If investors want to find bargains today in the energy sector, they have to shop in the scratch-and-dent bins. Norway's Statoil (NYSE:STO) is a good example. Concerns about this company's production growth prospects have kept a lid on the stock price as more dynamic companies like Whiting (NYSE:WLL), Brigham Exploration (Nasdaq:BEXP), and Cimarex (NYSE:XEC) have raced by. The question, though, is whether Wall Street has made too much of Statoil's near-term growth woes and whether patient investors might be looking at a bargain in these shares.

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A Poor Quarter amidst Sluggish Expectations
Wall Street was not expecting very much from Statoil in the fourth quarter, but they got even less than that. Of course, "not expecting very much" is a relative judgment - Statoil still produced almost 17% revenue growth and 19% operating profit growth.

Unfortunately, during that same period the company saw a 23% increase in the average price for petroleum liquids and a 17% increase in natural gas prices. What that highlights is that once again production was a significant issue. Total production in the quarter fell more than 5% to about 1.95 billion barrels of oil equivalent per day, with lifted volumes of liquids (more valuable in today's price environment) down 8%.

And It Gets Harder
A bad quarter is not all that significant to long-term investors, but the company's near-term guidance may prove more problematic. Analysts were worried about the company's production prospects and the company basically confirmed those fears, projecting that 2011 production levels would be even with 2010 or perhaps slightly lower. There are some legitimate reasons for this guidance, including the shutdowns in the Gulf of Mexico and some "operational issues" in Angola, but the fact remains that an energy company's value is predicated on finding oil and gas and getting it out of the ground.

Making matters worse, the company once again delivered a reserve replacement ratio below 100%. Statoil found only 87% as much new oil and gas as it pumped in 2010, continuing an unfortunate run of below-100% results. Although 2010's replacement rate was an improvement over last year, the three-year average of 64% is just not acceptable.

To provide some context, Anadarko (NYSE:APC) replaced 153% of its production in 2010, ConocoPhillips (NYSE:COP) preannounced a 138% reserve replacement rate, Santos delivered 110%, and Petrobras (NYSE:PBR) is expected to clock in at about 170%.

The Case for Buying
Bad as that all is, there may yet be arguments for holding Statoil. While the near-term production outlook is not strong, the company has a lot of projects and prospects that could boost production in a few years' time. What's more, the company is one of the best and most experienced operators in harsh and demanding conditions - meaning that as energy deposits become more difficult to access, Statoil may have a worthwhile competitive advantage - and does so with rather good margins per barrel. (For more, see Competitive Advantage Counts.)

The dilemma for investors is price. On forward-looking measures like EV/EBITDA, Statoil seems quite undervalued relative to many other E&P companies. Then again, on metrics like price/book or EV/reserves, it is harder to make the argument that Statoil is desperately cheap. There seems to be a definite balancing act going on between Statoil's operational quality, its future prospects, and its near-term production outlook.

Right now, almost any relatively cheap energy company is going to have some issues. Ultra Petroleum (NYSE:UPL) is a great company but heavily weighted toward natural gas in a world where everybody wants oil. Apache (NYSE:APA) is a time-tested operator, but one that is reliant on locations like the Gulf of Mexico and Egypt that are presently problematic. Petrobras has enormous reserves to tap, but investors cannot get over their lingering fears that the Brazilian government will not do right by shareholders.

The Bottom Line
Statoil is worth at least a look but with the caveat that it might not really pay off for a few years. Aggressive investors may want to pair Statoil up with a hotter name like Brigham or Whiting, while patient investors may want to buy-and-hold with a multi-year horizon. The real crux here is production - if Statoil can deliver acceptable production growth and recharge those reserves at economical prices, this stock could work over time. (For more, see Oil And Gas Industry Primer.)

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