EUR 850.00 For Business Accounts Only

Morningstar | Equinor Finishes Year Strong, Looks to Keep Momentum Into 2019

Equinor reported adjusted earnings of $4.4 billion in the fourth quarter of 2018, a 10.9% year-over-year change, and $18 billion for the fiscal year 2018, an increase of 42% compared with 2017. Net operating income amounted to $20.1 billion and organic free cash flow rose to $6.3 billion. The upstream segment drove the increase due to higher production and higher oil and gas realizations of nearly 30%. Midstream and Downstream, or MMP, segment results dampened Equinor’s overall earnings increase with higher costs and narrower margins leading to a 15% decline in operating income from 2017. The refining reference margin fell from $6.3 in 2017 to $5.3 per barrel over the past year.

Based on $70 per barrel, Equinor expects to generate free cash flow of $14 billion over the next three years and achieve a return on average capital employed of over 14 percent by 2021. However, that is a higher price than current market expectations and our long-term price assumption of $60/bbl. We expect free cash flow of about $5 billion and a ROACE of nearly 8% in 2021 using our lower price deck. That said, Equinor’s cash flow break-even level remains at about $50/bbl.

Management maintains dividend growth will track earnings growth in recent years while share buy-backs remain an integral part of Equinor’s return policy, although it did not complete any in 2018. However, it increased the quarterly cash dividend by 13% to $0.26. Our fair value estimate for Equinor remains NOK 215 per share and our moat rating is unchanged.

Overall, Equinor has successfully implemented the necessary cost reductions to surpass their 2018 targets. Nevertheless, maintaining capital expenditure at current levels whilst seeking production growth may prove challenging in the years ahead. Equinor’s future earnings critically depend on their ability to leverage the knowledge and operational efficiency garnered on the Norwegian Continental Shelf, and applicability on a global scale.

Net debt/capital fell from 29% at year-end 2017 to 22.2% at year-end 2018. Capital spending guidance is $11 billion and includes 20-30 exploration wells. Meanwhile, management will continue to target acreage and asset acquisitions in Norway, the U.K., Mexico, Canada, and Brazil.

The reserve replacement ratio reached an all-time high of 213% in 2018, largely due to the sanctioning of several high-value projects, positive revisions and acquisitions increasing the Reserves to Production to 8.7 from 7.6 years.