The Secret Oil Stock That’s a Must-Buy

Readers of my articles know I am big on energy . That is, Im big on fossil
fuels because I believe they will continue to be an intrinsic part of the global
economy for decades to come. So Im always on the lookout for interesting plays
in the energy sector. Statoil ASA (NYSE: STO ) was nowhere on my radar. This
Norwegian oil company was so beset with problems that it pretty much had
abandoned its home country as a source of oil. I cant blame the company. Its a
lot warmer in Brazil and probably more fun, too. Then one day black gold.
Texas Tea. Oil, that is. And right in its own backyard of the North Sea. This
particular oil field was 40% owned by Statoil, and it could yield as much as a
billion barrels. Its also in comparatively shallow water, so the company wont be
drilling miles underwater for its bounty. Then one day more black gold. Texas
Tea. Oil, that is. This time in the chilly Arctic. This field might hold 500
million barrels. The good times are back for Statoil, and they will be for a
very long time. So is STO worth buying into? Statoil is going to have to load up
on capital expenditures to start pulling that oil out of the water. Thats not a
bad thing as long as the company can turn those expenses and oil into hard
dollars. While I am bullish on energy in the long term, there are short-term
demand fluctuations that could impact just how much oil the company can sell. In
this case, looking at the companys past results wont help much. Its great that
even in crappy times, Statoil turned a multibillion-dollar profit. The problem
was that its capital expenditures were so large that Statoil basically had no
free cash flow. So STO is going to have to use its $8 billion in cash to start
moving that oil, and hope demand is such that it can turn around and sell it. My
guess is this will happen. I dont think analysts have factored these discoveries
into their earnings estimates, either. So to a certain extent, trying to place a
value on Statoil is difficult. Earnings are going to rise 20% this year, but
analysts only have 4% growth next year, and I think thats low. At the very
least, the stock deserves a P/E of 10 for the long-term, which means it is just
about fairly priced right now and it pays a 5% dividend. I think that puts it
solidly in the buy category, although retirement investors might want to wait
and see how these oil fields pay off first. As of this writing, Lawrence Meyers
did not hold a position in any of the aforementioned stocks.