Forecasted Financial Statements

To avoid overly complicating the forecast, we do not forecast all income, expenses and balance posts. Instead, we base the forecast on a number of selected forecasts that represent the overall development of the firm.

These are revenue, EBITDA-margin, Depreciation, Corporation tax/effective tax, net financial expenses,

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operating working capital, property, plant and equipment, equity and equity equivalents and net-interest-bearing debt.

5.4.1 Revenue

Generally, Statoil’s revenue is made up of income from sale of crude oil, natural gas, liquid natural gas (LNG), refined products and a share of other income. Interestingly, Statoil does not only market and trade its own production, but also third party volumes and volumes owned by the Norwegian State. These volumes have been set to 24.5 percent and 28 percent respectively of total combined oil and gas volumes based on 2015 levels (Statoil ASA, 2016a). Consequently, we add another 52.5 percent on top of the forecasted production volumes. The third party and Norwegian State volumes have been higher in the past, but decreasing. As a result we did not use an average. For calculations, see appendix 9.

In the past, income from total sales of crude oil, natural gas and liquid natural gas makes up about 80 percent of total operating revenue excluding other income. Now we are referring to the total volumes including that of third parties and the Norwegian State. The remaining 20 percent of revenue excluding other income comes from sale of refined products. When forecasting the oil and gas revenue we do not distinguish between natural gas and LNG, mostly because LNG is just pressurized and cooled down natural gas. Our calculation is therefore made by dividing the forecasted production levels, third party and Norwegian State volumes into a share of crude oil and natural gas, then multiplying the quantities with their respected prices and the average exchange rate of the year. Additionally, refined products are expected to continue to make up 20 percent of total revenue each year in the forecast period.

Other income has historically made up around 2 percent of total revenue. In our re-organized income statement we recognize that most of this other income is in fact from sale of production licenses and projects.

As have considered this part of Statoil’s expertise and operations, we add a 2 percent other income to the total forecasted revenues.

At last, it is worth mentioning that we do not consider the renewable segment to generate any profit in the foreseeable future. Despite Statoil investing in renewables, the segment does not generate any significant income as of yet, and we know very little about how Statoil will perform in this segment. Consequently, we do not devote attention to this in our forecast.

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5.4.2 Other Forecasted Variables

EBITDA-Margin: The EBITDA-margin describes how well the company is managing their expenses. One might argue that the expected increased production will give a faster growth in operating expenses. However, Statoil has undergone extensive cost-cutting measures in the recent years (Statoil ASA, 2016a). We expect the recent market events to be a wake-up call for the industry and that growth in operating expenses will be kept at a moderate level in the future. For 2016 and 2017 we made individual estimates for all the different expenses affecting the EBITDA margin. Cost of goods sold (purchases) had a significant drop from 2014 to 2015. With the expected stabilized oil price, we believe the purchases to increase slow and steady already from 2016. For the operating expenses, we forecasted a further decline as we believe Statoil will continue to cut reduce the operating costs. Suppliers to Statoil are accepting renegotiated contracts and lower rates, which in turn helps Statoil reduce its expenses. The selling, general and administrative expenses are kept close to previous levels, without too much increase. Exploration expenses are also kept a little below 2015 levels as we expect Statoil to be careful with its exploration expenses in the coming years. From 2018 and up to terminal period we followed the argument of Koller (2010) to set the EBITDA as a percentage of revenue. Thus this is set to 34% of total revenue, as this is close to what Statoil has experienced previously during increasing commodity prices.

Depreciation: There are several methods for forecasting depreciation. To reduce risk of errors due to lumpy capital expenditure we use a constant rate of depreciation. This is equal to Statoil’s previous depreciation rates.

Corporation Tax and Effective Tax: The statutory tax rate for Statoil will as of 2016 and forward be 25 percent.

The effective tax rate depends on several different factors such as the statutory tax rate, special uplift and petroleum income tax. We find the effective tax rate by calculating a historical average excluding the effective tax rate of 2015. In 2015, the effective tax rate was significantly different than from previous years, particular due to large losses. Excluding 2015, we find that the average effective tax rate is 70.76 percent. Even though the Norwegian statutory tax are has been reduced from 27% to 25% in 2016, the petroleum tax was increased from 51% to 53%. Thus, we believe the effective tax rate in future profitable years to be similar to that of recent previous profitable years.

Net Financial Expenses: The net financial expenses are based on last year’s NIBD and are multiplied with the borrowing cost. The tax shield is calculated by using the corporate statutory tax rate of 25%.

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Operating Working Capital: As the operating working capital includes inventories, receivables and payables we estimate the future development with revenue as driver (Koller, Goedhart, & Wessels, 2010). This seems like a good benchmark as these factors are usually directly linked to operations and are likely to increase as revenue increases.

Property, Plant & Equipment: As the non-current assets in total have been increasing every year since 2010 with the exception of 2015, we see that the non-current assets compared to revenue vary a lot. Property, plant and equipment account for a big share of non-current assets and we chose to forecast PP&E separately. For this particular post, we forecasted the two first years individually. We expect PP&E to decrease slightly in 2016 as commodity prices are still low. In 2017, we expect PP&E to increase back to 2015 levels. From 2018 and on, we estimated the PP&E to be a percentage of production levels. We find this to be a good measure as PP&E is expected to follow the growth in production rather than the growth in revenue. For 2018 and up 2020 we expect PP&E to be 50% of production levels, while increasing to 55% in the terminal period as the commodity price recovery is starting to mature.

Equity and Equity Equivalents: Using revenue as a driver for equity is not a very good measure. In the past we see that the ratio of equity compared to revenue is very different each year. Instead we use last year’ equity and add this years’ net earnings deducted for dividends.

Net Interest-Bearing Debt: This post is calculated as 39% of invested capital. This is mainly due to no clear ratio or trend when comparing NIBD to revenue and therefore we find invested capital to provide a better measure.

Not Forecasted: There are some aspects that we chose not to forecast, mainly to reduce the potential for errors. Other income is calculated into the revenue as a percentage of total revenue. The net income from associated companies, however, is almost zero each year. Hence, we do not devote any attention to this.

Goodwill and acquired intangibles are kept constant at the current level for the first two years. We don’t expect Statoil to perform any large acquisitions that will positively affect goodwill. From 2018 and on we do not forecast goodwill separately as we assume this to be included in the overall invested capital forecast. This is in line with Koller (2010) arguing that there is little empirical data indicating a clear relation to value creation of acquisitions. Also deferred tax assets and liabilities are not calculated as they are subject to many different factors such as revenue, pensions, financial instruments, and losses. Consequently, estimating the deferred tax is not expected to add any information to the perception of value of Statoil. Rather this is assumed included in the forecasted NIBD.

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