EQNR - Equinor Offers Potential And Diversification

2023-06-26 13:38:03 ET

Summary

• Equinor ASA has an almost $100 billion market and a continued single-digit P/E ratio showing its financial strength.
• The company continues to have strong tax obligations to the Norwegian government, but Norway provides a strong operating position, and diversification opportunities.
• The company has continued to generate incredibly strong dividends, generating strong free cash flow at current prices of more than $70 Brent.
• Combined with share repurchases, we expect Equinor to continue generating double-digit shareholder returns and growing.

Equinor ASA ( EQNR ) is a Norwegian state-owned oil company. The company has a market capitalization of more than $90 billion and an incredibly strong portfolio of low-cost assets. As we'll see throughout this article, the company's strong existing assets, along with growth potential, make it a valuable investment.

Equinor Q1 2023 Results

The company managed to generate strong returns in the 1Q , showing its financial strength.

The company has continued to generate strong cash flow with cost discipline. The company's dividend was $0.9 USD / share, a double-digit dividend yield, showing the company's financial strength. The company is commencing additional share buybacks, as shares outstanding have declined, and expects strong 2023 capital distributions.

The company continues to have incredibly strong earnings, impacted by an incredibly high tax rate. The company's earnings were impacted by declines in natural gas and liquids prices in the double-digits across the board, however, it still had just under $5 billion in earnings ($3.5 billion adjusted which declined substantially YoY).

The company's raw earnings declined substantially due to lower prices, which combined with taxes, resulted in much lower net earnings. Still, the company still has a single-digit P/E at current profits.

Equinor 1Q 2023 Production

The company is continuing to focus on strong production for shareholders, showing its financial strength.

The company is targeting 3% production growth for the year, taking oil and gas production to 2.13 million barrels / day. The company has had some turnaround impacts from production, but it's continued to bring new major projects online. The company's Triton Power acquisition has helped gas-to-power, with >1 TWh in power generation.

We expect this to remain a strong and growing part of the company's business.

Equinor 1Q 2023 Cash Flow

At the end of the day, the company's ability to drive shareholder returns is based on its cash flow.

Post taxes, the company earned $9.7 billion in CFFO. The company paid one NCS tax installment of $5.4 billion USD, with two more in 2Q which will dramatically impact CF although temporarily. The company paid $2.3 billion in organic capex, resulting in $4.2 billion in net cash flow. That's after a massive $3.3 billion in shareholder returns (a double-digit yield).

We expect the company's cash flow to remain incredibly strong in upcoming quarters, even as the company ramps up capital spending. That'll increase shareholder returns. Continued share repurchases, will enable the company to increase its overall value, on top of an incredibly strong dividend.

Equinor Outlook

The company is focused on continued growth and investment within its business.

As discussed above, the company expects 3% production growth. However, long-term success is supported by a strong capital program. The company is ramping up organic capex above prior guidance to $13 billion in the 2024-2026 time period. That increase in the company's capital guidance to just over $3 billion a quarter, will help future returns.

That stronger capital spending will enable increased growth and diversification in the company's energy business. In the meantime, we expect double-digit returns as the company uses free cash flow ("FCF") for both dividends and share buybacks. The company's share buyback authorization is ~3% of outstanding shares, and we expect that to be able to keep increasing.

Regardless of how the company spends its cash, its double-digit FCF yield at current Brent prices shows its strength. Europe's need to diversify from Russia will support its natural gas business heavily, and overall, we expect the company to be able to drive substantial returns making the company a valuable stable investment.

Thesis Risk

The company's largest risk is regulation. Oil and natural gas are unpopular among the populace, especially in the country with the highest % of EVs . The company is shifting strategies, but we expect it to be a slow and expensive shift. That could hurt the company's ability to drive future shareholder returns for investors.

Conclusion

Equinor has continued to perform incredibly well in a tough market. The company has hefty tax obligations, but it operates in a market with strong reliability. Additionally, the company's valuation means that it continues to generate a double-digit FCF yield, one that's very sustainable for the company.

Additionally, the company is continuing to invest in growth. Production is growing 3% this year, and with ramping up organic capital expenditures, we expect production to continue growth. Shareholder returns will be in the double-digits, and overall, the company is a valuable long-term investment. Let us know your thoughts in the comments below.

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