I bought Statoil (NYSE:STO) on the idea that this Norwegian energy giant was troubled, but that it would get its house back in order and deliver on its strong legacy of profitably developing energy reserves in challenging locations. So far, not so good. Statoil is one of the worst-performing energy majors over the past year, rising about 3% while Chevron (NYSE:CVX) has risen 29% and Exxon Mobil (NYSE:XOM), Total (NYSE:TOT), BP (NYSE:BP) are all up about 18%.

Statoil continues to struggle to keep a handle on production costs, and unplanned outages have wrecked havoc with a relatively fixed operating expense structure. Though I still believe that Statoil can do better, and is significantly undervalued on that basis, it's getting harder and harder to stay patient with the stock.

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Poor Q1 Results Highlight Familiar Problems
Statoil delivered a negative surprise with its first quarter earnings report, though it has gotten more difficult to honestly call underperformance a surprise.

Production was down 8% from the year-ago period and 2% from the fourth quarter. Although that was not too far off expectations, it was a fair bit worse than the results of BP (down 6% and up 1%), Chevron (up less than 1%, down 1%), and Exxon (down 4% and up 2%). Oil and gas production were largely identical, both in absolute terms (oil production was 52% of the total) and in relative terms. Realizations were likewise weak, with prices down 6% and 2% to an average of $74.78 per barrel of oil equivalent (BOE).

Profitability was even more problematic. Overall operating income fell 28% and missed the Street average by about 11%. Profits from Norwegian operations were down 26% on a 13% decline in production, as unplanned outages combined with an inflexible cost structure pummeled profits. International profits (down 15%) were weak on very poor U.S. gas profitability, while MPR profits were down 44% (and 38% below expectations) on weak gas trading results.

SEE: A Guide To Investing In Oil Markets

The Cost Of Doing Business Keeps Going Up
High production costs have been a challenge for Statoil, and they're not letting up. Statoil's operations in the North Sea have always been higher-cost operations, and getting production ramped up in areas like the Bakken have likewise required higher layouts. To that end, the company's year-end PV-10 declined 20% on a 24% increase in development costs. While BP and Eni (NYSE:E) have seen pressure to their per-barrel PV-10 numbers, and Total and Royal Dutch (NYSE:RDS.A) haven't shown great growth, Statoil stands out, and not in a good way.

On a more positive note, organic reserve replacement came in at 113% for 2012, the highest number in 15 years. The proved reserves number was flat year on year (5.2B BOE) and the reserve life is somewhat low (eight years), but Statoil's strong exploration results and aggressive drilling program should boost those numbers in the coming years. Finding and development costs were stable at a bit under $27 per boe, which is still rather high relative to its peers.

There's A Lot That Can Go Right
Certainly there are a lot of negatives that can be trotted out against Statoil, and Wall Street's sell-side has been pretty dutiful in doing so in recent months. Nevertheless, I still believe there are meaningful positives that can drive this company to better days.

Few companies (if any) are better than Statoil at operating in difficult environments, and that's increasingly where the new oil and gas discoveries are. Likewise, Statoil is quite adept at various enhanced oil recovery methods and technologies. Couple that with a strong exploration program, I believe Statoil can outperform very low production growth expectations over the next five to ten years.

Likewise, I think Statoil has some excellent future reservoirs still early in their development lives. The company overpaid for its Bakken exposure, but its performance has been pretty good. Elsewhere, I think projects in Angola, Tanzania, Ghana, Mozambique, and Russia's Arctic hold real promise.

The bigger question is whether Statoil can drive operational improvements that flow through to the bottom line. A large percentage of the company's current reserves are in Norway, and that does limit the company's options to some extent. Still, I believe better execution (and maybe even just better luck) is possible and the company could generate better returns with a little more cost discipline and a willingness to walk away from “production growth at any price” projects.

SEE: Oil And Gas Industry Primer

The Bottom Line
Statoil is pretty much hated by the Street right now. Relative to published sell-side price targets, the stock seems about as underpriced as BP and Total, but the implied valuation is much different. A 4x multiple to 12-month EBITDA is generally a low/discounted multiple among the majors, but a 3x multiple for Statoil suggests a whopping 60% upside to the current price. Now Statoil certainly deserves some penalty for its weak margins and its extreme leverage to very high oil prices, but this degree of penalty seems excessive. Accordingly, value keeps me invested in these shares, but if management doesn't pick up its performance in the next year or so, even the die-hards are going to give up.

At the time of writing, Stephen D. Simpson owned shares of Statoil.