Equinor ASA

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

Equinor ASA is a global energy company, primarily focused on exploration, production, and trading of oil and gas, with growing investments in renewable energy solutions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Equinor operates in the energy sector, a field characterized by high capital expenditure, long development cycles, and sensitivity to price volatility, regulatory changes, and the shift toward cleaner energy sources. The company navigates this complexity through a global presence with assets in Norway, Brazil, the UK, and the US, while maintaining operational excellence and a commitment to sustainability.

Business Overview:

  • Revenue Distribution:
    • Equinor’s primary revenue driver is the production and sale of oil and gas, with volumes and prices highly dependent on global markets, supply dynamics, and geopolitical events. The revenues are usually higher in integrated, non-upstream focused companies.
    • It is increasingly investing in renewable energy segments, primarily offshore wind, with an aim to become a net-zero company by 2050. This segment still contributes a relatively small amount of the total revenue.
    • The company also has Marketing, Midstream & Processing segment, which brings the produced raw material to the market.
    • Geographically, Europe is Equinor’s most important sales region.
  • Industry Trends:
    • The oil and gas industry is facing a complex interplay of factors: rising demand from emerging economies, volatile pricing due to geopolitical tensions, and increasing pressure to decarbonize and transition toward greener energy sources. In addition, the recent conflict between Russia and Ukraine has caused major disruptions in the supply chain and resulted in volatile pricing.
    • The global renewable energy markets is booming, and are becoming increasingly efficient while also lowering their prices, making their energy output more affordable. Governments are also pushing for more investment in renewables.
    • A global shift towards increased energy efficiency, combined with the advent of new technologies, also creates pressure on the fossil fuel industry.
  • Margins:
    • The company operates in a commodity based industry and margins have fluctuated based on the pricing of oil and gas. Recent years have been very volatile, and due to the Russian and Ukraine war and the subsequent increased demand for natural gas, they have seen large rises in prices and margins.
    • The increase in investments in renewables and other alternative sources of energy might reduce margins if returns do not meet expectations.
  • Competitive Landscape:
    • The energy sector is filled with companies ranging from large multinational corporations to smaller, specialized firms. In the oil and gas segment, Equinor competes with oil majors like ExxonMobil and Shell, as well as national oil companies and smaller independent producers.
    • The Renewable energy segment is even more diversified, with companies specializing in different sectors like wind, solar, bioenergy, and hydrogen. As of right now, it is very fragmented, but the space is expanding, and will probably consolidate over the next decades.
    • In general, the industry is extremely capital intensive, and therefore a lot of the moat of a company comes from how well they manage their finances and capital expenditures.
  • Differentiation:
    • Equinor differentiates itself by having a strong foothold in Norway, which is a low-risk and politically stable country for the production of oil and gas, and with its focus on sustainability. The company has heavily invested in wind energy and CCUS, and is striving for net zero emissions by 2050.
    • Also, as a former state-owned company, Equinor enjoys advantages with government support and a good legal and political infrastructure. They are also more able to develop new large projects that are very capital intensive, but highly rewarding.

Financials In-Depth:

  • Revenues and Profitability:
    • As with most oil and gas companies, the revenue of Equinor varies greatly depending on the prices and demand of oil and gas in the market. There has been much volatility in recent years due to geopolitical risks, specifically after the Russian-Ukrainian war.
    • Despite the instability, they have maintained profitability and strong cash flow.
    • Earnings are strongly tied to market prices. If the price of crude oil rises, the business will perform better.
    • They have also been investing heavily into renewables but they are not as profitable as their core fossil fuel business.
  • Cash Flow:
    • Equinor’s cash flow from operations is a significant strength, allowing it to finance investments in new projects and provide returns to shareholders. They have strong cash flow, which in 2022, was about $40 billion, but it dropped down a bit in 2023, to around $30 billion due to lower pricing of oil and gas.
    • However, the company’s investments, specifically into renewables and new production fields, can severely dampen their cashflow in the long term. This has caused higher costs in 2023.
  • Capital Structure:
    • The company’s debt levels are well-managed with low and stable net-debt-to-capital ratio over the past couple of years, and the amount is relatively low in comparison to the assets it possesses, a good sign of health.
    • The high credit rating from Moody’s and Standard & Poor’s gives them ample access to capital markets.
    • The company has a good degree of liquidity as well, and can easily cover their liabilities.
  • Recent Developments:
    • The company has announced several partnerships and acquisitions, especially in the renewable sector. This will aid in diversifying their business and allow them to participate in new markets, while also leveraging the existing infrastructure for growth.
  • They have also committed to investing heavily in reducing carbon emissions and their long-term focus is to become net-zero by 2050.
  • Share buybacks have also been approved by the board, giving investors opportunities to profit from returns, instead of spending on expansions into new, unknown territory.

Recent Issues:

  • Russia Exit: In 2022, Equinor made the decision to leave Russia. The company’s investments in Russia were approximately 1.2 billion USD before they decided to pull out. The exit from Russia caused a $1.08 billion charge. This charge was absorbed in one year, without causing significant financial problems to the company, which shows it’s resilience.
  • Write-downs in U.S. Wind Business: Equinor took a write down of 349 million USD on its U.S. wind business due to cost inflation and higher interest rates, showing the difficultly of these new projects. The write downs were primarily on the Empire Wind project.

Moat Rating: 3/5

  • Justification: Equinor has some of the characteristics of a company with an economic moat, but it is not as strong as some of the other companies in the industry. The key drivers are listed below:
    • Scale: They are one of the largest oil and gas companies in the world, and their sheer size creates scale in refining, and trading of commodities. They are also large enough to deploy capital for large projects that are hard to compete with for new entrants.
    • Regulatory Approvals: They possess regulatory advantages when it comes to pipeline operation and offshore production licenses, primarily in Norway.
    • Unique Resources: They possess world class assets in Norway and several other locations globally, which leads to highly efficient operations and lower production costs than their peers.
    • However, all of these factors are not unique to Equinor. Other players have the same advantages, and it makes it hard to establish a moat. Furthermore, they are exposed to geopolitical risk and a high degree of market volatility. In short, they are not fully in charge of their performance and therefore they fail to truly demonstrate a significant sustainable competitive advantage.

Risks to the Moat and Business Resilience:

  • Price Volatility: As mentioned previously, commodity pricing is a huge part of the revenue of Equinor. Fluctuating prices of oil, gas, and other commodities may affect the company’s revenues and earnings, and their profitability may depend on whether they can pass the rising costs to their consumers, and if they can’t they will be operating at sub-par margins, thereby hurting profitability.
  • Regulatory Risk: Changes in environmental regulations, taxation, and climate change policy can all negatively impact the business. These changes can come in the form of emission standards, carbon taxes, and limitations on exploration activity, which might affect the company’s profitability and long-term plans.
  • Geopolitical Risk: As previously mentioned, the current crisis between Russia and Ukraine has clearly shown the effect of the geopolitical landscape on the energy market. Any new tension in any market they have investments can affect the price and supply of crude oil, and thus lead to significant loss and damage to the company.
  • Technological Disruptions: New innovations in technology such as EV’s and renewable energy may lead to lower dependence on oil and gas, and hurt the fossil fuel industry. Also, if the companies are unable to adapt to new emerging technologies in drilling, production and processing, it may lead to less efficiency than their peers, thereby increasing their costs and dampening profitability.

Understandability: 4/5

  • Justification:
    • The basic premise of what they are doing is simple. They produce oil and gas, transport it, and sell it to buyers.
    • However, as is the case with most large energy companies, their financial statements and overall business operation is complex, making it harder for new investors to grasp the fundamentals of the business.
    • Understanding the interplay of regulatory factors, supply risks, geopolitical factors with the pricing of the commodities, and how they affect the business, can be quite difficult for laymen.

Balance Sheet Health: 4/5

  • Justification:
    • The company has a manageable amount of debt with low short term liabilities. This, along with a high credit rating, means that they have a very safe balance sheet.
    • The net-debt-to-capital is around 0.25, which is an acceptable ratio and makes the company resilient to changes in credit markets.
    • However, their investments in new fields and renewable energy might cause a substantial strain on the financials in the next coming decades. It remains to be seen how efficiently the investments will play out and if they can continue to generate cash flows.
    • In terms of current ratios, their current assets are almost twice their total liabilities, meaning that they are very liquid and easily cover their expenses.
    • Furthermore, they have a history of good cash flow, which can be used for their operations or give out generous dividends to investors, therefore a very stable and healthy balance sheet.

Please note that I do not have access to specific financial databases to get up to date information on the mentioned metrics like book value and other things.