Equinor ASA (NYSE:EQNR) Q1 2024 Earnings Call Transcript

Equinor ASA (NYSE:EQNR) Q1 2024 Earnings Call Transcript April 25, 2024

Equinor ASA beats earnings expectations. Reported EPS is $0.96, expectations were $0.78. Equinor ASA isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome, everyone, to the Equinor Analyst Call for Q1. At this time, all lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to hand the call over to Mr. Bard Glad Pedersen, Senior Vice President and Head of Investor Relations. You may begin your conference.

Bard Pedersen : Thank you, operator, and good morning to you all. My name is Bard Glad Pedersen, and I’m heading up Investor Relations in Equinor. As usual, I’m here together with Torgrim Reitan, our CFO. Torgrim will take you through our results first before we open for the Q&A, and we will keep this within one hour. So with that, I hand it to you, Torgrim.

Torgrim Reitan : Okay, so thank you very much, Bard, and good morning. And thank you all for joining us. I hope you all are doing well and are being well since we last met in February. So let’s dive straight into the results. Today, we delivered solid financial results driven by strong operational performance and production in a quarter with increasing liquids prices, but lower gas prices than we saw last year. The solid results are also supported by MMP coming in above the guided range. From this quarter, we have introduced adjusted net income and adjusted earnings per share as new performance measures. We also renamed some measures to better align with industry practice, and we no longer adjust for over and under lift. In the quarter, we report adjusted operating income of $7.5 billion before tax and a net income of $2.7 billion.

We deliver solid cash flow from operations of $9.7 billion and $5.8 billion after-tax, and earnings per share were 96 cents. We continue to make strategic progress across the portfolio. Earlier this year, we were awarded 39 new production licenses on the Norwegian continental shelf. We know that area well, and we are confident that we will make new discoveries. We are cutting emissions while we invest, and recently the Sleipner and Gudrun fields on the NCS were connected to power from shore. We reduced CO2 by 160,000 tons per year, and that will lead to around $27 million in reduced OpEx on an annual basis. We recently announced high grading of a U.S. onshore gas position through a transaction with EQT. We will swap our operatorship and interest in Ohio for non-operated interests in the Northern Marcellus Shale in Pennsylvania with lower breakeven and lower emissions, and also leading to increased production and profitability.

Within renewables, we remain value-focused and disciplined. As you have seen in the recent Norwegian offshore wind auction Sorlige Nordsjo II, in that auction we participated, but we stopped at a bid level that would have created value. And we were okay not to win. Value creation is and will be our top priority. 2024 is the year of de-risking for Empire Wind 1 project in New York, and we are progressing. After CMU, we were awarded a new off-take agreement with significantly better terms. Next, we aim to take an investment decision and secure project financing later this year. And with a new contract and project financing, we expect a nominal equity return between 12% and 16% for our U.S. East Coast offshore wind portfolio. From there, we also aim to farm down and bring in a new partner, which will significantly reduce our CapEx. We continue with strong capital distribution, in line with what we communicated at our Capital Markets Update in February.

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Q&A Session

For the quarter, the board approved an ordinary cash dividend of $0.35 per share, and an extraordinary dividend of $0.35 on top of that. As you know, we intend to grow the cash dividend by $0.02 on an annual basis. In February, we also introduced a two-year share buyback program to increase predictability. The program is $10-12 billion in total, with $6 billion allocated for 2024. For the quarter, and subject to AGM approval, we announced a second tranche of up to $1.6 billion in line with this program. This tranche will start following the AGM in May. For 2024, we therefore expect to deliver a total capital distribution of $14 billion, as we have said earlier, and this translates into a yield of 17%. Turning to safety, in late February we had a fatal helicopter accident, and we lost a dear colleague, and five people were injured.

We are working closely with authorities, and we have an ongoing internal investigation with a focus on helicopter safety and emergency preparedness. Although we have had positive trends for safety performance, this is a very strong reminder to keep safety as our number one priority. Production was strong in the quarter, in line with our expectations and growing by 2%. The share of liquids in production increased compared to the same quarter last year. Our NCS production is driven by strong production efficiency and increased capacity at Johan Sverdrup and ramp-up of Breidablikk, an asset we started last autumn. Internationally, production grew around 3%. That was driven by partner-operated Vito Field in the U.S. Gulf of Mexico, Bussard in the UK, and New Wells in Angola.

U.S. onshore gas production is somewhat down, and operators are now planning curtailment of production in a response to lower prices. So we have not included this in our production guiding, so that leads to a larger downside risk to our guiding. But, the curtailment is done to create more value and prioritizing value over volume. And as you know, we are supporting this. Power generation is up, and our renewables production is almost 50% higher than in the same quarter last year. Mainly driven by the Rio Energy acquisition and the startup of 500 plus megawatt Mendubim solar plants in Brazil, where we own 30%. Offshore wind production is also increased in the quarter. But gas-to-power production from Triton was lower due to low spark spread. So now let’s turn to our financial results.

Oil prices increased through the quarter, while gas prices were down by actually 50% from the same quarter last year. Strong production drove E&P Norway’s results, delivering adjusted operating income of $5.8 billion and $1.3 billion after-tax. Our international E&P segments delivered around $1 billion in adjusted operating income, and actually more than $800 million after-tax. Driven by production growth and a portfolio which has been high graded overtime. Then MMP, they have delivered within or above the increased guiding for the past five quarters. And this quarter, the results came in above the range at $887 million. Strong liquids and LNG trading contributed to these results. Renewable energy assets in operation contributed with $46 million in the quarter.

As we continue to build a renewables business, the adjusted operating income for the segment was negative as expected. Over OpEx and SG&A, that increased by 1%, while our production grew by almost 2%. However, we are not shielded from market effects, inflation and cost pressure. And because our accounts are in dollars, and the Norwegian kroner remains weak, the impact is not easily seen in the accounts. So there is an underlying growth in OpEx, and it is primarily driven by operation and maintenance, transportation costs, and increased activities within renewables and low carbon solutions. We maintain a strong focus on cost control and prioritization, and we work closely with partners and suppliers on this. So, over to our cash flow. This quarter, we have a solid cash flow from operations of $5.8 billion after tax.

We made one NCS tax installment of around $3.5 billion. Next quarter, we will pay the two final installments based on the 2023 earnings, totaling around SEK75 billion. So higher tax payments in the second quarter than in the first quarter. At the Capital Markets update, we were expecting our cash flow from operations this year of around $17.5 billion after tax. Now and based on forward prices and including interest elements, we still expect to deliver around this level. And although gas prices are around $4 per MBtu lower than our CMU assumptions, but also oil prices are higher than we assumed. Next year, we expect to be back to delivering around $20 billion in cash flow from operations after tax. You may also want to note that our sensitivity towards changes in gas prices is dampened by the Norwegian tax system.

As a general rule of thumb and disregarding the tax lag, a $4 change in the gas price equals around $1.5 billion change in cash flow from operations after tax. In the quarter, we spent $3.2 billion in cash dividends and share buybacks executed in the market. The state’s share of buybacks will be paid in July impacting our third quarter cash flow. Our organic OpEx for the quarter was $2.8 billion. In addition to all of this, working capital decreased by $3.2 billion and this is mainly due to lower gas prices and lower third-party and equity crude volumes at the end of the first quarter. After taxes, capital distribution and investments on net cash flow came in marginally positive at $8 million. So we have a solid financial position with more than $37 billion in cash and cash equivalents and a net debt to capital employed of negative 20%.

As we said at the Capital Markets Day in February, we expect the net debt to become positive by the end of this year, and this still remains the case. So lastly, since February, our guiding remains unchanged. But as I mentioned, there is uncertainty related to commercial curtailment of gas within U.S. onshore. So with that, I hand it back to you, Bard, and I do look forward to your questions.

A – Bard Pedersen : Thank you, Tore. We are then ready to start the Q&A, and I see we have a good list already. [Operator Instructions] We’ll then start. And first on the list was Biraj Borkhataria from RBC. So please, Biraj, go ahead.

Biraj Borkhataria : Hi, thanks for taking my questions. I’ve got 2, please. The first one is on MMP and obviously, another strong result this quarter. I was wondering if you could just help dissect the drivers and give a bit more color on the trading front because the volatility is obviously still high. But relative to the last couple of years, it’s lower. So I’m just wondering is this Equinor taking on more risk than before. Or is there something else driving it? Just trying to understand the sustainability of these results. And then the second question is on Johan Sverdrup, there’s some expectation that, that field will come off plateau either later this year or early next year. Is it possible to give some color on what the next two to three years will look like for the field?

Should we expect a relatively steady decline post plateau? Or do we have a decline and reach another lower level of plateau or something else? So any incremental information will be helpful there. Thank you.

Torgrim Reitan : Okay. Thank you very much, Biraj, two important questions. So first on MMP. Yeah. So let me try to sort of give you a little bit more insight into that. Traditionally, it is sort of the gas trading that has sort of been the largest contributor to that result. Still, gas and power is delivering well with above $500 million in earnings. Crude is almost at the same level and they normally are not. They are normally or historically at least, at a lower level. But what we see is that with the Russian oil going to Asia that creates a good opportunity for our portfolio and our assets. So that enables us to take advantage of the qualities that we have in our portfolio. It gives us opportunities to trade in the time dimension and it gives us opportunities to trade geographies as well.

So those are the three elements that drives it. It’s driven by the assets that we have with certain qualities, it is a flexible, large shipping fleet, and it is a trading organization that trades 24/7 around the clock and global books. So that has sort of proved to deliver well. On the gas side, I would say, is still a good result. But volatility within natural gas and also the geographical arbitrage opportunities within gas are sort of less than it has been over the last few years, but still, they continue to deliver well. On your question whether we take more risk, well, not really, this is asset-backed trading and sort of the spec book or the — is very, very limited as such. So this is based on the underlying portfolio and assets and the flows.

On your second question, Johan Sverdrup, yeah. So what we have said is that we expect Johan Sverdrup to come off plateau towards the end of this year or early next year. I think it’s important to remind ourselves that we have accelerated production on Johan Sverdrup significantly over the last years. And as you remember, in April, we sort of qualified 750,000 barrels per day in capacity. Then I really would like to leave with you that Johan Sverdrup is designed and built for massive water handling with a very, very large water handling capacity. So what we see is exactly what we should expect. Out of curiosity, we actually plan to flush the reservoir several times with water during the lifetime of Johan Sverdrup to improve and increase regularity, not regularity, but the recovery of the life at wheels you wouldn’t understand.

Water management is a very, very integrated part of the value of the assets. So you see — you have seen over the last few months, a little bit of increasing water cut in the wells that is as expected. And that would continue to, over time, increase as you would understand. So the way to sort of work with the clients is to drill new wells. It is to optimize production and water management, and it’s also about future phases like Johan Sverdrup Phase 3 as such. So on that note, we have put in one new well recently. There are two wells ongoing. And when those are done, there are more wells to be drilled as well in that reservoir. Yeah, Johan Sverdrup Phase 3 might be of interest. That is a tool to manage the client. And that is underway. And we expect that to start maybe late ’27 and then — or ’28 as such.

I mean it is progressing. So this is — I’m giving you a very long answer, Biraj. This is, of course, very important for us. And this is at the core of the components of the company to manage the client and optimize the recovery rate. So thanks, Biraj.

Biraj Borkhataria : That’s very helpful. Thank you.

Bard Pedersen : Thanks, Biraj. Next on my list is Teodor Sveen-Nilsen from Sparebank 1 Market. So Teodor, please go ahead.

Teodor Sveen-Nilsen : Good morning, Torgrim and Bard. Thanks for taking my questions. Two questions from me. I just want to follow up on [indiscernible]. I understand that this is a complicated competent field and complicated operations we currently are carrying out. But I just wonder for 2025. And we know that the field is coming off plateau. What should we model in terms of spare production next year? Will it be 5%, 10% or 15% below the Q1 2024 production, any like kind of thoughts or guesses around that would be useful? Second question is on the gas market and the gas value chain. I just wonder, in the long term, do you plan to take any additional positions in the value chain for LNG from U.S. to Europe? Or are you happy with your current position? Thank you.

Torgrim Reitan : Okay. Thanks, Teodor. Yeah, so on the Johan Sverdrup, yes, it is a complicated field. But clearly also with a very, very significant potential for recovery and we have sort of assumed a 70% recovery rate on that asset. So the flow characteristics are very good. We are not ready to give you a rate that you can use for your calculations. But as sort of the field is coming off plateau and it will come off plateau, clearly, we will help guiding you all on that development. I think it’s very important for me to say that the production guiding that we have put forward for this year, next year, the 5% growth in production towards 2026 takes into account decline on Johan Sverdrup. And the development of Johan Sverdrup is exactly what we expect and have forecasted in our communication.

Yeah, then on the gas markets. Yeah. So clearly, the European gas market has been through a few very, very turbulent years and sort of there is a new reality surfacing in the market. The European gas market has moved from being priced based on pipe gas to becoming an LNG priced market. So our long-term expectation for price in Europe is based on actually competition for LNG between Asia and Europe. And we expect that to be around $10 per BTU in the long term. So I would say, indirectly, we have actually a very, very large exposure to LNG pricing to the piped gas position in Europe. So we already have that. I mean we also have a couple of third-party contracts, with Cheniere in the U.S. So I mean, it’s there and then — but we have no sort of plans to build a significant LNG business beyond what we have currently.

Teodor Sveen-Nilsen: Okay. Thank you. That’s clear. Can I just follow up for your 2026 guidance of 5% growth? How much [Indiscernible] you have to factor into that estimate?

Torgrim Reitan : Thanks, Teodor. That’s actually the exact same question as you asked. So I can’t give you a different answer, then we’ll have to keep the dialogue going on that. It is developing as expected and clearly it boils down to our ability to manage water, to drill new wells and optimize the reservoir and production characteristics.

Teodor Sveen-Nilsen : Yeah, that’s clear. Thanks.

Bard Pedersen : Thank you, Teodor. The next one is Martijn Rats from Morgan Stanley. So Martijn?

Martijn Rats : Yeah, good morning. Thanks for taking my question. I have two as well. The rest of Bloomberg headline this morning that says that Equinor sees additional risk to oil projects in the UK North Sea from the labor government if the labor government were to come in. And I was wondering if you could provide some color sort of behind that comment, what are sort of the risks that that you would see if that were to happen, that would be helpful. And just very briefly to follow up on sort of Biraj’s question on MMP. I fully understand the comment about to gas is still good as per normal, but then oil was a bit of an upward surprise in terms of the trading results for this quarter, partly because of the diversion of Russian cargoes to Asia.