EQNR - Equinor Stock: 12% Yield Big Dividend Growth Cash Cow

2023-05-07 09:15:00 ET

Summary

• Equinor ASA yields 12.17%.
• Equinor management declared the 2nd straight $.90 total quarterly distribution, up 125% vs. 2022.
• Equinor ASA stock looks undervalued vs. its industry.

Looking for high yield dividend growth?

Norwegian oil & gas major Equinor ASA ( EQNR ) is in a unique position to benefit from the dislocation of Russian energy sales to that region, as it's on Europe's doorstep.

Like many energy companies, Equinor ASA's coming off a very strong 2022, but, in EQNR's case, management sees the party continuing for years to come, and is stepping up its dividends and buybacks in a big way in 2023.

Management declared a total of $.90/share in distributions based on Q1 2023 earnings , up 125% vs. Q1 '22. EPS and Dividends/share both rose over 200% in 2022 vs. 2021.

Even with these large dividend hikes, EQNR's dividend payout ratio is a very low 31.66%, on a trailing 12-month basis, due to very strong earnings.

Company Profile:

Equinor ASA, an energy company, engages in the exploration, production, transportation, refining, and marketing of petroleum and petroleum-derived products, and other forms of energy in Norway and internationally. The company was formerly known as Statoil ASA and changed its name to Equinor ASA in May 2018. Equinor ASA was incorporated in 1972 and is headquartered in Stavanger, Norway.

Equinor’s operations are managed through operating segments (business areas). The reportable segments are:

-Exploration & Production Norway (E&P Norway)

-Exploration & Production International (E&P International)

-Exploration & Production USA (E&P USA)

-Marketing, Midstream & Processing ((MMP))

-Renewables ((REN)).

Norway E&P is the largest segment - with 82% of EQNR's adjusted earnings in Q1 '23. MMP brought in ~10.6%, E&P International earned 5%, and E&P USA earned ~5% of Q1 '23 adjusted earnings.

Earnings:

Adjusted earnings for Q1 '23 were down in all segments except MMP, due to lower prices - Brent oil fell 20%; E&P Norway's gas price fell 42%; E&P USA's gas price fell 33%, and the group average liquids price fell 24%.

While overall equity production was up 1%, and entitlement production rose 3%, much lower prices, and tough comps from Q1 '22 put a dent in Q1 '23 growth. The production growth was driven by the ramp-up of new fields and wells, and fields back in production, such as Johan Sverdrup phase 2 and Snøhvit in Norway and Peregrino in Brazil. Short-term operational issues at Johan Sverdrup early in the quarter impacted the increase.

Revenues were down 19.7%, EBITDA fell ~35%, and interest expense rose $197M, up 74%.

Still, Net Income was up over 5%, and EPS rose ~9% in Q1 '23, aided by a 3.5% reduction in the share count.

Cash Flow:

One of EQNR's big strengths is its strong cash flow:

"Net cash flow of USD $4,201 million increased by USD $2,532 million compared to the prior quarter despite the lower price environment and continued increased dividend cash outflows (USD 2,861 million compared to USD 582 million)." (EQNR site.)

Dividends:

Management previously declared a $.30 regular dividend and a $.60 extraordinary quarterly dividend, based on Q4 '22 earnings, which goes ex-dividend on 5/11/23.

On May 4th they also declared another $.30 regular dividend and a $.60 extraordinary quarterly dividend, based on Q1 '23 earnings, which will go ex-dividend on 8/14/23, with an 8/25/23 pay date.

The rapid escalation, up 224%, in dividends in 2022 reversed EQNR's formerly negative dividend growth rate, which now stands at an impressive 43.39%:

EQNR also has a $6 billion share buyback program for 2023, and aims to deliver in total $17 billion in total capital distribution in 2023.

Taxes:

While Norway imposes a 25% withholding tax on dividends received by foreign investors, there is a tax credit on foreign taxes paid that you can take on your U.S. tax return. However, you should consult your tax advisor for more info on this matter.

CAPEX:

Management estimates Organic Capex of at USD $10-11 billion for 2023, and at an annual average of around USD 13 billion for 2024-2026.

Growth Projects:

Management sanctioned 13 projects in 2022, adding around 600M barrels in reserves. They have around 35 exploration wells planned in 2023, and they estimate a 3% production increase. EQNR continues to have several large projects in the works for 2023 - 2025 in its E&P Norway and E&P International segments. By the end of the decade, management expects the production to be on par with current levels, while delivering a 50% reduction in EQNR's emissions.

EQNR has 6 Renewables projects in operation, with an additional one, the Hywind Tampen sanctioned for 2023, and the world's largest offshore wind farm, the Dogger Bank, being developed in 2024-2026. EQNR owns 40% of this joint venture.

Profitability & Leverage:

ROA increased a bit in Q1 '23, whereas ROE slipped somewhat, as did EBITDA Margin. However, all 3 figures remained much higher than industry averages. EQNR's conservative balance sheet continued to strengthen, with lower Debt/Equity, much lower Net Debt/EBITDA, and much higher interest coverage than industry averages:

Debt & Liquidity:

EQNR has remaining long-term bond debt of USD $26.2B, with an average of ~9 years to maturity.

It also has a multi-currency revolving credit facility of USD $6B, including USD $3B “swing line” (same day value) option. The facility was signed on 5/6/21, and is available for 3 years. Equinor has the option to further extend the maturity twice by one additional year. The first option to extend has been utilized.

EQNR's debt is rated high grade investment grade stable by Moody's and S&P:

Performance:

While EQNR has caught a mild bid over the past month and quarter, it has lagged its industry and the S&P 500 (SP500) over the past year and so far in 2023.

Analysts' Targets:

Thus far in 2023, EQNR has received 4 upgrades and 2 downgrades from Wall Street research firms. At its 5/5/23 intraday price of $29.59, EQNR is 21.7% below the $36.00 lowest price targets, and 25% below the $37.10 average price target.

Valuations:

Equinor ASA looks undervalued vs. its industry on a trailing and forward P/E basis, a P/Sales basis, and an overall EV/EBITDA valuation.

EV/EBITDA looks at Enterprise Value, EV; the total market cap and Net Debt, vs. how much EBITDA a company produces. The idea is to figure out if the amount of EBITDA the company generates merits its current market cap and net debt amount.

On that basis, it looks like EQNR is very undervalued vs. its industry, with a very low EV/EBITDA of 1.22X, vs. the industry average of 4.74X.

Parting Thoughts:

Low leverage, ongoing strong cash flow, a very attractive well-covered dividend yield, a management willing to reward shareholders, and a unique geographic location creating a tailwind - there's a lot to like about Equinor ASA, which is why we own shares. We rate Equinor ASA a strong BUY.

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All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.

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