On Wednesday, February 6, 2019, Norwegian oil giant Equinor ASA (EQNR) announced its fourth quarter 2018 earnings results. As we have come to expect from energy companies recently, these results were fairly solid, with the company posting fairly large gains in top-line revenue and production. Upon deeper analysis of the company's results, we see even more impressive performance. Overall, the company as a whole appears to be continuing to deliver on its promise and potential and continues to show why it may be the best energy major in the space today.
As my long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company's earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article as well as serve as a framework for the resultant analysis. Therefore, here are the highlights from Equinor's fourth quarter 2018 earnings results:
- Equinor brought in total revenues of $22.438 billion in the fourth quarter of 2018. This represents a 31.11% increase over the $17.114 billion that the company brought in during the fourth quarter of 2017.
- The company reported a net operating income of $6.745 billion in the fourth quarter. This represents a 30.16% increase over the $5.182 billion that the company had in the prior year quarter.
- Equinor had a reserve replacement ratio of 213% in 2018. This was an all-time high for the company.
- The company produced an average of 2.170 million barrels of oil equivalents per day during the fourth quarter of 2018. This represents approximately a 2% increase year-over-year.
- Equinor reported a net income of $3.367 billion in the fourth quarter of 2018. This represents a 30.76% increase over the $2.575 billion that the company reported in the fourth quarter of 2017.
The first thing that anyone reviewing these highlights is likely to notice is that Equinor's revenue increased fairly significantly on a year-over-year basis. This may be especially confusing given that oil prices fell almost 40% during the quarter. However, the average Brent crude price during the quarter was $67.80, which is an 11% increase over the $61.30 average from last year. As we can see here, the realized price that Equinor received both in Norway and internationally was higher in the most recent quarter than a year ago:
In addition, Equinor's production was higher than in the year-ago quarter. As mentioned in the highlights, Equinor had an average equity production of 2.170 million boe/day compared to 2.134 million boe a year ago. This also had the effect of boosting the company's revenue because it provides it with more product to sell. When combined with the highest selling prices then, we can clearly see how the company's revenues would be greatly improved.
This rise in production also supports the company's growth narrative, which I have discussed in previous articles (such as this one). As I discussed, the company intended to grow its production at a 3-4% compound annual growth rate over the 2017 to 2020 period. The past year's production growth was short of that target however so Equinor will need to make up for it over the next two years. Interestingly though, the firm changed its outlook with regards to this topic with the latest announcement. The company now states that it will grow its production at a 3% CAGR over the 2019 to 2020 period. It is somewhat uncertain whether it changed this outlook due to the company's inability to grow its production at a fast enough rate over the past two years or not but this new projection is actually a bit better for the company long-term because it is a similar rate over a much longer horizon. The challenge now will be achieving it in light of the lower oil price environment.
One of the nicest developments that we saw in these results is the enormous 213% reserve replacement ratio that the company had. At the end of 2017, Equinor had total reserves of 5.367 billion barrels of oil equivalents, which increased to 6.175 billion boe at the end of 2018. This points to the incredible success that the company's exploration unit had last year and, in fact, continues the success that this unit has been having for quite some time now. This is a critical thing for the long-term health of the company because the oil industry is an extractive one. A company literally obtains the product that it sells by pulling it out of the ground. Therefore, it is critical that the company continually finds or otherwise obtains new resources to replace the ones that it pulls out of the ground or it will eventually run out of oil and gas to sell. Equinor's exceptionally high reserve replacement ratio indicates that the company is enjoying a great deal of success at this task.
In several previous articles about Equinor, I made the point that the company is actively working to diversify its production base away from Norway. This makes sense as Norway is generally considered to be a mature region of the world and despite some large and well-publicized finds in recent years, most predictions are that the region will see its production decline over the coming years. We saw those production diversification efforts play out during the fourth quarter as Equinor's production within Norway declined by 4% while its international production went up by a massive 13%. We also saw the company deliver impressive production growth in Brazil and the Gulf of Mexico, among other places. Equinor is truly becoming an international company and we should see this continue over the coming years as it continues to bring new projects online.
Equinor has not historically been a fantastic dividend growth stock like ExxonMobil (XOM) or Chevron (CVX). Therefore, it was somewhat nice to see that Equinor took advantage of its strong performance in the quarter to increase its dividend to $0.26 per share from the $0.23 that it had previously. As is always the case though, it is critical for us to ensure that the company can actually afford this dividend. The easiest way to do that is to look at a metric known as free cash flow. This is defined as the amount of money left over from the company's operations after it makes all necessary capital expenditures and pays all of its bills. This is therefore the money that the company can use to pay back debt, buy its own stock, or pay dividends. It is generally calculated by subtracting capital expenditures from operating cash flow. In the fourth quarter of 2018, the company had free cash flow of $1.210 billion. In the same quarter, the company had 3.329 billion weighted average shares outstanding. The new dividend costs the company $865 million per quarter then so it appears to be generating more than enough money to cover this higher dividend.
In conclusion, this was a very good quarter for Equinor as the company continues on with its growth narrative. The company also enjoyed very good success with its exploration program and continues to diversify internationally. In combination with the higher dividend, there is certainly a lot here for investors to be happy with.
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Disclosure: I am/we are long EQNR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.