Equinor: Getting Less Attractive

Summary

• Equinor reported first-quarter 2020 on May 7, 2020. Revenues and others were $15.13 billion, down 8.2% from the same quarter a year ago and down slightly sequentially.
• It was a record operational performance with production in the first quarter of 2,233 K Boep/d, an increase from 2,178K Boep/d from the same period in 2019 and up 1.6%.
• In some bad news, Equinor is slashing quarterly dividend by 67% to $0.09 per share.
• The extent of the dividend cut has altered the investment thesis. While I do not recommend reducing your position, I believe it is time to take a pause and hold the stock.
• Looking for a helping hand in the market? Members of The Gold And Oil Corner get exclusive ideas and guidance to navigate any climate. Get started today »

Source: The Johan Sverdrup field in the North Sea (Photo: Espen Rønnevik/Øyvind Gravås - Equinor ASA)

Investment Thesis

The Norwegian-based Equinor ASA (NYSE:EQNR), 67%-owned by the Norwegian state - formerly known as Statoil - reported its first-quarter 2020 results on May 7, 2020.

The main issue that has negatively affected common shareholders this quarter is that the company decided to slash its quarterly dividend from $0.27 per share to now $0.09 per share - a steep haircut of 67%, which is quite uncommon for the oil industry.

Yes, of course, there are plenty of reasons why this move is justified, but the fact of the matter is those common shareholders are not happy with this surprising move. The company decided to slash the dividend rather than increasing debt again and exacerbating debt-to-capital ratios, which are already high.

Surprisingly, only two oil supermajors chose to cut their dividend payout: Equinor and Royal Dutch Shell (RDS.A, RDS.B). All the others decided to keep the dividend at the same level, as we can see in the graph below.

It is an exceptional decision that fits the extraordinary constraint due to COVID-19 and the effects the actions of Saudi Arabia had on oil prices. Equinor also elected to suspend its $5 billion 2019-2022 share buyback program and issued $5 billion in a bond issue in April.

The European oil major was planning to execute the second tranche of its plan - worth $675 million when including the Norwegian state’s share - between May 18 and Oct. 28.

Equinor is one of the smallest in terms of market cap amongst its peers, as we can see below:

The extent of the dividend cut has altered the investment thesis. While I do not recommend reducing your position, I believe it is time to take a pause and hold the stock in the long process of slow accumulation, now that the dividend is much less enticing. However, it is crucial to trade short term about 40% of your position to take full advantage of the sector's extreme volatility.

CFO Lars Christian Bacher said in the conference call:

In the last two months, Equinor has taken forceful actions to further strengthen our financial position. First, we suspended the buyback under the share buyback program until further notice. Second, we introduced an action plan to reduce spending by $3 billion before tax in 2020. Third, we issued bonds for $5 billion at attractive terms to be proactive given the uncertainty of financial markets. And finally, we reduced the first quarter dividend by 67% compared to the one proposed for the fourth quarter last year.

Equinor ASA - Balance Sheet And Production 4Q'2019: The Raw Numbers

Equinor	4Q'18	1Q'19	2Q'19	3Q'19	4Q'19	1Q'20
Revenues in $ billion	21.72	16.41	16.90	14.70	14.90	15.06
Total Revenues and others in $ billion	22.44	16.48	17.10	15.61	15.17	15.13
Net Income in $ million	3,366	1,711	1,477	-1,107	-236	-708
EBITDA $ million	9.570	7.425	6.085	4.833	5.606	4.863
EPS diluted in $/share	1.01	0.51	0.44	-0.33	-0.07	-0.21
Cash from operating activities in $ billion	4.20	5.13	2.66	4.18	1.77	5.04
Capital Expenditure in $ billion	2.99	2.03	2.83	2.64	2.70	2.35
Free Cash Flow in $ million	1,210	3,101	-173	1,543	-926	2,693
Total cash $ billion	14.09	15.78	15.57	14.04	12.05	12.97
Long-term Debt in $ billion	25.73	29.80	30.49	28.78	29.03	28.52
Dividend per share in $ per share	0.24	0.26	0.26	0.26	0.27	0.09
Shares outstanding (diluted) in billion	3.329	3.331	3.331	3.329	3.322	3.312
Oil Production	4Q'18	1Q'19	2Q'19	3Q'19	4Q'19	1Q'20
Oil Equivalent Production in K Boep/d	2,170	2,178	2,012	1,909	2,198	2,233
Group average oil price ($/b)	59.0	55.8	59.3	52.5	56.5	44.2

Click to enlarge

Courtesy: EQNR Filing and Morningstar

Financials: Trend And Production Discussion

1) Revenues and other were $15.13 billion in 1Q'20

EQNR reported first-quarter 2020 on May 7, 2020. Revenues and others were $15.13 billion, down 8.2% from the same quarter a year ago and down slightly sequentially (please look at the graph above).

Net Income was a loss of $708 million, or $0.21 per share, down from a gain of $0.51 per share the same quarter last year.

The net non-cash impairments were $2.45 billion in the first quarter. The two most essential items were:

• $0.9 billion are related to E&P Norway.
• $1.4 billion to assets E&P International, of which $1.1 billion is related to our assets in North America.

Finally, Equinor's renewable segment produced 559 GWh this quarter.

The CFO said in the conference call:

As expected, our financial results have been negatively impacted by the lower prices. Our average realized liquid price was $44.2 per barrel, down 21% since the first quarter last year. Similarly, our average invoice gas prices, both in Europe and the U.S., were down 41% in the quarter. Despite this, Equinor delivers a solid net free cash flow of $362 million after capital distribution.

Equinor's realized price for liquids was $44.2 per barrel during the first quarter of 2020. Please see historical price since 2015 below:

The adjusted earnings come from E&P Norway, E&P International, and MMP. Details below:

Source: From the company presentation (extract)

Cash from operating activities is now $13.65 billion yearly, with $5.04 billion in 1Q'20.

2) 2020 Guidance And Outlook

Equinor lowered its business outlook, including $9.5 billion in capital spending in 2020, with an exploration CapEx of ~$1 billion. (Source: EQNR Presentation)

As part of the company's $3 billion action plan, the 2020 organic CapEx guidance has been reduced from $10-11 billion to around $8.5 billion.

The 2020 exploration guidance is reduced from around $1.4 billion to around $1 billion.

For 2021, Equinor guided for an organic CapEx of about $10 billion. And the average CapEx for the years 2022 and 2023 is around $12 billion.

3) Free Cash Flow was $2,693 million in Q1'20

The company's free cash flow was a gain of $2,693 million in the first quarter of 2020, or $3.137 billion yearly ("ttm").

The annual dividend payment is now down to $1.2 billion, based on $0.09 per share per quarter (U.S. investors are getting less after tax, or about 28% lower).

Equinor completed the first tranche of the company's share buyback program at a cost of $58 million.

It has a dividend yield of 2.48%. However, U.S. investors receive a yield of 1.79% net.

4) Net Debt is $15.55 billion in 1Q'20

Note: Debt indicated above in the graph is the gross interest-bearing debt.

Total cash as of March 31, 2020, was $12.97 billion compared with $15.78 billion as of March 31, 2019. Total net debt is now $15.55 billion ($14.02 billion in 2019).

According to the company's presentation, the net debt ratio adjusted was now 25.8%.

Source: EQNR Previous Presentation - the recent note offering is not indicated

5) Production Upstream and Investment in Renewables

It was a record operational performance with production in the first quarter of 2,233 K Boep/d, an increase from 2,178K Boep/d from the same period in 2019 and up 1.6% sequentially.

Production cost was down by 6% in the first quarter compared to the same quarter last year. Johan Sverdrup was quite impressive, with 470K Bop/d at the end of April with a unit production cost below $2 per barrel.

Liquids represent 54.46% of the total output.

Source: EQNR Presentation (extract)

Commentary And Technical Analysis

Equinor SA decided on a problematic action by slashing the dividend by 67%. Cutting earlier may help the company recover faster, assuming that oil prices continue to improve as they did recently. At least, it is what we can say to limit the sour test of such shareholders' loss. Equinor cut its dividend payment during the financial crisis in 2008-2009.

However, oil prices are seeming to regain some traction recently, assuming that compliance by OPEC promised cuts as followed, which is something that has not been documented in May.

Overall, the survey showed the group cut just 5.91 million bpd from April levels, producing 24.77 million bpd. This is 4.48 million bpd of the promised reduction, or 74% compliant.

Another subject that could help is that Equinor seems to lead big time on energy renewable (solar and wind energy projects) as well. I know may investors are attached to this issue.

Investments in solar and wind energy projects by the world’s oil majors over the next five years are expected to reach $17.5 billion, a Rystad Energy analysis finds. But a closer look at the numbers reveals that some $10 billion, or 57% of the amount, is expected to be invested by a single company, Equinor, the only investor whose majority of greenfield capex will be towards renewable energy.

Rystad Energy thinks that the COVID-19 pandemic could be the "catalyst for oil majors to pump more capital into renewables, to acquire assets, developing skills, and nurturing the capacity to transition beyond petroleum."

Technical Analysis

EQNR is trading within an ascending triangle pattern with line resistance at $15.25 and line support at $14.60. We are pretty close to the end of the pattern (APEX), and we may soon experience a pattern breakout.

Assuming a weakening of the oil prices, it is highly likely that we may experience a support breakout with the retest of the 50-DMA at around $12.70.

However, the ascending triangle is generally bullish, which means that the stock could eventually cross the resistance at $15.25 and potentially trade above $16.00. In theory it is possible, but the oil prices are not helping, and I see some downside from here.

The strategy is to sell at least about 30% of your position at or above $15.25. Then wait patiently to accumulate again under $12.70.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

I am trading EQNR occasionally short term.