Equinor

Crude oil trading at negative prices is not sustainable.  How do I play it when it recovers?

Equinor (formerly Statoil) is Norway's state owned oil company.  It has very low production costs, operates in stable jurisdictions, and has reasonable finances.

I got this idea from Vitaliy Katsenelson's Contrarian Edge.

All numbers are from their 20019 Annual Report ending December (pre-virus, and pr oil crash).

Business

What do they do, and where are they exposed to?

• Almost all their profit came from Norway E&P, which consists of 70% oil, 30% Natty & NGLs (by revenue).
• Next are their operations in the US (p38), which produced around 10-20% of their oil, natural gas and NGLs.   What and where do they produce?  By revenue, most should be GOM oil.  By BOE, most is Marcellus natural gas.  There is very little shale oil - there's some from the Bakken, but their Eagle Ford assets were sold off in a well-timed November sale.
• Their International E&P (including the US) made a small loss.
• This is offset by their Marketing, Midstream & Processing making a small profit.
• They have a stake in 7 wind farms.  Makes for nice ESG photos, but meaningless for profits.
• They own an insurance company!  I think it insures the parent against operational risks (eg: workmen's compensation).  Again, not meaningful for profits.

So basically: Norwegian offshore oil production, followed by US and international (mostly) offshore oil production, followed by natty.  Minimal US shale oil.

Finances

Net debt (including IFRS 16 Leases) are 22bn, of which 4bn is due this year.  Another 4.2bn is due in 2021 and 2022.  They recently raised 5bn very long term debt on good terms.  I am ignoring long-term financial investments, which are required for insurance.  2019 interest payments were 1.5 billion.  All debt is fixed rate.  Its in a mix of major currencies (p198), but "normally swapped into USD".

2019 operating profits covered interest payments by 6 and a half times.  CFO covered it 15 times.

Despite the large debt, I don't think they have to issue new shares.  I think their status with the Norwegian government allows them to issue debt cheaply.

Net Debt has dropped from 33bn in 2016 to 22bn now.

Its unclear to me how much of their production is hedged.

Production Costs

They state they have breakeven prices for different projects between $11 and $40.  Not sure if that is extraction or full cycle costs.

In March they stated they can be "organic cash flow neutral before capital distribution in 2020 with an average oil price around USD 25 per barrel for the remaining part of the year".  I interpret this to mean their overall cash breakeven is $31 Brent.

Reserves

Charting their oil (not BOE) reserves:

Relationship with oil price

EQNR's stock price seems to follow Brent:

Conclusion

Good company that meets my criteria:

• Operates in stable, lawful jurisdiction.  No geopolitical risk.
• Low cost of production
• Minimal exposure to US Shale oil.  Product priced in Brent (seaborne), not WTI (landlocked).
• Reasonable financials, although a bit too much debt.

This is not an exhaustive look, I won't buy-and-hold forever.  And the oil industry is very difficult to study.  Who really understands break-even costs, or accounting rules for reserves and E&P?  If I buy, it is just as a trade for rising oil prices.

I would prefer to buy a basket of oil companies, but am unlikely to find many (any?) that fit the above criteria.

I use Hedgeye for timing when to buy.  I am not buying now.  The economy is still shit.  Oil producers may keep overproducing for a long time because of fixed costs and hedges.  And there's a chance Brent crashes, maybe below zero, after all the oil tankers fill up.

Misc

The Norwegian government owns 2/3rds of Equinor.  Norway has the worlds largest sovereign wealth fund, so I don't think they will push Equinor to pay dividends.

If I buy, I have to buy the ADR since Interactive Brokers does not access the Oslo stock exchange.  One ADR represents one share.  There is a fee of 0.5c per ADR for each dividend distribution.  Interactive brokers has Equinor as STL (Statoil).  Witholding tax for dividends should be 15% for Singapore residents (p8).