STOHF - Equinor: Trying To Thread The Needle Between Capital Returns And A Viable Asset Base

2024-07-26 14:37:56 ET

Summary

• Equinor is returning significant amounts of capital to shareholders, but faces real challenges in sustaining or growing payouts due to pricing and production pressures.
• Q2 results beat expectations, but the overlift and MMP results that drove the beat are likely not sustainable on a quarter-to-quarter basis and there's nothing fundamentally stronger about the story.
• Management has been making plans and projections assuming $13/mtbu natural gas in Europe, but the forward curve is below that (and sell-side expectations are even lower), creating more distribution risk.
• Although Equinor has been doing better than peers in terms of organic reserve replacement and finding/development costs, a reserve life below 8 years is problematic and future production growth looks limited.
• Free cash flows in the $6B-$7B range can support a fair value in the high-$20s, but I do see risks to the payout and further risks to natural gas prices.

If you like companies that return large amounts of capital to shareholders, you may well like Equinor ASA ( EQNR ) quite a lot. But if you also like companies whose capital payouts are sustainable and/or likely to grow, it’s a much more challenging story as Equinor is likely to continue facing real pressure on pricing and production growth....

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