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Morningstar | Higher Taxes and Working Capital Lead to Minor Hiccup in Equinor's Improving Cash Generation

No-moat Equinor largely met market expectations in the second quarter of 2018. Higher liquids and gas prices in the upstream more than offset higher operating costs owed to new fields starting up and higher maintenance activity in the quarter, lifting adjusted earnings after tax by 31% to $1.7 billion year on year. Although production fell 3% because of natural declines on the Norwegian Continental Shelf, Norwegian upstream operations have been the largest performance boost to the group in the quarter. Adjusted earnings jumped 58% to $3 billion year over year, as higher realizations more than offset higher costs related to maintenance and seasonal turnaround activity. Internationally, strong growth predominantly from the U.S. onshore, North American offshore, and Brazilian offshore fields was dampened by lower gas realizations in North America as well as higher royalty expenses and maintenance costs. Adjusted earnings for the segment grew to $1.030 billion from $876 million last year. Total production increased to 2,028 mboe/d from 1,996 mboe/d and is on track to meet guidance of 2% growth for the full year. We plan to update our model with second-quarter results but do not anticipate a change in our fair value estimate larger than 10%. Equinor’s no-moat rating remains unchanged.

Higher taxes and an increase in working capital meant that operating cash flow came in at $3 billion versus $4 billion last year, resulting in a little hiccup in free cash flow generation for the quarter. After dividends paid, free cash flow fell to a negative $679 million from $561 million last year. Nevertheless, the reinstated dividend at $0.23 per share remains safe, and we expect cash flow generation to pick up for the remainder of the year. Net debt/capital rose to 27.2% from 25.1% last quarter on said working capital increases as well as the acquisition of Brazilian offshore field assets.