Norway’s Equinor is the stock to play European gas
The Norwegian state-controlled company is the second largest natural gas supplier in Europe behind
(symbol: GAZP.Russia). Equinor has achieved a financial windfall from an extraordinary spike in gas prices in Europe to around $40 per thousand cubic feet, almost 10 times the US benchmark and the equivalent of an oil price of $240 a barrel. .
The company’s U.S.-listed (EQNR) shares, which currently trade around $33, look attractive at 8.6x forecast 2022 earnings of $3.88 per share. The stock has a dividend yield of almost 5%. This reflects a basic quarterly payment of 20 cents per share and special quarterly dividends of 20 cents per share that Equinor expects to pay this year.
Equinor also plans to buy back $5 billion of stock in 2022, which will result in a total return (dividend plus buybacks) of almost 10%, one of the highest among major energy producers.
No western energy company is more exposed to European gas, which is perhaps the best energy market in the world today. Formerly known as Statoil, Equinor supplies around 20% of the continent’s gas.
Equinor may also be the greenest of the world’s leading energy companies, with a carbon footprint per barrel of oil and gas produced less than half the industry average. It compares well to its peers in offshore wind power generation and carbon capture, with unrivaled technological expertise.
|Company / Symbol||Recent Price||Change over 52 weeks||2022E EPS||2022E P/E||Dividend yield||Market value (bil)|
|Equine / EQNR||$33.22||67%||$3.88||8.6||4.8%*||$108.2|
|BP / BP||29.03||11||4.70||6.2||4.5||94.2|
|Chevrons / CLC||166.27||52||11.92||14.0||3.4||323.8|
|ExxonMobil / XOM||82.79||38||7.35||11.3||4.3||350.5|
|Hull / SHEL||51.71||20||6.64||7.8||3.7||196.1|
*Includes a special quarterly dividend of $0.20 E=estimate
“Equinor is the world’s leading offshore oil, gas and renewables operator,” said Antonio De Pinho, senior resource analyst at VanEck, which owns Equinor shares.
Decades of work developing oil and gas fields in the harsh waters off the Norwegian coast have bolstered Equinor’s offshore drilling capability. It operates an extensive network of undersea pipelines totaling more than 7,000 miles to bring gas ashore and then pump it through pipelines to Europe.
The company has used its Norwegian offshore experience to develop offshore fields in countries like Brazil.
The company’s technical prowess was on display in the fourth quarter, when it increased its offshore gas production by 16% to alleviate a European shortage and take advantage of high prices.
Europe needs gas and its options are limited. As a result, it continued to buy gas from Russia, which provides around 40% of the continent’s supply.
However, most European countries want to reduce their exposure to Russian gas in the coming years, which should benefit Equinor.
Equinor produces over two million barrels per day of oil and its equivalent, split equally between oil and gas. Two-thirds come from the company’s prolific Norwegian offshore fields. European gas represents about a third of its total production, and most of it is sold on the spot market and thus benefits from the currently high prices.
“This winter, the energy realities in Europe have demonstrated the importance of stable and reliable gas deliveries from Norway,” said Anders Opedal, CEO of Equinor, during the company’s earnings call in February. “Currently, we are seeing low inventory, low spare capacity and too low energy investments over time.”
Company executives declined to speak to Barons.
The biggest risk with Equinor would be a collapse in gas prices in Europe. Its stock, however, is already discounting a potential downside, given a free cash flow yield of around 20%, assuming oil at $100 a barrel and gas at $20, half the current price. Suppose gas costs $10 per thousand cubic feet and the free cash flow yield is about 10%.
“We believe gas prices in Europe could stay higher for longer as there is no easy way for the market to normalize before the end of this decade,” HSBC analyst Kim Fustier wrote. in a client note last month.
Equinor, 67% owned by the Norwegian government, has a market value of $110 billion, or more than
(PB). With no net debt, Equinor also has one of the best balance sheets among major energy companies.
Its base dividend is low compared to its peers and the company plans to gradually increase it in the coming years. Special dividends could become the norm, given its healthy balance sheet.
Environmentally conscious Norway levies a hefty 78% tax on Equinor’s domestic profits. Still, with a low cost of around $2 per thousand cubic feet for gas, the company’s after-tax profits are still healthy.
The company has one of the largest wind portfolios among European energy companies. It plans to have 12 to 16 megawatts of renewable power generation, mostly wind, in place by 2030. That’s enough to power about 10 million homes.
Equinor’s distinctive skills are evident in its use of electricity – using power supplied by cables from onshore hydroelectric plants – to operate offshore platforms in two areas. This results in one of the lowest carbon footprints in the world. Most offshore platforms in the world are powered by diesel generators or natural gas.
And the company is years ahead of
(CVX) in carbon capture, says VanEck’s De Pinho.
Equinor’s Northern Lights project, in collaboration with
Total energy services
(SHEL), is expected to start operations in 2024. It will take the carbon emissions, channel them off the coast of Norway and bury them about a mile and a half under the Atlantic Ocean, with the capacity to store 15 million to 30 million tonnes of carbon per year by 2035.
While Equinor emphasizes its green initiatives, it does not lose sight of its core business. Oil and gas production is expected to grow 2% this year and at a similar pace through 2026.
The Norwegian continental shelf remains a prolific source of energy. The company’s large offshore Troll field has been in operation for 25 years and still has over 25 years of estimated reserve life.
With its leading position in the European natural gas market and a low carbon footprint, Equinor is ideal for energy-conscious and environmentally conscious investors.
Write to Andrew Bary at [email protected]