Stock Analysis & Ideas

Equinor: Expecting Record Profits Despite Oil Price Uncertainty

Story Highlights

Equinor is benefiting from the ongoing surge in oil prices, with Fiscal 2022 almost certainly going to be its most profitable year ever. With the ongoing macroeconomic turmoil persisting, elevated oil prices could endure, suggesting that Equinor shares could have further upside against a relatively soft valuation. Also, the company is about to pay substantial dividends, while its stock repurchase program should further boost the overall capital return yield.

Norway-based Equinor ASA (EQNR), previously going by the name of Statoil, is one of the leading European publicly-traded energy companies, boasting a market capitalization of around $115.8 billion.

The company is famed for helping build up Norway’s sovereign wealth, with the Norwegian State still owning 67% of the total shares. The government’s ownership stake is managed by the Norwegian Ministry of Petroleum and Energy, providing Equinor with unique advantages when it comes to financing, the expansion of its licenses, and overall prestige in the industry.

As a result of the ongoing inflationary environment, uncertain macroeconomic outlook, and the lasting invasion of Ukraine, commodity prices have skyrocketed. This is especially true in the energy sector, with WTI crude futures hovering close to $120 per barrel. Consequently, oil majors like Equinor are printing cash these days.

Further, following the company’s divesture from Russia due to the ongoing invasion of Ukraine and the enduring sanctions against Russian energy, Equinor’s market position is set to strengthen. The Western world is about to evolve increasingly dependent on Equinor’s production, improving the company’s operating leverage.

Combined with Equinor owning one of the most powerful asset portfolios in the energy sector, leading to lower production costs than its competitors, its investment case remains rock-solid. Near the current oil price levels, Equinor should achieve record earnings this year. With no visible catalysts pointing to oil prices declining anytime soon, its explosive performance is likely to persist in the next few years.

I am bullish on the stock.

Surging Oil Prices to Massively Boost Earnings 

In early May, Equinor released its Q1-2022 results, with the numbers vividly reflecting the ongoing tailwinds in the energy sector.

Revenues came in at $36.4 billion, a 106% increase year-over-year. Higher revenues mirror both the rebounding demand for oil that had previously been crushed during the COVID-19 pandemic and the surging oil prices following the current shaky macroeconomic environment.

During the quarter, Equinor’s liquids and gas production was 2,106 mboe/day, slightly lower than 2,168 mboe/day in the prior-year period. The decline in production was primarily attributable to the divestment of an unconventional U.S. onshore asset in Q2 2021 and an anticipated organic drop.

Net income came in at $4.7 billion, 147% higher year-over-year, reflecting the top line’s vertical gain as well as expanding margins amid economies of scale. On a per-share basis, net income was $1.46 compared to $0.57 in Q1 2021.

With oil prices not only remaining elevated but sustaining their upward trend, Equinor’s Fiscal 2022 EPS could approach and even exceed $7.00, according to my models. Consensus estimates currently point towards a humbler Fiscal 2022 EPS of $6.81. However, estimates have consistently been revised upwards. Thus, if they were also to approach the $7.00 mark soon, I wouldn’t be surprised.

Management expects organic CapEx to remain close to $10 billion during 2022-2023, while the company aims to maintain the unit of production cost in the top quartile of its peer group.

Capital Returns & Valuation

Equinor maintained the quarterly dividend at $0.20 while declaring an additional special quarterly cash dividend of 20 cents. Besides the current base annualized dividend per share base rate of $0.80, Equinor is, in fact, going to pay a further $0.80 through Fiscal 2022 in the form of 20-cent extraordinary dividends each quarter. Thus, the dividend yield should exceed 4.6% this year, even at the stock’s current elevated levels.

Further, amid realizing record profits, Equinor has been executing aggressive stock repurchases. The company bought back $1.33 billion worth of stock during Q1, following the $5-billion boost to the share repurchase program in the prior quarter. Note that all share buyback amounts include shares to be redeemed by the Norwegian State in order for its 67% equity stake to be maintained.

As far as Equinor’s valuation goes, assuming we take a prudent view and utilize a Fiscal 2022 EPS estimate of $6.80, shares are currently trading at a forward P/E of just over 5x. The multiple appears to be quite low, as investors recognize that it’s based on inflated earnings. With oil prices likely to eventually normalize, so will the valuation.

However, if oil prices were to persist for the next few years, we could easily see this multiple expand higher. The ongoing macroeconomic cataclysm could favor this scenario. Still, it’s impossible to know where oil prices will move going forward in such an unpredictable environment.

Wall Street’s Take

Turning to Wall Street, Equinor has a Hold consensus rating based on two Holds assigned in the past three months. At $32.70, the average Equinor stock forecast suggests 3.7% downside potential.

Takeaway 

Equinor is benefiting from the ongoing surge in oil prices, with Fiscal 2022 almost certainly going to be its most profitable year ever. The company is about to pay substantial dividends, while its stock repurchase program should further boost the overall capital return yield.

Shares are hard to value at the moment, as they could be fully valued if oil prices start to decline. However, with the ongoing macroeconomic turmoil persisting, this doesn’t seem to be the most likely scenario. Thus, Equinor shares could have further upside against a low valuation multiple, in spite of Wall Street’s conservative price targets.

Disclosure

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