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Are you looking for an opportunity to make some money in the energy sector?
Over the past three months, the energy sector has led all other sectors, up 13%. This sector is also known for its cyclicality, but it also has some attractive dividend stocks.
One of them, Equinor ASA (NYSE:EQNR) experienced a major dividend payout boom in 2022, increasing its total quarterly payouts to $0.70/share from $0.18/share as energy prices soared in the wake of the Russian invasion of Ukraine. Prices have fallen in 2023, but EQNR’s management has still increased quarterly total payouts to $0.90/share for Q1-Q3 2023.
Equinor ASA, an energy company, is engaged in the exploration, production, transportation, refining and marketing of petroleum and petroleum-derived products and other forms of energy in Norway and internationally. The company was formerly Statoil ASA and changed its name to Equinor ASA in May 2018. Equinor ASA was founded in 1972 and is headquartered in Stavanger, Norway.
Equinor’s operations are managed through the following business segments:
- -Exploration & Production Norway (E&P Norway)
- -Exploration & Production International (E&P International)
- -Exploration & Production USA (E&P USA)
- -Marketing, Midstream & Processing (MMP)
- -Renewable Energy (REN).
Due to the much lower prices, EQNT has had very tough competitions so far in 2023. Liquid prices fell 51% in the second quarter of 2023 compared to the second quarter of 2022, European gas fell 58% and North American gas fell about 77%.
Liquid production increased by 12%, while gas volume decreased by approximately 11% in the second quarter of 2023 compared to the previous year. NCS region volume was up 3%, but international region volume was down about 7% and US volume was down about 8%.”
Norway E&P is the largest segment — it delivered 79% of EQNR’s adjusted earnings in Q2 2023. E&P International generated 10%, MMP contributed about 9% and E&P USA generated about 3% of adjusted income in the first quarter of 2023. REN, the Renewable Energy segment, reported adjusted income of -$84 million.
Dramatically lower prices and mixed volume growth drove double-digit declines in revenue, net income, EPS, operating cash flow, and EBITDA in Q1-Q2 2023. Despite EQNR’s very low level of debt, interest expense still increased by 60% and EBITDA/interest coverage decreased by 60%. The number of shares decreased by 3.5%.
These dismal numbers stand in stark contrast to those of 2022, when EQNR posted triple-digit net income and EPS growth, 94% EBITDA growth, and 68% revenue growth:
Management approved 13 projects in 2022, adding approximately 600 million barrels to reserves. Around 35 exploration wells are planned for 2023. EQNR continues to have several major projects in the works in the E&P Norway and E&P International segments for 2023-2025.
By the end of the decade, management expects production to be at current levels while reducing EQNR’s emissions by 50%. EQNR has six renewable energy projects operational, with another, Hywind Tampen, approved for 2023, and the world’s largest offshore wind farm, Dogger Bank, being developed between 2024 and 2026. EQNR owns 40% of this joint venture.
Management forecast production growth of c.3% in 2023, with c.$10-11 billion in organic capital expenditures.
EQNR has very strong dividend growth of over 43% over 5 years, driven by a rapid 224% increase in dividends in 2022. This increase reversed EQNR’s previously negative dividend growth rate. So far in 2023, EQNR has paid three quarterly payouts of $0.90, increased its base dividend from $0.20 to $0.30, and extraordinary dividends of $0.70 in the first quarter 2023 and $0.60 paid in Q2-Q3. 23
EQNR’s base dividend yield is just 3.81%, but its extraordinary dividend yield is 7.6%, for a potential total return of 11.42%. The big question is whether or not management will continue to pay those hefty supplemental dividends in the coming quarters.
EQNR also has a $6 billion share repurchase program for 2023, and management expects a capital distribution of approximately $17 billion in 2023.
The company distributed approximately $10 billion for the first two quarters of 2023, leaving a balance of approximately $7 billion for the third through fourth quarters of 2023. With 3.1 billion shares, the payout of $0.90 per share works out to approximately $2.8 billion per quarter. So it appears that EQNR can continue to reward shareholders with another quarterly payout of $0.90 this year.
The EPS/dividend payout ratio for Q1-Q2 2023 was still at a reasonable level at 82.19%, but well above Q1-Q2 2023 when it was just 22.35%.
While Norway imposes a 25% withholding tax on dividends from foreign investors, there is a tax credit on foreign taxes paid that you can include in your US tax return. However, you should consult your tax advisor for more information on this subject.
While EQNR has outperformed the S&P 500 over the past month and quarter, it has significantly underperformed the average performance of the S&P and the major oil and gas industry over the past year and so far in 2023.
Analyst Price Targets:
EQNR just received an upgrade from Morgan Stanley this week, from underweight to equal weight. It was also upgraded from Sector Perform to Outperform by RBC on 8/9/23.
At its intraday price as of 9/1/23 of $31.53, EQNR was 1.5% below analysts’ lowest price target of $32.00 and ~16% below their average price target of $36.53.
EQNR looks significantly cheaper than the industry on a trailing P/E basis at 4.13X versus the industry average P/E of 8.11X. However, it’s about the same based on a projected P/E ratio. It appears cheaper on a P/Sales basis and more expensive on a P/Book basis.
EQNR’s EV/EBITDA is very low at 1.47X due to very low net debt.
Debt, profitability and liquidity:
EQNR has $24.7 billion of outstanding long-term debt with an average remaining life of approximately 8.5 years. However, the company has $19.65 billion in cash and about $23 billion in near-term investments, making its net debt/EBITDA ratio extremely low at just 0.07X. The interest coverage is very high at over 40 times.
While ROA, ROE, and EBITDA margin declined somewhat in Q1-Q2 2023, they’re all still well above the industry average.
We rate Equinor ASA as a speculative buy but do not step in just yet, waiting for a possible market pullback in the treacherous month of September. Another alternative would be to sell puts below EQNR’s price/stock.
All tables provided by our investment group unless otherwise noted.
Source : seekingalpha.com