The 2022 market narrative has been dominated by Russia’s invasion of Ukraine and the conflict’s effect on commodity prices. After a decade of underinvestment in fossil fuel extraction, the shunning of Russian hydrocarbons has been painful on a global level. As the energy transition toward renewables presses forward, liquefied natural gas appears to be the bridge of choice. In light of natural gas prices rising more than 165% year-over-year, the path to renewables looks more like a toll bridge. With Europe poised to take on the brunt of Russia's energy export sanctions, Equinor ASA (NYSE:EQNR) is well positioned to play the role of toll collector.
Equinor is a Norway-based company with a diversified energy portfolio, consisting of petroleum, natural gas, and renewable assets. With more than 68% of the company’s production coming from the Norwegian continental shelf, EQNR’s geographic proximity to continental Europe provides for operational advantages and efficiencies. Europe's clamoring for energy security and the recent statement by the European Union reclassifying natural gas fired power plants as "green energy" provide Equinor with demand tailwinds for years to come.
Equinor continues to diversify sources of revenue by bolstering the renewable energy portfolio. EQNR's investments in wind and solar help offset the underlying risks associated with fluctuating oil and gas prices. Renewable energy production rose to 511 GWh in Q1 2022, a 13% increase from Q1 2021. The company also is capitalizing on expertise with CO2 storage/capture, recently being awarded two licenses in the North Sea and Barents Sea. We view the CO2 storage/capture vertical as a consistent source of future revenue growth.
Why the constant search for sustainability? When placing a five-year price target on a company’s equity, the BSN methodology puts a high emphasis on “visible sustainable growth.” Extended growth forecasts come with their own set of limitations. These limitations are even more prevalent for commodity-based names. Statistically speaking, the further out we forecast, the lower our confidence interval becomes around modeled expectations. To combat confidence interval slippage, we look for signs of earnings growth visibility. As the degree of earnings visibility increases so do the chances that our growth assumptions will come to fruition.
For a stock that has risen 60% over the last 12 months, Equinor's fundamentals remain very attractive. Sporting a PEG ratio of 0.11 and a forward P/E ratio under 5.5, EQNR fits the value driven bias observed in periods of rising interest rates. Our valuation model suggests a five-year price target of $191. However, to compensate for the elevated risks surrounding commodity-based companies, we're adjusting down our price target expectations by 20%. This results in a five-year price target of $152 for shares of EQNR.
As a reminder, our rankings blend both fundamental and technical analysis. We assign a weighting to factors across both disciplines with those stocks scoring the highest comprising the upper echelon of the rankings. Historically, financial analysts have looked at fundamental and technical characteristics of stocks in a vacuum. I find that incorporating both into my models allows us to better avoid “value traps” and “high fliers” with great charts, but no visible earnings backing them up.
The chart for Equinor remains constructive, steadily rising over the last 12 months. EQNR was largely range-bound, from October 2021 through February 2022. The commencement of Russia's invasion of Ukraine on Feb. 24, 2022, catapulted the stock through most of April. The brief pullback observed in late April and early May, was primarily driven by demand worries, resulting from the ongoing COVID lockdowns in China. A strong earnings announcement on May 4 helped shares of EQNR put in a near-term support level of around $32 and provided the catalyst for rocketing back to levels not seen since 2008.
We continue to view Equinor as a "Strong Buy" with the stock consistently ranking in the top quartile of our Best Stocks Now app. EQNR currently sits 35th out of the 6,094 securities we track. We hold Equinor in both our Dividend & Growth and Premier Growth portfolios.
While earnings results for commodities-based businesses are highly sensitive to the price of the underlying commodity, we expect the favorable pricing environment to remain intact. Tailwinds for oil and liquid natural gas prices should persist as the European region re-configures energy sources in light of the supply shocks created by Russia's invasion of Ukraine.
Additionally, Equinor's increasingly diverse sources of revenue helps to alleviate embedded volatility in the company's stock price. EQNR's hydrocarbon strategy is spread out geographically and incorporates all aspects of the industry: Exploration, production, transportation, and refining. Management's proven success developing renewable energy projects and EQNR's acquisition of Danske Commodities in 2018 provides a cushion for the boom-and-bust cycles that have plagued the energy sector.
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This article was written by
Bill Gunderson (@billgunderson) is the CEO and Chief Market Strategist at Gunderson Capital Management in Mt. Pleasant, South Carolina. He is also a professional money manager, former research analyst, author of Best Stocks Now! 2011, and developer of the Best Stocks Now! App (www.BestStocksNowApp.com). Bill offers a free 4-week subscription to his weekly Best Stocks Now! Newsletter to all Seeking Alpha readers at www.gundersoncapital.com. Bill hosts a daily stock market radio show that is syndicated nationwide on the Salem Broadcast Network. He has made numerous appearances on the Fox Business Channel, CNBC, and Bloomberg Radio. Bill's articles have been published by Barron's, Forbes, TheStreet.com and other financial publications. He can be reached at email@example.com or by calling (855) 611-BEST.
Disclosure: I/we have a beneficial long position in the shares of EQNR either through stock ownership, options, or other derivatives. 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.
Additional disclosure: I collaborated with my Gunderson Capital colleague, Barry Kyte Jr., CFA, on this article.