blog

Norwegian giant, Statoil ASA ( STO ) is looking to reduce its investment as well as operating expense and staff in order to yield an additional $5 billion of cash per year.

This state-controlled explorer has set a target to meet this extra pre-tax cash flow by 2020. According to sources, the company aims to achieve this by trimming capital expenditure by about 25% from 2013 and reducing operating costs and technical staff by 15% and 20%, respectively.

In 2013, Statoil's capital expenditure was $19 billion. The figure is expected to fall by 8% than previously planned in the period from 2014 through 2016, or $20 billion per year.

Statoil, which has a majority of its operations based in Norway, faces challenges as drilling in the region is more costly than anywhere in the world and labor costs are almost double than that of the U.S. Hence, the company's latest move is part of its efforts to counter the pressure of rising costs on profit margins, given the stagnant crude prices.

The company is creating a Technical Efficiency Program to tackle the rising costs and declining returns. This is likely to considerably improve cost and resource efficiency.

According to the company's documents as seen by Bloomberg, the program intends to trim well-related costs by 25% by 2020 to lower its capital investment. This compares to the company's projection of a 15% cut by 2016 at its capital market update in February.

Statoil, which derives 66.67% of its production from Norway, plans to cut the cost of altering existing platforms and other assets by 30% by 2020, in comparison to 20% by 2016. Furthermore, by 2020, it aims to reduce the cost of new facilities by 25%.

The standardization of offshore platforms and subsea installations to a 10% reduction in research and development spending were the other efficiency measures outlined in the documents.

The company believes that it will be able to finance dividends with organic free cash flow by 2016, by choosing its investments more carefully as well as trimming costs and after partially funding raising payouts with asset sales of above $18 billion over the past four years.

Currently,Statoil carries a Zacks Rank #2 (Buy). Other stocks worth considering in the same sector include Encana Corp ( ECA ), CVR Refining LP ( CVRR ) and Matrix Service Company ( MTRX ), all of which sport a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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