Earnings Call Transcript - EQNR Q4 2024

Bård Glad Pedersen, Head of Investor Relations

Good morning all. It’s a pleasure to welcome you to Equinor's Capital Market Update and Presentation for 2024. My name is Bård Glad Pedersen and I am heading up Investor Relations at Equinor. Before we start, I want to give a few safety instructions to those of us here in the room. If an emergency situation should occur, the evacuation signal is a public address and voice alarm. Please note that we only evacuate if the voice alarm tells us to do so. Then please follow the signed fire exits and messages from the guards. Exiting is at ground level and please disperse safely away from the building and further notice will be given during normalization. Today, we will have two presentations here in the primary session. It will be our CEO, Anders Opedal; and our CFO, Torgrim Reitan. After their presentations, there will be a Q&A for analysts here in the room and all the members of the corporate executive team are here and ready to provide answers. Later, after that, we will have three breakout sessions. One with Anders and Torgrim, one with Kjetil Hove and Philippe Mathieu, the Executive Vice Presidents for EPN and EPI; and one with Jens Økland and Irene Rummelhoff, the EVPs for Renewables and MMP. But before all of that, we will do, as we do in all Equinor meetings, we will start with a safety moment. This will be with our EVP for Safety, Security & Sustainability, Jannicke Nilsson. And just before I hand it over to Jannicke, I will remind you that the presentations here today will include forward-looking statements and non-GAAP measures. Then we are ready to start, and I hand it over to you, Jannicke.

Jannicke Nilsson, EVP for Safety, Security & Sustainability

Thank you to Bård and good morning to all of you. At Equinor, safety and security is strongly integrated into our leadership and culture. And as Bård said, we start every meeting with a safety moment. Today, I would like to share a safety moment with you addressing the link between safety, security, and operational performance. On the left, you see the serious incident frequency. At the end of 2024, the shift had reduced to 0.3, a reduction of 73% since 2011. Last year, we had the best safety results ever in the company. This demonstrates how systematic efforts over time give results. Still, we can never rest. Last year was marked by a tragic helicopter accident where we lost a dear colleague. It requires continuous efforts to further improve to make sure all our people are safe every day. Preventing major accidents and serious security incidents is also important for energy security. Equinor's gas supply has become vital for Europe's energy security and being a trusted energy provider is a role we take very seriously. To secure our people and assets, we need to perform well within all elements of security, with extra attention to cybersecurity, infrastructure, and business continuity. We regularly test our ability to handle accidents while maintaining production. By reducing serious incidents, we protect our people and also minimize production disruptions. We can also free up capacity to improve production efficiency, maintenance, and asset integrity. This is reflected in our long-term positive trend on these parameters. In 2024, Johan Sverdrup and Troll delivered a combined production efficiency close to 95%. These elements are a result of systematic work to improve safety, security, and operational performance, which directly impact energy production and our ability to secure flow from producing assets to the market. There is a strong link between safety, security, and operational performance. Safety and security are integrated into everything we do, no matter what energy we produce, where we are, and who we work with. We have great people in the company and also great suppliers and partners. We work closely together with authorities. And together, we will continue to improve, making sure all people and assets are safe every day. Now, I would like to hand it over to Anders Opedal, our CEO, to take you through our capital market update. Anders, the floor is yours.

Anders Opedal, CEO

Yes, and good morning to all of you. It's really good to see you again. I've been looking forward to today. And Jannicke thank you very much for the clear message on safety and security. Safety is my first priority and a clear commitment for all leaders and colleagues. Safety and security is the fundamental for everything we do, also the value we create. Today, I have four messages for you. First, we are positioned to deliver industry-leading returns. We are doubling our production growth and we are increasing our free cash flow and we are announcing a competitive capital distribution. And we demonstrate a consistent strategic direction, adapting to changing markets and taking clear actions to further increase value creation for shareholders. We expect to deliver above 15% return on capital employed all the way to 2030. Returns on capital employed are many ways the most holistic KPI, and we are well-positioned to deliver on an industry-leading level at a lower price than we used last year. We expect more than 10% growth in our oil and gas production from 2024 to 2027. We have increased our production outlook by progressing on our projects and high-value transactions. Over the next three years, we now expect $23 billion in free cash flow. This is a significant improvement achieved by optimizing the portfolio, cutting CapEx, and addressing costs. The stronger free cash flow enables competitive shareholder distribution, an important priority for me and a clear commitment from the Board. For 2025, the Board has decided on a total capital distribution of $9 billion. It represents a $0.02 increase in the quarterly cash dividend and $5 billion for the share buyback. In 2024, we took actions to improve short-term financials and set us up for further growth. I'm proud of our operational performance, industrial progress, portfolio-shaping transactions, and strong trading results. All this is made possible by our great people, and I would like to use this opportunity to thank all our employees for their dedicated efforts to create these results. Through strong operational performance, we delivered returns on capital employed of 21%. The cash flow from operations was $18 billion after tax, higher than we indicated at the start of the year, and our capital distribution was exactly as promised. Strong production, especially from the Norwegian continental shelf, contributed to the results. In our international upstream business, 2024 was a year of change with large transactions improving growth and cash flow. In our renewables and low-carbon solutions business, we adapted to market challenges; across our segments, we spent last year optimizing our portfolio of assets and projects for strong value creation. We face three global trends impacting energy markets. Energy demand is growing. We expect higher production growth. Market and political uncertainty is high. We are robust and set up to create value from volatility. The pace of the energy transition is uneven, and we have the flexibility to adapt. We are well-positioned to create value in this context. First, energy demand is growing. Global oil demand is expected to exceed 100 million barrels through this decade. For gas, we expect demand to increase and stay above today's level all the way to 2050. Asia drives demand short-term and we see the U.S. increasing going forward. This impacts the tight European gas market. Lower storage levels than last year create potential for higher prices and volatility. The market balance will be driven by weather, renewable production, as well as competition for LNG. For power, we foresee significant growth towards 2050, creating renewables and flexible power opportunities while reducing demand for hydrocarbons over time. The second trend is geopolitical tension, tariffs, and increased commodity market uncertainty. Oil demand is increasing with slow growth in Asia, and higher supply from non-OPEC countries adds uncertainty to the price outlook. Our response is not new, but highly effective: robustness and resilience. We combine our strong financial position with a competitive and flexible project portfolio. Our marketing and trading business is also well positioned to capture value from volatility and market inefficiencies. Through the last decade, with all the volatility and uncertainty we experienced, we delivered returns well above peers. The third global trend is the uneven pace of the energy transition, moving fast in some markets and slow in most. Even massive renewable growth is currently energy addition, not energy transition. Inflation, interest rates, supply chain issues, and regulatory uncertainty reduce the pace of the energy transition. Segments like offshore wind and hydrogen are impacted. We adapt to these realities by facing and prioritizing investments to maximize returns. To underline that value creation is at the core of our decision-making, we now retire the gross CapEx ambition. In our view, the energy transition must be balanced and financially sustainable. We are increasing our free cash flow generation and expect to deliver $23 billion from now to 2027. From 2024 to 2027, we expect free cash flow growth above 50%. The largest driver is an $8 billion CapEx reduction. We reduced our investments in renewables and low-carbon solutions by 50% in this period compared to last year's outlook. In addition, project financing of Empire Wind and the establishment of a joint venture in the U.K. On operational costs, we take forceful action to offset inflation and maintain a stable cost level, all while growing production. This drives long-term resilience. We continuously improve and scale technology. We apply AI across exploration, concept selection, operation and maintenance, and create significant value. As an engineer, I could, of course, talk a lot more about it, but let me just give you one example. We use AI in planning the Johan Sverdrup 3 project. We generated over 1 million alternative field layouts and well trajectories, adding $12 million in value to the project. So, while not that big, remember, we have more than 50 projects on the Norwegian continental shelf, and the true value creation comes when we scale it up to all the projects. The improved free cash flow strengthens our capacity for competitive shareholder distribution. For 2025, total distribution will be $9 billion. A competitive, predictable, and growing cash dividend has the highest priority when I allocate capital. Our dividend policy is to grow the annual cash dividend per share in line with underlying earnings, and this remains firm. Last year, we set an ambition to grow the quarterly cash dividend by $0.02 on an annual basis. We delivered on this in 2025, and you should expect us to continue doing that in the coming years. We have a clear commitment to deliver competitive capital distribution and we will use share buybacks to do this. The stronger free cash flow we present today provides substantial capacity to deliver. We have previously indicated a base level of $1.2 billion annually in share buybacks. This is not sufficient to be competitive in the current environment. We, therefore, remove this as a guiding principle because we plan to do more. To have flexibility and ensure competitiveness, we are not providing exact guidance on long-term levels. We will revert to this for individual years. We have a clear commitment to be competitive, a strong track record, and a stronger free cash flow supporting distribution capacity. We now expect to grow our oil and gas business and production by more than 10% by 2027. We also increased our expected production in 2030 to around 2.2 million barrels per day, up from 2 million in last year's outlook. We continue to cut CO2 emissions from our production to reduce costs and increase value creation. Our organic reserve replacements ratio came in above 110 last year, and including transactions, we achieved more than 150%. With this, we strengthened our long-term value creation. Our international upstream segment is on track to become close to a 1 million barrels per day business. And we expect the free cash flow to grow from $1.3 billion last year to more than $5 billion in 2030. The Bacalhau FPSO is sailing to Brazil, expected onstream later this year. We closed several large transactions, focusing our international portfolio on core markets. In the U.S., we deepened our onshore gas position. This increased our production outlook by around 80,000 barrels oil equivalent per day in a growing market. And after 40 years in the U.K., we are writing the next chapter, creating the largest operator together with Shell. We supply one-third of the U.K.'s gas, and given the winter season, let me assure you that we can provide a stable supply of gas for decades to come. Let's move to the source of that gas, the Norwegian continental shelf. I know you are interested in Johan Sverdrup. Sverdrup delivered record oil production last year, more than any single field, in any single year on the Norwegian continental shelf ever. During my recent visit to the Sverdrup field, I got an update from our team describing how they systematically keep production high and increase recovery, and they continue to succeed. We now expect 2025 Sverdrup production to be close to the level of the last two years. With extensive recovery efforts, including the Phase 3 project, we increased the recovery factor ambition to 75%, up from 65% when we made the investment decision. We continue to invest and develop our NCS portfolio. With new volumes from 19 projects, we maintain high and stable production towards 2027; actually, a slight increase. We continue to improve recovery around our hubs. Last year, Troll had record production after almost 30 years in production. We expect to maintain production in Norway at a high level of 1.2 million barrels per day all the way to 2035. This is driven by projects now in planning or execution, increased recovery efforts, and infrastructure-led exploration. These are volumes with short lead time, low cost, and low emissions. We expect to deliver around $12 billion in cash flow from operations after tax all the way to 2035. We are investing in renewables and low-carbon solutions to create shareholder value for decades to come. We are taking firm actions in response to challenges in the offshore wind industry. To increase value creation, we have high-graded the project portfolio and reduced spending. Towards 2027, we expect to invest around $5 billion in these segments. The value-driven prioritization impacts the pace of growth, and we expect our production capacity to be at 10 to 12 gigawatts installed in 2030, including our share in Ørsted and Scatec. This is down from 12 to 16 gigawatts. So far, we are delivering above 10% equity return on our current and renewable assets in operations. Our focus on returns is persistent, and we will continue developing our portfolio to deliver 10% equity returns full cycle. This includes the development of the Empire Wind project in the U.S., a project in a challenging market with returns under pressure and uncertainty. The project execution is progressing well. We are working to de-risk the project. Last year, we won a 30% higher strike price and secured financing for the project. All future CapEx is covered by the project financing and the tax credits. Moving forward is the best way to create and protect shareholder value. Not doing that would impact cash flow negatively due to substantial cancellation fees. We still plan to bring in a partner at the right time, but reflecting the uncertain timing of this, our CapEx and cash flow outlook presented today do not assume any farm down; this is a potential upside. As of now, expected lifecycle returns are close to the double-digit portfolio requirement we present today. In low-carbon solutions, different technologies are progressing at different paces. Carbon capture and storage projects have many similar traits as oil and gas, and our capabilities are in place. The regulatory framework is progressing, and customers are interested. We are ready, but we'll only execute if we get long-term commitment from our customers. We have excess storage capacity of 60 million tons of CO2 per year, adding 20 million last year and maintained our ambition. We have a focused strategy to deliver competitive shareholder returns based on three pillars: oil and gas, renewables, and low-carbon solutions, building on our strength and technological leadership. We invest to develop a resilient business and create long-term value as energy markets change. We see power from renewable sources and low-carbon value chains as an important part of future energy systems. We have the people, skills, and ability to build industry over time. Taking responsibility for cutting our own emissions is our most important contribution to addressing climate change. We have an industry-leading low level of emissions from production and maintain our ambition of net 50% reduction by 2030. Continued efforts to cut emissions while producing oil and gas reduce costs, increase returns, and enhance competitiveness. The energy transition is currently moving slower than expected. We adjust to the market situation and opportunity set. Today, we make the following changes: we lower our renewables ambition for 2030, we introduce a range for our net carbon intensity ambitions, and we retire our gross CapEx ambition. But our strategic direction remains the same. We continue to reduce emissions and build a profitable business in renewables and low-carbon solutions towards our net-zero ambition. To end, let me remind you of the key takeaways. First, we are positioned to deliver industry-leading returns, we are doubling our expected production growth, we are increasing our free cash flow, and finally, this enables us to deliver a competitive capital distribution for 2025. And as demonstrated today, we have substantial capacity for 2026 and beyond. I look forward to your questions later when my great colleagues in the corporate executive committee will also join. But first, I will hand over to our CFO, Torgrim Reitan, and he will give you more details on our outlook and also, of course, the fourth quarterly results. So, Torgrim, the stage is yours, and thank you very much for the attention.

Torgrim Reitan, CFO

Thank you very much for this, and good morning everyone. Very good to see you all again here in beautiful London. So, first, I'll share some reflections on the Capital Markets Day material before I go into the quarterly results and full year results. So, you have heard today that we are taking firm actions. We are improving all our key metrics, and we are committed to providing a competitive capital distribution. Let me provide more details into how we are going to continue to deliver industry-leading returns, how we are going to improve our free cash flow significantly, and how we are going to increase our production, and by all of this, improve the resilience of the company. So, let's start by talking about the framework for how we would like to create shareholder value. First, all the key metrics have improved, and that is even with a lower price deck. Oil and gas production continues to deliver very well, around $20 billion in cash flow from operations. We have taken firm actions to reduce our organic CapEx. We now expect that to be $13 billion per year over the period 2025 to 2026, and after project financing of Empire Wind, the number will be even lower. Then we are resilient to lower prices. So, our cash-neutral price after all investments is now at $50 per barrel, which is $5 lower than last year. We will run with a very solid balance sheet, as you are very well aware. So, that brings me to the center of this slide. And that is what we sold for and how we think it is best to create shareholder value, which is very, very important to us. First, return on capital employed is the metric that captures everything. It has always been front and center in the way we operate and run this company. So, we will continue to deliver industry-leading returns. Then, free cash flow. Improving free cash flow of $23 billion is what we now expect to provide over the next three years. This leads me naturally into capital distribution. Let me start with our track record. From 2022 to 2024, we returned $45 billion. We made extraordinary earnings in 2022 and 2023, and we chose to share that with our shareholders and pay that back. For 2025, the Board is proposing a quarterly cash dividend of $0.37 per share, which is almost 6% up from last year. On top of this, we expect to do a share buyback for $5 billion, leading to a total distribution of $9 billion for the year. The first tranche of $1.2 billion starts tomorrow. In 2025, we are still returning extraordinary earnings and cash from previous years, and the total distribution is around 45% of expected cash flow from operations. Our capital structure and balance sheets are normalizing. So, going forward, it will be our strong free cash flow that supports a sustainable capital distribution. Our starting point will always be to deliver a predictable and growing cash dividend, then we will use share buybacks to achieve a competitive level in total distribution. We are well aware of the approach of our peers, both in Europe and the U.S., and we are confident that we will be competitive towards that. So, let's look at how this all comes together. The blue bars show a solid and stable cash flow, around $20 billion on average over the next three years. This is the average, and it is fairly stable. This year, we expect around $20 billion, but with the fall in gas price assumptions, we expect it to be a little bit lower next year before the cash flow again grows and increases in 2027. For 2025 to 2027, we plan for around $13 billion in annual organic CapEx. Remember, a $3 billion project financing of Empire Wind came in place last year at competitive terms and will be drawn upon going forward. We have hedged an all-in interest rate for that project of around 5%, which equals around 4% after tax. When excluding the Empire Wind investments, which are covered by the financing, CapEx will be around $11 billion this year. Average CapEx for 2026 and 2027 will be around $12.5 billion. We aim to draw quite a bit on the financing in 2025, also covering parts of the CapEx in 2026. We expect the tax credit from Empire Wind to be received in full in 2027 after production startup, and that's important. It means all remaining CapEx for Empire Wind will be covered by project financing and the tax credit. The renewable CapEx you see behind me is largely related to projects in execution. Beyond this, we have flexibility. Let me say a few words also on the outlook towards 2035. Last year, we spent quite a bit on that, so I just want to give a brief update. Return on capital employed is expected to be around 15% in 2035. The oil and gas activities expect that to provide $20 billion in cash flow from operations also in 2035. However, the contribution from renewables and low-carbon solutions will be lower in 2035 than we said last year due to lower investment levels that we are now planning for. From 2024 to 2025, we expect more than a 50% growth in the free cash flow. We have reduced our CapEx by $8 billion over the next three years. In addition, we are forcefully addressing costs, driving significant improvements into the free cash flow. Inflation has been challenging across our industry. We have worked very hard to fight this. It is encouraging to see that in the fourth quarter, we have almost stopped the underlying cost increase. Going forward, we aim to keep costs flat while delivering strong production growth. In renewables and low-carbon solutions, we are cutting costs by around 20% by prioritizing our early phase activities. The estimated impact of all this is around $2 billion in cost savings towards 2027. These are important background drivers for the $23 billion in free cash flow over the next three years. Getting capital allocation right is key to creating shareholder value. Our highest priority will always be to deliver a predictable and growing base dividend. Then we will continue to create value by investing in a high-return portfolio. As you have seen today, we are ready to use the flexibility in our investment program to ensure a competitive free cash flow and sustainable capacity for our distribution. Out of the $23 billion in free cash flow, the surplus cash after paying or growing the base dividend is around $11 billion. This sets us up well to deliver a competitive share buyback program. We are well-prepared to deal with lower prices. First of all, we run a solid balance sheet, and we will continue to do that. Our cash flow is resilient. If gas prices in Europe are reduced by $2 per mbtu, our cash flow from operations will be reduced by $0.8 billion, going from $20 billion to $19.2 billion. The Norwegian tax system is key; it is neutral, linear, and a net profit tax. This means if prices come down, 78% will be offset by reduced taxes. Investments on the NCS are deducted immediately. Today, we invest around $6 billion annually on the Norwegian continental shelf; after tax, that is actually less than $1.5 billion. Please keep that in mind when you compare our investment programs with others. Our portfolio of low breakeven projects ensures robustness, and the significant flexibility in our investment program is key here. Less than half of our CapEx is sanctioned from 2027 and beyond, and we operate most of it ourselves, which gives us control. We are well-prepared to handle volatility. Our MMP business has consistently delivered within or above the increased guiding range. We use our flexible assets to capture value from volatility, price spikes, and geographical arbitrage opportunities. We have access to all major gas hubs in Europe, and this gas is based on 70% day-ahead and 30% month ahead. When there is volatility and price spikes, we take advantage of it and that money finds its way to our earnings. Our oil and gas business has become even better. We get more out of the $10 billion in investments now than we have before. We expect a growth of more than 10% towards 2027, double what we indicated last year, and production in 2030 is up from 2 million barrels per day to 2.2 million. Furthermore, free cash flow has improved from oil and gas, and unit production costs are down, leading to even better programs with quality growth from a project portfolio with low breakevens, below $40 per barrel, high returns around 30% real internal rate of return, short payback time of around two and a half years, and low carbon emissions of less than 6 kilos per barrel. Our IGD is a good example of how we use different structures, setting up a specialized entity. The IGD will be self-financed, cover Rosebank CapEx, derisk our deferred tax assets, and add to our production growth; and lastly, it will increase our free cash flow. We have created value through all different phases the renewable industry has lived through. We entered offshore wind early, secured leases at very low costs on projects that we are currently executing. We remained disciplined when the market heated up and did not overpay for Seabed leases. Instead, we took advantage of market conditions and farmed down, achieving capital gains of around $2 billion. We have experience with cycles and we know that something good always comes out of a downturn. We do believe that the offshore wind industry will emerge from this difficult time stronger and more robust. We will remain disciplined. As you can see, we have reduced our CapEx significantly, and through the actions we are currently taking, we are well positioned to create value now. The challenging situation within offshore wind is also reflected in the valuation of Ørsted. Last year, we acquired a 10% stake; the share price has continued to decrease since then, but we have a long-term perspective on this holding. This is a more capital-efficient way to increase our exposure to offshore wind. So far, we are focused on improving returns in our existing portfolio, building longer-term optionality at a low cost, and continuing to deliver double-digit returns. Let me turn to the fourth quarter and full year results. Last year, we had our best-ever safety results. As Jannicke mentioned, this is a race without a finish line and we need to continue to improve. For the year, we delivered a 21% return on capital employed and $18 billion in cash flow from operations after tax. For the quarter, we report adjusted operating income of $7.9 billion before tax and an IFRS net income of $2 billion. Adjusted earnings were $0.63 per share. In the quarter, international production was impacted by a hurricane and curtailments in the U.S., partly offset by new wells in Angola and the U.K. For the year, we had a strong operational performance and delivered in line with our production guidance. We had record high renewables production in the quarter, mainly driven by onshore power plants in Brazil. Then to the financials: adjusted earnings in E&P Norway totaled $6.8 billion before tax, driven by strong operational performance. Our international segment delivered close to $500 million in total and was impacted by underlifting and one-off effects. Our marketing and midstream segment delivered solid results driven by strong LNG and gas trading. Our organic CapEx was $12.1 billion for the full year, at the low end of our guidance. For the fourth quarter, NCS tax payments totaled $5.8 billion. For the first half of 2025, we expect three installments of NOK 35 billion each. Our balance sheet is robust with over $23 billion in cash. Our net debt ratio is 11.9%. However, it is important to note that our trading business took advantage of market situations around year-end and working capital increased as a function of this. We expect a lower net debt by the end of the first quarter. We have delivered on our guidance for 2024. Let me take you through guidance for 2025. We expect organic OpEx of $13 billion for the year and $11 billion after project financing. We are investing for growth in oil and gas, and we expect production growth of around 4% this year, well on track to deliver the 10% by 2027. To conclude my presentation, our consistent strategy and firm actions we are taking put us in a good position to deliver premium returns, stronger free cash flow, and a competitive capital distribution. Thank you very much for your attention. I will leave it to Bård to guide us through the Q&A session.

Bård Glad Pedersen, Head of Investor Relations

Thank you, Torgrim and thank you, Anders, for your introductions. We are now ready to start the Q&A session. I will try to take notes and note hands. We'll start here in the room. Martijn Rats from Morgan Stanley is first. Please keep your hands up, I can take notes while you ask your question.

Martijn Rats, Analyst

Hi, this is Martijn Rats from Morgan Stanley. Thank you for the presentation. I have two questions. Compared to last year's presentation, the strategy for renewables and low carbon seems quite different. Since these changes don't happen overnight, I assume your perspective began to shift soon after last year's presentation. Could you share some insights on how this discussion evolved within the company? What factors influenced your thoughts in 2024, and how did that lead to the plans you are now presenting? For my second question, which is more technical, can you provide some clarity on the guidance you're giving? Are you still expecting the balance sheet trajectory to remain in the 15% to 30% gearing range? What is your comfort zone, and what will the path for the balance sheet look like? Thank you.

Torgrim Reitan, CFO

Okay. Thank you. Two very good questions. As we said, we have taken clear actions during 2024. In last year's outlook, we had also added potential winning bids in the offshore wind industry. We anticipated kind of lower bid levers and kind of higher returns in some of those projects. That did not happen, and we deliberately did not win those bids. This CapEx is then, of course, removed. We also took a close look at our onshore business and high-graded our portfolio. You've probably seen that we guided around $13 billion in CapEx for 2024. We ended up with $12.1 billion, and a substantial part of that was actually not executing projects in our onshore portfolio. This has been an ongoing development throughout the year. In our early phase portfolio, we identified that in several countries, we did not have the route to profitable projects, so we had to stop those projects as well before we went into the bidding process. Similar on low carbon solutions. As I said in my speech, different technologies move at different paces. Particularly on hydrogen, we see that customers are coming later to the table to commit to long-term contracts, which impacts project plans. On your question about the balance sheet, we anticipated good positioning by year-end, adding 5% to the hosted transactions. Our MMP has also used time well lately to create value using the balance sheet, which is why you see it a bit higher at year-end. We expect it to be lower by the end of the first quarter, and by the year's end, we will be around the lower level of the guided range.

Bård Glad Pedersen, Head of Investor Relations

Thank you. The next one on the list is Biraj Borkhataria from RBC.

Biraj Borkhataria, Analyst

Hi, thanks for taking my question. First one was on Sverdrup, which I'm sure I'll be happy to talk about. You previously talked about declines coming through in and around year-end or early 2025, you put eight wells onstream last year. The move today to extend the plateau— is that a result of the performance of the latest wells, or has something fundamentally changed in your understanding of the reservoir there? Just some color on that would be helpful. Second question is on major investments you have. You've got two different projects, Rosebank in the U.K., Empire Wind in the U.S. You've taken on quite a lot of policy risk in different ways. In the U.K., obviously, the right to produce is a question mark, and then Empire Wind, it seems like based on the headlines, the $2 billion of tax credits could be at risk. Could you just talk a bit about why you continue to push ahead with both of those? Is it possible to pause given the uncertainty, and how you're thinking about that upside and downside risk?

Anders Opedal, CEO

Yes, thank you. On the Sverdrup, we will provide more detailed information in the breakouts. This comes from our team's dedicated efforts both onshore and offshore in the Sverdrup field, where we are successfully delivering these wells. While drilling, we see opportunities to improve our trajectory and achieve longer paybacks, which will allow for higher production from the wells we are drilling in the future. We will also retrofit into multilaterals and other initiatives. This is part of our strategy to sustain high production levels. While we are producing water in the field, the team has worked diligently to separate oil and water efficiently, which helps us maintain high oil production while also managing water removal. This is the result of enhancements in drilling, recovery operations, and production maintenance. Regarding Rosebank and Empire, we acknowledge that the political landscape is shifting in many countries. We appreciate the recent ruling for Rosebank, which allows us to advance projects while adhering to new environmental impact assessment requirements. We are confident in the quality of this project and its progress. Although there is political risk, we believe it will continue moving forward. For Empire, the tax credits were established under the previous administration, and changing this situation will require congressional approval, which we don't anticipate occurring quickly. We view this as a political risk, and it's essential that we enhance our projects and maintain a solid balance sheet to prepare for potential shifts in energy policies during the investment period. We advocate to all governments that having predictability and stability in the regulatory environment is vital; otherwise, energy companies may be hesitant to invest.

Bård Glad Pedersen, Head of Investor Relations

Thank you, Anders. The next one on my list is Teodor Sveen Nilsen from SpareBank 1 Markets.

Teodor Sveen Nilsen, Analyst

Thank you. Two questions. First, on your target to grow production to 2.2 million barrels per day by 2030, definitely a positive move. Could you just take us through where you expect that growth will come from and how much is organic growth and how much is inorganic growth? The second question is on Empire. You have changed your guidance for return requirements for renewables to 10% nominal equity return. How does the Empire project compare to that guidance? Would you see a positive NPV, even assuming tax credits are canceled?

Anders Opedal, CEO

Yes. Let's divide the questions, Torgrim. But the 2.2 million barrels per day growth will come from Bacalhau, Raya, and Sparta projects, which will come online in this period. Additionally, we've added 80,000 barrels of oil equivalent from transactions in the U.S. onshore, and the IGV for the U.K. will increase our production with 35,000 to 40,000 barrels a day on average towards 2030. The work being done on the Norwegian continental shelf will also contribute to consistent and growing production at 2.2 million compared to last year's outlook of 2 million. Torgrim can now elaborate on Empire and returns.

Torgrim Reitan, CFO

Thank you very much, Anders and Teodor. Regarding Empire Wind, if we talk about lifecycle returns, that is close to 10% nominal equity returns. We have taken into account the farm-down we did with BP, who has also covered half of the development costs during this period. The project has been significantly derisked this year with competitive terms and 30% higher strike prices, which explains our optimism going forward. For anything we say regarding NPV without ITC, keep in mind you have two levels of ITC: 30% which has existed for a long time and 10% related to local content which has been decided by Congress. There's a strong history in the U.S. of grandfathering projects if changes are made. This represents the best assumption moving forward for us. It needs to be acknowledged that while there are remaining uncertainties, we're confident in the derisked project and the progress being made; we expect close to 10% equity returns.

Bård Glad Pedersen, Head of Investor Relations

Thank you, Anders and Torgrim. We'll take the next question from Lydia Rainforth from Barclays.

Lydia Rainforth, Analyst

Thank you. Can you talk about how you are keeping the cost base flat while growing production? That's impressive progress on cost. Additionally, can you explain what you mean by a competitive distribution? Are you looking at dividend yield versus paying out a percentage of cash flow? How do you think about allocation between share buybacks versus additional capital requirements?

Anders Opedal, CEO

Thank you. Regarding cost management, it is encouraging to see the cost develop consistently with flat underlying costs year-on-year. We have been focused on cost for a while, particularly on the Norwegian continental shelf, where our scale enables us to achieve more volume in the same operating model. We can take on more projects and maximize efficiencies. We are continuously working on technological improvements and scaling in the operations, which contributes to managing costs effectively. As for capital allocation, let me reiterate that our first priority remains the cash dividend, aiming to grow shares in line with long-term underlying earnings. This is our foremost capital allocation target going forward. Following that, we want to show we are competitive. However, we prefer not to tie cash distribution, like the dividend payout, to a percentage of cash flow due to volatility on the Norwegian continental shelf. Instead, our focus is on maximizing and increasing free cash flow. Over recent years, we've demonstrated our competitiveness in this approach.

Torgrim Reitan, CFO

In terms of M&A activity; we are committed to improving our portfolio through evaluations of acquisitions while ensuring strong capital distribution. This ongoing effort will remain part of our strategy. We’ve aimed for a net debt level of 15% to 30%, but we are willing to operate conservatively, ensuring capital distribution capacity and the ability for value-creative M&A if necessary.

Bård Glad Pedersen, Head of Investor Relations

Thank you. We will go with Yoann Charenton from Bernstein next.

Yoann Charenton, Analyst

Thank you. I would like to ask about the capital distribution. I believe, and correct me if I'm wrong, but this is the first time that Equinor is offering buybacks that will exceed dividends this year. How important is this for addressing the need for your distribution to be competitive with buybacks exceeding dividends? Additionally, what commodity price environment do you see next year, specifically in 2026, for you to continue to offer this buyback exceeding dividends?

Anders Opedal, CEO

Last year, we provided guidance for two years of our capital distribution. As we approached normalization from a very high commodity environment and excess cash returned to our shareholders, we have moved toward a more sustainable distribution capacity based on free cash flow. We are not binding this to the exact cash dividend level; we see the importance in balancing competitive distributions. We expect our share buybacks to align with overall free cash flow, seeking to create an environment that supports competitive distributions to our shareholders.

Bård Glad Pedersen, Head of Investor Relations

Thank you. We'll take a caller and then revert back to the room. Please open the line.

Operator, Operator

John Olaisen, ABG. Please go ahead.

John Olaisen, Analyst

Thanks for taking my questions, ladies and gentlemen. I have two questions, if I may, very quickly. Is guidance impacted by the U.K. joint venture with Shell in the U.K., or are you assuming CapEx investments and production proportional to your stake in the joint venture? That's my first question. The second question is regarding exploration. I noticed that you're now saying 175 wells between now and 2030 in Norway, closer to 30 wells per year compared to the previous guidance of 20 to 30. Is that a correct observation and secondly, how does exploration spending between now and 2030 look in dollar terms and is it included in the CapEx guidance?

Anders Opedal, CEO

Regarding exploration, your observation is right. Last year, we indicated an expected increase in exploration activity on the Norwegian continental shelf at around 20 to 30 wells. However, we see potential for increased capacity going towards 30. We have a lot of prospects to pursue and capacity to work this way moving forward. On CapEx?

Torgrim Reitan, CFO

Yes. On exploration spending, it is assumed capitalization of that exploration, which links to expectations. In the NCS, 80% of that program relates to closed infrastructure exploration, which allows for a significant degree of capitalization. Most of that is accounted for in our investment program. With respect to the IGD, it is a 50/50 joint venture, so we will participate as an owner, but this will be deconsolidated from our balance sheet. We will not report related CapEx, but we will receive dividends from it. What we agreed with Shell is a priority that will be set as we build the new company, which will improve our free cash flow and production levels significantly.

Bård Glad Pedersen, Head of Investor Relations

We will take the question in the room. I have Michele Della Vigna from Goldman Sachs on that side. Michele, you can get the microphone.

Michele Della Vigna, Analyst

Thank you very much and congratulations on a strong pipeline of start-ups for the next few years. As we look beyond that, as you start to plan for growth in 2030 and beyond, especially in international projects, there aren't many pre-FID projects. I wonder if this is the right time to look for more countries and new opportunities or whether you believe it's better to wait for the next downturn. Do you see it as the right timing to pursue new opportunities? On Empire Wind, I know there have been many questions, but one risk is regarding tariffs on imported equipment from Europe. Do you see this as a potential risk, or have you largely completed sourcing the equipment?

Anders Opedal, CEO

We have worked rigorously to optimize the EPI portfolio while undergoing restructuring through both acquisitions and divestments. Philippe is pursuing opportunities for post-2030 growth, particularly with ongoing exploration in Angola, which can yield IOR techniques and infrastructure-led exploration. Regarding M&A, we continually examine potential value-creating deals and ensure they offer free cash flow longevity. We are open to investigating opportunities, ensuring they drive sustainable value growth. As for equipment tariffs, we are closely monitoring developments in this fluid market. Much of our supply is within the U.S. and we have already secured significant amounts of equipment produced there, although a portion will still come from Europe.

Bård Glad Pedersen, Head of Investor Relations

Thank you. Then we have Peter Low from Redburn here in the middle of the room. Peter, if you raise your hand, then you'll see the mic.

Peter Low, Analyst

Thanks for taking the question. The first was on the operating cash flow guidance. I think you did $18 billion in 2024, and that was at $81 a barrel. I think in 2025, you're guiding to $20 billion at a $70 a barrel assumption. Could you walk through how that improvement is expected to unfold year-over-year? The second question relates to the European gas market. We started the year with pretty high pricing in a tight environment, and how do you see that unfolding as we move through 2025 and beyond?

Anders Opedal, CEO

Thank you. I'll have Torgrim take the first query, and then I'd like to ask Irene to discuss our gas outlook moving forward.

Torgrim Reitan, CFO

Yes. The cash from operations in 2024 was $17.9 billion at a realized oil price around $80, with a European gas price expectation of $11. The assumptions for 2025 predict $70 oil against $13 gas. The price impacts between those years nearly balance out. Cash flow moves from approximately $17.9 to around $20 due to production growth and cost improvements. Additionally, CapEx will see significant reductions as our renewable investments—

Irene Rummelhoff, EVP for Marketing, Midstream & Processing

Regarding gas prices, we're observing prices rising rapidly because of the end of the Ukraine transit and regulatory storage filling efforts, particularly in Germany. We anticipate an exciting year with potential price spikes due to the high demand for AC in Asia coinciding with storage filling regulations. Tight conditions should persist into 2026 and 2027 before new supplies enter the market. The crucial question remains whether growth in Asian demand will keep pace with new supplies. Unknowns like potential adjustments to Russian volumes through Nordstream channels complicate the picture, but initial estimates suggest limited impact compared to L&D imports into Europe.

Bård Glad Pedersen, Head of Investor Relations

Thank you, Irene. This concludes our formal Q&A; we will cover a few more. I will have Henri Patricot from UBS first, and then Chris Kuplent from Bank of America.

Henri Patricot, Analyst

Yes, thank you. Just one follow-up on the financial framework. I think, Torgrim, you stated that free cash flow will be used to support shareholder returns, specifically focusing on it. Given net debt is within your gearing range, should we assume that you will use the balance sheet to pay additional shareholder returns competitively, purely from free cash flow? Is that the right interpretation, or would you allow net debt gearing to move a bit higher within the range?

Torgrim Reitan, CFO

No, thanks, Henri. This is the last year before we untangle from extraordinary elements from the past. Going forward, capital distribution will primarily depend on ongoing business considerations regarding cash from surplus or free cash flows. This should be viewed as a sufficient capacity to remain competitive in distributions rather than a straightforward mathematical model. The balance sheet at the moment feels right and we do not intend to re-leverage beyond our current levels.

Bård Glad Pedersen, Head of Investor Relations

Thank you. Chris Kuplent from Bank of America.

Chris Kuplent, Analyst

Thank you. I'd like to focus on inorganic growth; you previously noted no inorganic CapEx numbers in your financials and the absence of disposals implies you aren't looking to repeat your recent actions. Does this site that you believe M&A must be self-funded? Any inorganic growth has to be funded through disposals? Can you also offer insight into the hurdle rates utilized for M&A, citing your recent acquisition as a benchmark for how that relates to the competitive return of 10%?

Anders Opedal, CEO

Yes, Torgrim previously mentioned how we evaluate our degrees for M&A. Consider hurdle rates here as they must surpass our cost of capital, enhancing overall company value through acquisitions and disposals. This isn't strictly about individual acquisitions or divestments; it’s the broader company portfolio experience that matters over time. In terms of Ørsted, the rationale for acquiring a 10% stake is there; the market's fluctuating share price doesn't diminish the strong fundamental value we see long-term.

Torgrim Reitan, CFO

Yes, certainly. We approach hurdle rates similarly across the board, ensuring projects add value relative to our cost of capital, with fundamental analysis crucial for assessing overarching return rates. Timing on acquisitions or disposals is key. We aim for a robust M&A track record, investing countercyclically around promising opportunities.

Bård Glad Pedersen, Head of Investor Relations

Thank you, Anders and Torgrim, and thank you all for your insightful questions. We didn't manage to reach the bottom of the list, but we are over time. Anders and Torgrim will be in breakout sessions for further discussions and questions. The breakout will start immediately after this, so please take a moment to prepare before moving to your assigned rooms.

Anders Opedal, CEO

Thank you very much. As always, thanks for the good and challenging questions. We are on track to deliver leading industry returns, doubling production growth with increases in free cash flow, and a competitive capital distribution firm strategy, while implementing clear actions to enhance shareholder value. Thank you again. Looking forward to the breakout session.

Bård Glad Pedersen, Head of Investor Relations

Thank you.