EQNR - Equinor: Dividends Rising At The Norwegian Energy Major After 75% Price Gains

Summary

• I previously offered Equinor ASA as an alternative to U.S. energy.
• Equinor rose 75% over the three-year period but has stalled.
• Equinor's 10-year outlook looks good after record profits this quarter.
• European gas prices may be nearing a bottom.

I wrote an article in 2019 suggesting that Equinor (EQNR) was underpriced compared to its U.S. peers and could be a good addition to portfolios for its European gas focus. The stock is up 75% after a rent pullback, and I take a look at current expectations.

Equinor releases 'grotesque' record profits

Equinor continues to feel the heat of its U.S. counterparts after its recent record profits were called "grotesque".

In its Q4 '22 earnings this week, the Norwegian energy giant reported a record $74.9 billion in adjusted operating profit, which was more than double its previous high. The company posted a net profit for the year of $28.7 billion, up from $8.6 billion a year earlier.

The majority state-owned energy major became Europe's largest supplier of natural gas last year after sanctions against Russia's Gazprom. Equinor was boosted as the conflict in Ukraine pushed European gas prices to all-time highs.

However, gas prices have tumbled in 2023 and Equinor's stock dropped from an open of $33.90 to $28.46. The record profits have boosted the stock to $31.83 and have almost erased the losses for the year.

Adjusted EBIT for October-December came in at $15.1 billion, from $15 billion a year before, and beat analysts' forecasts of $14.4 billion.

Equinor has also been ramping up its shareholder returns, saying in its earnings report:

The board of directors proposes to the annual general meeting an ordinary cash dividend of $0.30 per share for the fourth quarter of 2022, up from $0.20 per share for the third quarter of 2022. The board has decided to continue the share buy-back programme of $1.2 billion per year, introduced in 2021 as an integrated part of capital distribution.

In addition, the board proposes an extraordinary cash dividend of $0.60 per share for the fourth quarter of 2022 based on strong earnings and the robust financial position. The board has also decided to increase the $1.2 billion share buy-back programme with up to $4.8 billion, resulting in a programme up to $6.0 billion in 2023.

At current prices, Equinor has a P/E ratio is 4X, compared to the 8X of Exxon Mobil ( XOM ). The company also has a ROE of 58% compared to the 22% of its American peer.

Not everyone cheered the results, as demonstrators at Equinor's headquarters called the figures 'grotesque'. Mel Evans, Greenpeace UK's head of UK climate, added: "Equinor is the latest fossil fuel giant to post record profits looted from tax billpayers' pockets while destroying the climate last year". Energy firms are still at risk of windfall tax grabs by governments.

A snapshot of Equinor's operations for 2023 and beyond

Equinor announced another oil and gas find in the North Sea this week, which marks the seventh such discovery since I wrote about the company.

"There is uncertainty as to the size of the discoveries, but an average of the various estimates gives a total volume of around 350 million barrels of oil equivalent, corresponding to a medium-sized Norwegian oil or gas field, and the size of the Aasta Hansteen field in the Norwegian sea", Equinor said.

Equinor continues to take advantage of oil production as it moves to a clean energy transition. The portfolio of oil and gas projects coming on stream over the next 10 years has an average break-even price of around $35 per barrel and an internal rate of return of around 30%. That could be a big driver of profits over years to come as investment in oil & gas dips, leaving the potential for rising oil prices.

Equinor booked its profits on a European gas price of $29 per MMBtu and liquids prices of $80 per bbl in the fourth quarter. This reflects the weakening of gas prices in the fourth quarter of 2022.

Equinor delivered strong sales and trading results, particularly from gas and power, selling to the markets with the highest demand. However, the Marketing, Midstream & Processing segment results were negative due to the timing impact of derivative contracts. In the Exploration & Production USA segment, deferred tax asset has been recognized at $2.7 billion, with a corresponding decrease in income taxes of $2.8 billion resulting in a low reported effective tax rate this quarter compared to last year.

The company continues to see progress in its renewables projects with "first power from the world's largest floating wind farm Hywind Tampen in 2022 and the world's largest offshore wind farm, Dogger Bank in the UK, to start production in 2023".

Equinor expects organic capex to be $10-11 billion in 2023, and an annual average of around $13 billion for 2024-2026. The company also expects to have production growth of around 3% in oil and gas, compared to 2022.

What is the outlook for natural gas in the region?

The outlook has turned negative for European natural gas if you want to believe the Wall Street analysts. However, that also requires that the conflict between Ukraine and Russia is heading for a peaceful resolution.

Cold weather is forecast to end soon, and gas reserves remain above their 10-year average. Traders are also expecting a reopening of the Freeport LNG plant in the US. Natural gas has slumped in 2023 by around 25% and Morgan Stanley recently cut its forecast for prices in the third quarter to €47 a megawatt-hour, compared with €64 estimated a month ago.

Dutch gas futures, the European benchmark, were trading at €53.68 on Thursday after soaring above €300.00 at the height of the conflict. That market could be approaching a floor that would support Equinor going forward.

Countries in "our European perimeter would reach 100% inventory fill as early as August if LNG imports continue at the current pace," Morgan Stanley said.

However, the alternative view is that continued low prices could remove demand discipline, boost consumption and hurt supply levels.

"It seems prices have found an equilibrium around their current levels," EnergyScan reported . "Any strong drop below those levels could trigger a rebound in demand from power generation and industry."

Conclusion

Equinor investors have been rewarded with strong returns and dividend growth over the last few years. The recent pullback in the stock represents the volatility in gas prices, which were stretched beyond historical norms. The current valuation of Equinor is still very low in comparison to U.S. firms, and investors should look to buy this latest pullback for a strong dividend. The company has a strong production pipeline for the next 10 years and that works at these lower oil & gas prices, which I do not expect to last over the next year.

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