Equinor Returns $17 Billion To Shareholders, Does Anyone Care?

The Quarter

After watching mostly profitless, total garbage companies lead the market so far this year, it’s nice to be in the reporting season for companies that produce prodigious profits like Equinor (NYSE:EQNR). While people have been selling the stock, bemoaning the “decline” in European natural gas prices given the relatively warm winter and the “weak” oil prices given China’s Covid shutdown, the company was generating record profits, well over double last year’s fourth quarter not even taking into account currency and other gains. I see why people have lost perspective about relative prices of oil and natural gas (although I encourage them to see the charts below), but it’s crazy not to consider the absolute prices. Quite simply, at $85 per barrel oil and over $15/mmbtu natural gas, this company generates insane profits just from its NCS (Norwegian Continental Shelf) alone.

I think it’s also important to remember that while Europe might have dodged a bullet with a mild winter this year, it is still a long way from solving its energy problems without Russian natural gas. A cold winter next year could easily lead to another major spike absent newer forms of power coming on.

I’d also add that oil prices are very firm in my opinion given China’s near total shutdown from Covid restrictions. Oil production is not spiking anywhere in the world that I’ve seen.

The Numbers

The profits are gargantuan. For Q4 and the full year 2022, EQNR generated $7.895 billion and $28.746 billion or $2.51 and $9.03 per fully diluted share, respectively. That’s versus $3.368 billion and $8.563 billion in Q4 and full year 2021, respectively. The share count came down about 3.5% year over year in Q4 reflecting the company’s repurchase program.

Cash flow was insane. Operating cash flow after $35 billion of taxes for the year came in at $35.1 billion versus $28.81 6billion last year when cash taxes were only $8.588 billion. Cap expenditure was about the same as ’21 at $8.75 billion. Net/net, free cash flow was $26.35 billion or a little over $8.30/share. That’s more than I could have hoped for in my bullish article on the company earlier in 2022.

The balance sheet is in amazing shape with a little over $20 billion of net cash. This number should probably be offset by about $17 billion of current taxes payable but also does not reflect some non-current balance sheet assets. Either way, in my opinion this company has the best balance sheet in the industry and at an enterprise value of about $85 billion is remarkably cheap given the robust cash flows without even mentioning its strategic positioning in the European energy market.

Risks

The risks to any energy company are commodity prices. I feel pretty comfortable with Equinor’s assets, particularly its European natural gas production, but European natural gas prices could come off hard like US prices have (although I think US natural gas could do well once Freeport LNG comes back online). Oil prices could similarly come down. Should that happen, Equinor’s record profits could decline meaningfully. At just over 3.5x earnings with around a 12% dividend yield if the special dividends stay at $.60 and $6 billion in buybacks against less than $100 billion market cap, I don’t think people are assuming continuation of record prices, but anything can happen.

Conclusion

I continue to regard EQNR as the premier energy E&P out there. I love its valuation and the strategic positioning of its assets. I have not even mentioned its renewable assets in this piece. At this valuation, you’re essentially getting them for free in my mind.