STOHF - Why We Just Bought More Shares Of Equinor

2023-11-14 12:07:26 ET

Summary

• Equinor ASA is a top investment pick with a diverse portfolio of assets and strong cash flow.
• The company had strong 3rd quarter results, with $8 billion in adjusted earnings and $7.5 billion in net operating income.
• Equinor's production and alternative businesses are performing well, with increased liquid production and improved power business.

Equinor ASA ( EQNR , [[STOHF]]) is one of the largest publicly traded energy companies in the world, with a market capitalization of roughly $100 billion. The company also comes with the backing of the extraordinary stability of operating in Norway. It is the preferred source of demand for Europe. As we'll see throughout the article, the company's diverse portfolio of assets and cash flow make it one of our top investment picks.

Equinor Q3 2023 Results

Equinor had strong 3rd quarter results in an environment much closer to its long-term normal.

The company had $8 billion in adjusted earnings and $7.5 billion in net operating income. YTD the company's post-tax cash flow has been an astounding $17 billion, with $2.5 billion net income. That highlights how the company is comfortably trading at a single-digit P/E. That high cash flow can enable substantial shareholder returns.

The company is continuing to struggle in some aspects of its growth such as the U.S. northeast offshore. There's strong political pressure right now to fix that. Other developments are having better luck. In the meantime, the company's operations are strong enough to both continue share buybacks and its dividend policy. Counting extraordinary dividends the company is at a >10% yield.

Equinor Q3 2023 Production

The company's production along with its alternative businesses have continued to perform well.

The company's oil and gas production decreased by less than 1% to 2.01 million barrels / day. However, the company's much more valuable liquid production, as natural gas prices have dropped, increased substantially versus its gas position. The company's USA production also remained strong, increasing by roughly 10% while NCS production declined.

The company's power business has improved dramatically. The company's renewable production has gone up by roughly 25% and the company's gas-to-power production has more than doubled. This is one of the company's largest areas of investment. A GWh is worth ~$100k and the company's quarterly production is almost $100 million worth.

It's still a small part of the company's overall business, but it's a part growing rapidly and a strong opportunity.

Equinor Q3 2023 Cash Flow

The company's cash flow picture above helps to highlight its overall strength and ability to generate returns.

The company has had several substantial tax obligations, but it's working to pay them down. The most recent quarter took a $3.75 billion hit, but the next quarter will be worse from a tax flow perspective, with roughly $7.5 billion in additional tax obligations. For the next quarter, that will burn effectively all of the company's cash flow.

The company had $7.5 billion in cash flow from taxes. Roughly half went to shareholder returns and another half went to investments. That meant $1.5 billion in net cash flow. The company has one of the strongest balance sheets in the industry with its reliable cash flow, so burning down some of the cash to meet its tax obligations is not surprising.

YTD the company's cash flow has been more than $37 billion. Tax remain the company's largest costs but 9 months into the year the company is already at double-digit returns to shareholders. The company has continued to aggressively buy back shares, and we'd like to see that continue for the long term.

Equinor Outlook

The company's outlook shows continued strength.

The company expects modest production growth of 1.5%, which is respectable at its scale. It's continuing to invest heavily. It's worth noting that in future years, the company expects its capital expenditures to ramp up to ~$3.3 billion / quarter versus just under $3 billion in the most recent quarter, as it continues to invest for the long run.

In the long run, the company's tax obligations remain hefty, however, its cash flow versus its valuation is more than enough to drive returns that justify its valuation.

Thesis Risk

The largest risk to our thesis is crude oil prices. The company's realized price has gone down YoY and it continues to rely heavily on its core business. Any substantial weakness there could substantially and negatively impact the company's ability to drive future shareholder returns from its cash flow.

Conclusion

Equinor is the rumored "perfect company." It has an unparalleled operating jurisdiction from the perspective of its financial reliability. The company pays hefty taxes, but the reliability is unparalleled. At the same time, there's a lot of demand to replace Russian natural gas in the region and build up energy security, and Europe views Norway as the best jurisdiction to import from.

The company has an incredibly strong financial position, arguably the strongest in the industry. The company's cash flow remains incredibly strong and the company is focused on driving that cash flow towards direct shareholder rewards. Regardless of whether it uses dividends or share repurchases, the company's strong cash flow makes it a valuable investment.

Equinor ASA's reliability and cash flow make it a valuable investment, one that's very tough to replicate, and that's the reason why we're adding another 1000 shares to our portfolio in the current market.

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