This earnings season has been anything but kind to integrated oil and gas companies like Equinor (NYSE:EQNR). The company served up humdrum earnings on Feb. 6, only to have Wall Street turn up its nose, sending shares down 4%.
Things are tough all over in the oil and gas industry, so the market's reaction isn't all that surprising. However, there were some bright spots in the otherwise gloomy numbers. Here's what investors need to know.
By the numbers
|Metric||Q4 2019||Q3 2019||Q4 2018||Change (YOY)|
|Revenue||$15.2 billion||$15.6 billion||$22.4 billion||(32.1%)|
|Net income (loss)||($230 million)||($1.1 billion)||$3.4 billion||N/A|
|Adjusted net income||$1.2 billion||$1.1 billion||$1.5 billion||(20%)|
|Earnings (loss) per share||($0.07)||($0.33)||$1.01||N/A|
|Operating cash flow||$1.8 billion||$4.2 billion||$4.2 billion||(57.1%)|
|Production||2.20 million BOE/D||1.91 million BOE/D||2.17 million BOE/D||1.3%|
Like most of its counterparts across the globe, Equinor saw a drop in revenue due to lower commodity prices during the quarter. Equinor's year-over-year 32.1% revenue plunge, though, was particularly steep relative to its peers. That's especially true considering the company's production increased slightly. However, Equinor had a very strong Q4 2018 in terms of both production and realized oil and gas prices, so this can be chalked up to a "tough comp."
Unsurprisingly, given the large revenue decrease, net income and earnings per share also tumbled. Adjusted net income strips out impairments resulting from higher-than-expected costs for ramp-up of new fields, drilling, and field development, as well as costs associated with an increase in proven reserves and changes in foreign exchange rates.
The decline in operating cash flow is particularly concerning, as Equinor's cash on hand is also near the low end of its 10-year historic range:
Highlights from the quarter
- The biggest news from the quarter was the start-up of production at the Johan Sverdrup deepwater field in the North Sea in October. Equinor boasts that the project was "ahead of schedule and more than 30% below the original cost estimate." Management expects the project to pay for itself by the end of 2020, a speedy turnaround.
- In October, Equinor made a final investment decision for the Hywind Tampen offshore wind farm development in Norway. The project will provide the five Snorre and Gullfaks offshore oil platforms with power, making them the first oil platforms in the world to be powered by a floating offshore wind farm. The wind farm will consist of 11 wind turbines with a total capacity of 88 MW, and is expected to provide 35% of the annual power demand of the platforms. Earlier in the year, the company announced a contract to develop an offshore wind farm in the U.S.
- Equinor's board plans to increase the quarterly dividend by 4% to $0.27 per share. The company is also in the middle of a $5 billion share buyback program that is expected to continue through 2022, with a $225 million tranche of buybacks expected in mid-2020 ($675 million when shares owned by the Norwegian government are included).
What management had to say
In a statement, CEO Eldar Saetre argued that the results were actually "solid":
Record high production, reduced costs and continued strong capital discipline contributed to solid results in a quarter with lower commodity prices. For the year we delivered competitive returns and strong growth in capital distribution. Going forward, we expect to grow production, returns and cash flow from a world-class project portfolio, representing 6 billion barrels to Equinor with an average break-even oil price below 35 dollars per barrel. The board proposes an increase in the quarterly dividend of 4% and the launch of the second tranche of our $5 billion share buy-back programme, based on an even distribution for the rest of the period.
What's next for Equinor
- For 2020, Equinor expects to deliver around 7% production growth, but long-term growth will be slower: about 3%, on average, from 2019 to 2026.
- Management projects average annual organic capital expenditures of $10 billion to $11 billion in 2020 and 2021, and about $12 billion in 2022 and 2023. That would represent a 20% increase over 2019's full-year organic capex of $10 billion.
- Equinor believes it will have the capacity to generate about $30 billion in after-tax organic cash flow from 2020 to 2023, achieving a 15% return on average capital employed, assuming oil prices of $65 per barrel (a big assumption; see below for more).
- The company has announced a goal of achieving carbon-neutral global operations by 2030, and reducing the net carbon intensity, from initial production to final consumption, of energy it produces by at least 50% by 2050. As part of this effort, it plans to aggressively develop its wind portfolio.
Par for the course
You can hardly blame Equinor for posting lackluster results when all of its big oil peers were doing the same, and for the same reasons. When oil, gas, and petrochemical prices are all down and refining margins are low, there's simply nowhere for an energy company to hide.
Unfortunately for Equinor and its peers, oil prices have now fallen below their fourth-quarter lows, which means Q1 2020 isn't shaping up to be any better than Q4 2019. Most investors will probably want to wait until the industry shows signs of stabilization before jumping in. And as attractive as a 5.8% yield is, even dividend investors may be concerned about Equinor's negative cash flow and comparatively low cash reserves and choose to look elsewhere in the sector.