Thursday, November 30, 2023

Equinor Update

Update and Review of Equinor.  I may buy some more energy producers in a few months if we get a downturn.  Here I look at their latest numbers and their ESG plans.


Equinor is primarily an Norwegian energy play, with 90% of 2022 Net Operating Income from E&P, and three quarters of that from Norway.  

How much is oil vs gas?  In dollar terms, usually more oil, but it varies with prices.  In the first 9 of months 2023, they sold more oil than gas, but in the same period of the previous year, more gas than oil (page 29).  Due to the massive spike in European gas prices in 3Q2022:


They've been printing money in the past 2 years due to high oil/gas prices.  2022 was a bumper year, 2021 more normal:

Quarterly cash-inflows vs cash-outflows:


  • Quarterly CFO does not correlate with oil/gas prices, because taxes (payable) seem to be accumulated in Q1 and paid out in other quarters.
  • Since quarterly data is noisy, calculate the payout ratio (CFO divided by dividends plus buybacks) for each calendar year: in 2021 it was 35%, 2022 was 48%, YTD 2023 is 94%.  In 2022, they spend almost all their generated cash on dividends/buybacks.

Balance Sheet and Capital Allocation

They've paid off their debt in 2021, accumulated cash in 2022, and have been returning capital in 2023:

But not all their cash and financial investments can be counted:
  • Their 28bn financial investments "mainly relate to investment portfolios held by Equinor’s captive insurance company and other listed and non-listed equities held for longterm strategic purposes" (p177).  We don't know how much is required for insurance.  2020's annual report says the same thing for 12bn of financial investments.  I'll take a wild guess that 12bn is required for insurance, leaving 16bn as long term investments.
  • For their 15bn cash, 6bn is required for hedging (p179).  Lets deduct another 2bn in case oil volatility increases. Leaving us with 8bn excess cash.
  • With debt of 25bn, net debt would be ~ 1bn.
Long term liabilities are 13bn provisions, mostly asset (rig) retirements.  Plus 3bn pensions.

There is no fixed policies for dividends or buybacks - appropriate for a cyclical industry.

The company previously mentioned they would like to return to a 10-15% leverage ratio (p10) - they count all cash and financial investments in this ratio - so that would entail a massive capital distribution.  I'm skeptical about this in today's world: any leverage is too much when you have 5% interest rates and a product whose price can go negative when people catch a cold.

Their main form of capital distribution is dividends.  Not tax efficient, but better than stupid acquisitions.  Overall I think their capital allocation is quite good.


They had 7 years remaining based on 2022 production.  The reserve replacement ratio has averaged 62% in the past 3 years.  Meaning replacement was below production.

Reserves in Norway have remained steady over the past 3 years (p7).

By boe, over half of the reserves are gas:

Business and Political Risks

Very few risks, which makes it a rarity for an energy producer:
  • Norway is a developed, democratic country with rule of law.  Most resource rich countries are shitholes (eg: DRC, Saudi Arabia) or simply poor & corrupt (eg: Indonesia).
  • Seabourne oil can be shipped anywhere.  The production areas and outbound shipping lanes are not in a potential war zone, like the Persian Gulf.
  • Norway's oil tax is 78%, though investments can be deducted over a few years.  This high rate is already priced in, and is actually an advantage, because: 1) Its safe and predictable, they have not changed it eg: like the UK did, and 2) the government is already getting 78% of profits, they're unlikely to take shares away from minority shareholders.
  • Norway is an net energy exporter, so they are unlikely to put a windfall tax on energy producers or restrict energy exports.
  • Offshore oil has low decline rates, unlike American shale.
  • Norway's oil is less carbon intensive to produce compared to Canadian oil sands.


Getting a reasonable valuation for energy companies is hard because energy prices have been so volatile.  Lets base it on 2021 and 9M2023 results.  2022 was too much of an exceptional year.

"Cash generated" is CFO minus "capex and investments".

Based on the current stock price of USD 32, the PE would be 8 or 12.  Reasonable, but not dirt cheap,

ESG Risk 

Equinor has an Energy Transition Plan, which I think is the biggest risk to its business:

The first item (reducing carbon use when producing oil) and third item (CO2 storage) are OK.  The second one (spending lots of money on renewable production) worries me:

  • Equinor aims to direct "30 of gross capex to renewables and low carbon solutions by 2025" and " more than 50% of our annual gross investments in 2030 towards renewables and low-carbon solutions" (p21).  It was 14% in 2022 and 11% in 2021:
  • They had to write down their US wind power projects this quarter.  Their UK wind farms are OK because prices are inflation adjusted.
  • In negotiations, they said they "would like to see 4% to 8% real unlevered return from our businesses in -- within renewables" (p12)
Lets do some numbers.  Based on 2021 and 2022 capex:
  • 2021 capex was 8bn, 2022 was 8.7bn.  Of that, 0.9bn and 1.2bn was spent on renewables and low-carbon (11% and 14% respectively).  
  • To bring it up to 30%, we need to spend an additional ~2.3bn by 2025.  To bring it up to 50%, we need to spend an additional 5.3bn by 2030.  They don't need to just bring it up to 50% of current 8bn capex, they need to bring it up to 50% of new ~12bn capex....after they spend more for renewables.
  • These additional sum could make low returns (4-8% real returns) in a much more risky investment.  Essentially we can see FCF (and therefore dividends/buybacks) reduced by this amount.
  • Based on 2021and annualised 9M2022 estimates, the 2030 aim would reduce the cash generated (CFO minus "capex and investments" by 15-17%).  It could wipe out their Net Operating Income (before tax)....though they could now claim back the new investments over several years at a 78% tax rate.


Everything looks good except for the ESG risk.  Time to explore other companies.

Saturday, November 11, 2023

Bought gold and bitcoin


Been building up my gold (AAAU) position, just reached my max of 10%.  I think the fed has stopped hiking, but I expect inflation to increase from 2+ to 3+ percent, while rates eventually go down (maybe in 2H24).

I'm expecting a decade of inflation.  And gold is also one of the few things that goes up if China invades Taiwan, so useful as a hedge against the unthinkable.


Hedgeye's Bitcoin trend turned bullish on 23rd Oct, but its been overbought, so hard to accumulate.  Managed to get a 4% position, would go up to 5% (at my buy price).  Thats a very high allocation for such a volatile asset - if it was volatility adjusted vs gold, it would be 1 or 2%.  But I believe bitcoin won't go to zero.

I am a bit uneasy holding a volatile risk-on asset heading into a market correction and recession.  But its been years through the crypto winter and the start of a recovery, so I obey the signal and buy on the trend breakout.  Lets see if Bitcoin stops correlating with the Nasdaq.


Still think we're in a bear market heading into a recession.

When would I cover my short positions?  When everyone knows we are in a recession. A Time magazine cover saying “World in Recession” would be useful.  I'd also cover if they drop too much (bear markets don't last forever), or when Hedgeye's trend changes (means I've overstayed my welcome).

2024 is an election year, expect 2H to recover coming out of the recession.  Learn to love inflation.


Energy recently turned bearish in Hedgeye's trend, so I expect it to get worse and may buy more Equinor and CNQ in a few months.  Not now.

My Positions