Torgrim Reitan was comfortable living in Stavanger, Norway as CFO of Statoil. But a year ago, with the global oil industry collapsing all around, Statoil’s newish CEO Eldar Saetre decided he had a new job for Reitan and sent him to Texas to take charge of the company’s North American operations.
Reitan, 47, felt some culture shock leaving his home on the North Sea for hot and humid Houston, the epicenter of the oil boom, and bust. As if an antidote to the reckless American wildcatting that drove the industry to excess, then collapse, Reitan brings a cooly rational, more Scandinavian, approach to the business.
Sending him was a good way for Statoil to “create the right sense of urgency,” says Reitan, and to remind the organization that Norwegians are still in charge. He replaced an American, Bill Maloney, in the job, and proceeded over the next few months to cut 20% of U.S. staff. He also installed a new management team that boasts five nationalities and 40% women. Even the Statoil campus, in Houston’s energy corridor, has just received a gut renovation — imagine Ikea at 10x the price. “There was a lot not working anymore,” he says. “This is a great opportunity to get it right.”
With 2 million barrels of daily of oil and gas production, Statoil is among the 20 biggest energy companies in the world. Reitan’s North American region is responsible for 240,000 bpd, split 200,000 bpd from onshore fields and 40,000 bpd out of the Gulf of Mexico. For comparison, that’s about as much as the total production of Pioneer Natural Resources or Continental Resources.
Statoil’s challenges in the United States are similar to so many other American E&P companies that paid too much to get in on the shale boom. In 2008 Statoil invested $3.3 billion in a joint venture with Chesapeake Energy in the Marcellus Shale of Pennsylvania. In 2010 it did a $1.3 billion JV with Talisman in the Eagle Ford Shale. In 2011 it paid $4.7 billion to acquire Brigham Exploration, which had built a big position in the Bakken formation of North Dakota. On top of all this came billions more in capital deployed to drill and frack the lands. “At the time they were considered as good transactions,” says Reitan. But “we have taken significant impairments.” (About $6 billion written down across the Statoil portfolio, in 2015.)
Reitan will be under no pressure to drill barely profitable shale wells just to keep the numbers up. “I don’t run my business with production targets. It is bottom line targets. Production is a vehicle, not a target.”
That’s a foreign mindset to a lot of U.S. shale drillers, for many of whom the past decade was all about drilling as many wells as possible as fast as possible and borrowing against reserves to keep the treadmill turning. That’s the business model that Aubrey McClendon perfected at Chesapeake Energy, but one that unfortunately ought to die with him.
“The way we were operating was not sustainable,” Reitan says. In the decade to 2013 oil prices quadrupled, yet profit margins halved. When prices pick up again we must be very disciplined.” That message is coming from the top. CEO Saetre a year and a half ago told his lieutenants not to bother bringing him any projects that required an oil price above $50 to break even, says Reitan. “People thought he was out of his mind.” But in North America Statoil is already puting it into practice. “Our breakeven for new developments has gone from $70 a barrel three years ago, to $41.”
So what are they drilling? Each of the shale plays has some sweet spots that “will work in a low price environment,” he says. In the Eagle Ford they’ve reduced drilling times by 70%, and 50% in the Bakken. “Per well economics have improved significantly,” says Reitan, but there’s not enough of the good stuff to last very long.
On the bright side, “Unconventionals are still in their youth, and we know much more than we used to.” Costs of drilling and fracking have come down a lot in recent months. Reitan insists they can fall further as engineers continue to standardize operations and wring out costs.
More profitable are Statoil’s offshore projects, in the Gulf of Mexico. Statoil is something of an offshore specialist, considering that that vast bulk of its cumulative oil and gas production has come from back home on the Norwegian continental shelf. “We see the offshore part as where we have significant DNA and can add value,” says Reitan.
Offshore also gives Statoil options. As a result of long-term investment decisions made during better times, Statoil is on course to double its production from the Gulf of Mexico in the next three years. The company has 50% in the deepwater Julia development (Exxon is operating), and 25% each in Bigfoot (with Chevron) and the $6 billion Stampede (with Hess and Chevron).
With that deepwater production coming, Reitan should be able to preside over higher-value growth in a time of belt-tightening. It takes him back to the old days. “I remember our IPO in 2001. It was a time when investors cared about return-on-capital-employed, sustainability, and nothing else. Then oil prices started to increase, and it became Production Growth No Matter What. Then we had the financial crisis and a focus on balance sheet resilience for a period. That turned into free cash flow and dividend coverage on a 3-year horizon. That is slowly moving back to a return on capital employed and sustainability of business — the same discussions we had 15 years ago.”
In March the buy-side analysts at Bernstein Research wrote, “We believe in Statoil’s value-over-volume plus oil price breakeven reduction strategy. These, coupled with continuing production growth from their own Norwegian backyard means we expect strongly rising ROACE and supported by attractive valuation.”
And yet the company is not entirely in the clear. According to Bernstein Research, if oil got up to $50 and stayed there, Statoil would generate about $12 billion in cashflow from operations this year. That’s not quite enough to fully fund expected capital investment of $13 billion, let alone maintain dividends. And what if oil were to wallow at $50 until 2020? Bernstein’s figures show that Statoil has enough lower-cost barrels coming into production around the world that it could plug its cashflow gap in about three years. Best of all in this volatile market, Statoil is seen as a great credit. Almost all its bonds sell at or above par.
Reitan is cagey when asked about the potential for making acquisitions among the wreckage of the shale boom. He says Statoil prefers to acquire new oil and gas by discovering it through exploratory drilling. They have, however, been active in M&A, divesting $25 billion in assets during times of high commodity prices and generating $7 billion in capital gains. No reason why they couldn’t round up sufficient financing to acquire assets. Maybe another acquisition in the Bakken to bring down their cost basis? No comment.
There will eventually be plenty of acquisition options for companies like Statoil. Most companies on the cusp of bankruptcy still have a few choice assets in their portfolio; it will just take awhile for those assets to be freed up for stronger hands to acquire. “If you have complex financings and you have debt trading at a big discount it is a deterrent to transactions,” says Reitan. Chapter 11 will sort it all out. “We must be prepared for fewer companies around,” he says, coolly. “That’s the nature of what’s happening.”
By Christopher Helman
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