EUR 850.00 For Business Accounts Only

Morningstar | We are increasing Equinor's fair value estimate as cost improvements take hold.

In the past few years, Equinor has primarily been focused on production growth, turning to international markets for growth to neutralize falling production on the Norwegian Continental Shelf.The strategy has proved relatively successful, leading to growth that offset NCS declines and numerous high-impact discoveries. However, returns suffered even before oil prices began to fall, prompting management to re-evaluate its strategic plan and ultimately abandon its previous 2020 production target of 2.5 million barrels of oil equivalent per day in favor of portfolio high-grading. With the drop in oil prices, returns fell further, leading management to focus on cost-cutting.Its efforts have largely paid off as a host of operational efficiency improvement projects have reduced dividend break-even levels to $40/bbl Brent in 2018, according to our estimates. Furthermore, Equinor is set to increase production through 2020, thanks to a strong pipeline of low-cost assets. Currently, these assets are expected to break even at $21 Brent per barrel, significantly enhancing the upstream portfolio and offering support for the cash dividend. The cost-cutting efforts on the NCS are critical to Equinor's future, as the region remains the company's most important. Thanks to its long dominance of the NCS, Equinor has the existing infrastructure and experience necessary to generate excess returns from future investment if costs can be curtailed. Future discoveries like the prolific and low-cost Johan Sverdrup (upward of 3 billion boe), along with cost reductions in other projects, should also lead to improved returns on the NCS.International operations will remain a key component of Equinor's future, although future investment may be more measured and dependent on achieving cost reductions, particularly for U.S. unconventionals. Meanwhile, deep-water prospects in the Gulf of Mexico and expansions in Brazil will contribute to growth before 2020.