LONDON Norway's Statoil (STL.OL) plans to ramp up its capital spending to over $20 billion a year, it said on Thursday, risking a cash crunch even if oil and gas prices remain high enough to sustain its plans to lift production by a quarter by 2020.
The investment plan will need oil prices to remain at over $100 per barrel for the state-controlled company to achieve a cash break-even, one of the highest levels required by a major oil company, analysts said.
"Given its capex guidance, this suggests estimated free cash flow generation of $1 billion, materially lower than the estimated dividend payment of $3.8 billion," Barclays said in a note.
Having already undertaken an aggressive expansion of its exploration interests abroad, Statoil aims to boost investments to record highs through 2016, bringing new fields into production from Brazil and East Africa to the North Sea, and drilling more wells than ever before as oil prices sit comfortably over $115 per barrel.
The annual capital spend is set to go on rising from $13.7 billion three years ago to $19 billion this year and an average of $21 billion over the next four years, it said.
Even beyond 2013, the free cash flow would be below the dividend payment, requiring the firm either to raise debt or to sell assets to fund at least part of its returns to shareholders, analysts said.
"There will be changes in the portfolio going forward ... there will be assets sold, there will be assets acquired," Chief Financial Officer Torgrim Reitan said at a results news conference in London.
"In terms of debt, we are on the low side and debt is very low priced currently so there are good arguments for increasing gearing. Having said that, it is strategically important to run with a solid balance sheet."
However, exploration efforts have paid off so far.
Statoil's reserve replacement ratio was 100 percent last year after 117 percent the year before, after years of being unable to replace the amount of oil and gas it produces with new discoveries.
And the firm plans to drill 50 wells in 2013 with big hopes on what it calls "high-impact" prospects off Canada, the Gulf of Mexico, the Arctic Barents Sea and Tanzania, Reitan said.
Statoil defines a "high-impact" prospect as one that can hold a total of more than 250 million barrels of oil equivalent reserves in place or 100 million boe net to Statoil.
Production, which jumped 8 percent to 2 million barrels of oil equivalent a day in 2012, will dip this year because of asset sales, lower U.S. shale production and the attack on its gas facility at In Amenas in Algeria.
But output should increase beyond that and exceed 2.5 million barrels per day by 2020 with nearly all of the increase coming from international operations.
Statoil posted a fourth-quarter adjusted operating profit of 48.3 billion crowns ($8.8 billion), ahead of expectations and allowing the firm to lift its dividend payment to 6.75 crowns per share from 6.50 crowns a year earlier.
Investors liked the numbers, pushing Statoil shares up 2 percent to 147.2 crowns, even though the stock trades at 9 times earnings forecasts for 2013, just ahead of the sector average of 8-8.5 times, according to Thomson Reuters data.
Its gas business, a cause for uncertainty last year because it had to renegotiate long-term sales contracts, also performed ahead of expectations, taking market share from rivals like Russia's Gazprom (GAZP.MM).
"The (gas) market is extremely tight, there is no new LNG (liquefied natural gas) coming from the Middle East, and the Asian LNG prices are at oil parity," Arctic Securities analyst Trond Omdal said.
"We expect gas prices in Europe and Asia to remain strong; the deterrent is, of course, that they are capped by coal imports from the U.S.," Omdal said, indicating gas prices are sensitive to alternative fuels, like coal.
Statoil now prices around half of its term gas contracts on the basis of spot market prices, giving up a traditional oil-linked pricing, and sees a further move to spot pricing, even though Gazprom, its biggest rival, rejected such a move.
The new pricing pushed gas production up 18 percent last year while its realized gas prices were up 5 percent.
"Demand in Europe actually declined a bit due to the state of Europe but on back of that we increased our sales," Reitan said.
"What we would really like to see is a more clear statement from Europe that gas is the future ... There is a lot of it (and) it is cheap."
Although the company hopes to raise the proportion of oil in its output to 60 percent by 2020, from around 55 percent currently, it said it will also venture further into liquefied natural gas, particularly in Tanzania, where it confirmed another major gas discovery on Thursday.
The find in the Lavani prospect adds up to 9 trillion cubic feet to the resource, making it "very likely" the company would develop it and opt for an LNG facility to take advantage of Asia's hunger for energy.
It will also spend heavily at home, not least on the giant new Johan Sverdrup field which is estimated to hold up to 3.3 billion barrels of recoverable oil, as it seeks to replace maturing North Sea fields.
($1=5.4892 Norwegian kroner)
(Additional reporting by Nerijus Adomaitis in Oslo; Editing by Mark Potter and Greg Mahlich)